As AT&T warns of permanently lower smartphone upgrade rates, Samsung lifts global Q1 smartphone sales above expectations

IDC charts the top five global smartphone companies, in terms of unit shipments, through the first quarter of 2017. (IDC)

Samsung reported its highest quarterly profit in three years, a noteworthy figure considering the company’s highly touted Galaxy S8 smartphone was released after the close of the first quarter. The company’s performance indicates it is moving past its disastrous recall of the sometimes-exploding Galaxy Note 7, and also served to help raise worldwide smartphone shipments by 4.3%, according to research firm IDC—a figure that was above the firm’s first-quarter forecast of 3.6% growth.

"The first quarter smartphone results further prove that the smartphone industry is not dead and that growth still exists," said Ryan Reith, program vice president with IDC's Worldwide Quarterly Mobile Device Trackers, in a release. "We believe the industry will show some rebound in 2017, and the strong first-quarter results certainly support this argument.

However, despite that somewhat rosy outlook for the global smartphone industry, recent commentary from AT&T could raise concerns among U.S. smartphone vendors. The carrier’s CFO said that AT&T continues to sell fewer phones since customers are holding on to their phones for longer periods of time, largely because the carrier is selling phones through equipment installment plans (where customers see the full cost of their phones and pay them off through monthly installments) rather than subsidies (where carriers essentially hide the full cost of the phone and recoup phone costs through monthly service fees).

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“I would suggest to you I think it is a more permanent change in the environment because of the change in who pays for it,” AT&T CFO John Stephens said during the carrier’s earnings conference call this week, according to a Seeking Alpha transcript of the event. “I clearly believe it is a permanent change from where we were in the subsidy model, and I believe that the upgrade rates will be down on a permanent basis.”

Wall Street analysts flagged Stephens’ comments and warned the trend might affect smartphone vendors like Apple. “While a new iconic iPhone should help drive iPhone sales for Apple, if AT&T’s expectations for upgrade trends is correct, Apple and the industry may find growth more challenging,” the analysts at Wells Fargo wrote in a note to investors this week. “Lower consumer appetite may also adversely impact pricing and margins. Whether this is a cyclical smartphone blip or the start of secular downtrend bears watching.”

Despite the clouds gathering over the smartphone industry, South Korea’s two main smartphone vendors—LG and Samsung—both reported strong first-quarter results. And while those results were mainly driven by sales of products other than smartphones, both companies offered positive outlooks on the smartphone industry.

Samsung, for its part, regained the title of “world’s largest smartphone vendor” from Apple during the first quarter thanks to shipments of 79.2 million smartphones, IDC said. “Substantial discounts on the Galaxy S7 and S7 edge helped move last year's flagships as they make way for the new S8 and S8+,” the firm said. “Outside of the high end, the product mix continues to shift toward more affordable models.”

As The Wall Street Journal noted, Samsung’s profits in the quarter were driven mainly by the company’s semiconductor division. The publication reported that operating profit margins in Samsung’s mobile division narrowed to 8.8%, from 14% a year earlier. Samsung though said it expects that figure to improve as it begins to sell its Galaxy S8 around the world.

“For the mobile business, market competition is expected to intensify in the second half,” Samsung added in its earnings release. “Against this backdrop, the company will strive to maintain profitability through robust sales of the Galaxy S8 and S8+ and the launch of a new flagship smartphone in the second half. Moreover, Samsung will also look to sustain profitability in the mid- to low-end segment by launching new products and streamlining the lineup.”

Meantime, LG reported its best first quarter profit in eight years, as Reuters reported, mainly due to sales of TVs and appliances. The company reported a slight loss in its mobile division, but said it expects results there to improve as sales of its own flagship Android smartphone, the G6, begin to gain traction.

Looking toward the rest of 2017, IDC said it continues to expect growth from Chinese smartphone vendors like Huawei, OPPO and vivo, as well as an expansion of sales in mid-range phones.