Samsung expects Q2 profit to fall, possibly due to misjudging Galaxy S6 Edge demand

Samsung Electronics said it expects operating profit to drop in the second quarter, which would represent the seventh consecutive quarter of year-over-year declines in profit. The world's largest smartphone maker by volume likely underestimated how strong demand would be for its Galaxy S6 Edge smartphone, analysts said. Although Samsung has taken steps to shore up supply of the phone, it appears to have been too late to improve the company's second-quarter figures.

In a statement, Samsung said it expects to earn around $6.1 billion (6.9 trillion Korean won) in operating profit for the second quarter, which would be a 4 percent decline from the year-ago period. The average forecast from a Thomson Reuters I/B/E/S survey of 39 analysts was a profit of around $6.34 billion; that figure was also the average of 33 analyst estimates compiled by Bloomberg.

Samsung said total company-wide revenue likely dropped to around $42.3 billion, down 8.4 percent year-over-year. Analysts said Samsung's chipset and memory business likely grew, which means sales disappointed in smartphones and perhaps other consumer electronics. Samsung did not disclose its quarterly earnings projections by business units.

Although Samsung likely sold millions of Galaxy S6 and S6 Edge smartphones in the second quarter, and sales probably performed better than last year's S5 model, Samsung appears to have underestimated how strong demand would be for the Edge variant. The S6 Edge has a curved screen for accessing applications on the side of the phone, and is $100 more expensive in the U.S. Both phones were widely praised by professional reviewers, yet Samsung seems to have calculated that it would sell more units of the regular S6.   

Citing an unnamed source familiar with the matter, The Wall Street Journal said Samsung initially expected to sell four Galaxy S6 smartphones for every S6 Edge that it sold, and produced phones for that plan. However, Samsung quickly saw that demand was much likely closer to even for the two devices, the report said. Samsung then had too many regular S6 models and not enough of the S6 Edge.

Samsung co-CEO J.K. Shin pledged in April ahead of the phones' release to boost production of the Edge to meet demand, and noted that Samsung was facing supply constraints.

In late April, the WSJ noted, Samsung executives said on a conference call with analysts that the company would be able to meet demand by the end of June.

Samsung has moved to rejigger its production facilities, which are largely in Vietnam, to be able to produce as many S6 Edge devices as the market demands, according to the unnamed source who spoke to the Journal, who said that sales and profit figures could pick up again in the third and fourth quarters.

Analysts estimate the company shipped 71 million to 76 million smartphones in the second quarter, with the two Galaxy S6 phones accounting for slightly more than 20 percent of the shipments, according to the Journal. According to Strategy Analytics, Samsung shipped an estimated 74.5 million smartphones during the year-ago quarter.

Samsung could also have missed its window to rack up strong S6 and S6 Edge sales, as Samsung's flagship smartphone sales typically taper off after their first quarter. Meanwhile, Apple (NASDAQ: AAPL) will likely introduce updates to the iPhone 6 and 6 Plus in September, and while those phones will probably not be blockbuster products like last year's models, it will inject an element of intense competition for Samsung in the second half of the year.

"The initial response to S6 smartphones wasn't all that bad, but Samsung failed to fully address the market demand," analysts at KB Investment & Securities Co. said in a July 3 report, according to Bloomberg. Samsung underestimated demand for the Edge model, resulting in a "marketing misstep," they said.

The difficulty Samsung is having could also bode ill for other smartphone vendors that rely on Google's (NASDAQ: GOOG) Android platform. "If Samsung's quarter is as bad as it looks, pretty much all the other Android vendors' Q2s will be worse," wrote Jackdaw Research analyst Jan Dawson on Twitter.

For more:
- see this Samsung statement
- see this WSJ article (sub. req.)
- see this Reuters article
- see this Bloomberg article
- see this The Verge article

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