Samsung forecasts nearly 80% jump in profit for Q3, but mobile biz 'isn't out of the woods yet'

Samsung Electronics forecasted a sharp jump in its operating profit for the third quarter, signaling that year-over-year profit declines might be ending. However, the growth in profit and revenue is expected to be largely driven by the conglomerate's components and chipset division, and it's unclear at this point how well its new smartphones are faring in the market.  

Galaxy Note 5

Samsung said it expects its operating profit for the three months ended Sept. 30 to increase by 79.8 percent to about $6.3 billion (7.3 trillion Korean won), breaking a streak of seven consecutive declines and its first year-over-year profit growth since the third quarter of 2013 when the company reported a 26 percent increase. Samsung said total revenue likely rose about 7.5 percent to $44.16 billion. In the third quarter of 2014 Samsung reported dramatically weaker profit and sales figures.

The results beat analysts' expectations, with analysts expecting a $5.8 billion profit, according to a Thomson Reuters SmartEstimate derived from 30 analysts. "Today's surprise results show those blue days are finally over and lend support to the market that it's about time to give Samsung another look," Peter Yu, an analyst at BNP Paribas in Seoul, told Bloomberg. "Analysts will now have to revise up their estimates, and it's been a while since they've done that."

Samsung has faced more pressure in the past year in the smartphone market, as its sales and profit margins have shrunk amid tougher competition from the likes of Xiaomi, Huawei and Lenovo in China as well as resilient sales of Apple's (NASDAQ: AAPL) iPhone in the high end of the market. Samsung revamped its flagship Galaxy S lineup earlier this year, but that did not translate into strong growth in the second quarter.

In August Samsung pushed out two phablets, the Galaxy Note and Galaxy S6 Edge+ earlier than it normally has in an effort to beat Apple's iPhone 6s and 6s Plus to market. Yet Samsung is still feeling pressure and last week said it would pay up to $120 to customers who purchase one of the company's new Galaxy S6, S6 Edge, S6 Edge+, or Galaxy Note 5 smartphones under a new promotion. South Korea's top two mobile carriers, SK Telecom and KT, said Samsung will cut prices for Galaxy S6 models by as much as $107 starting Thursday, which could increase sales but cut into margins. Samsung declined to comment on the price cuts, according to Reuters.

Some analysts think that price cuts on the phones are inevitable, especially because of competition in the high end and customers' growing affection for more mid-range smartphones. Samsung also has spent heavily on marketing in recent months to promote its new high-end phones. Analysts expect profit margins from the mobile business in the third quarter to be 8 percent to 9 percent, compared with about 30 percent for its chip business, according to the Wall Street Journal. Yet Samsung could also soon face pressure in chips as global supply outpaces demand, especially amid a slowing economy in China.

"The strong momentum in the chip business will wane," C.W. Chung, an analyst with Nomura in Seoul, told the WSJ. "The mobile unit isn't out of the woods yet and unless that changes, it won't be easy for Samsung to get back on an overall growth track."

Samsung does not release how many smartphone or handset units it sells on a quarterly basis. According to research firm IDC, Samsung shipped 73.2 million smartphones in the second quarter and had 21.7 percent global market share, down from 74.9 million units and 24.8 percent market share in the second quarter of 2014. Samsung was the only smartphone vendor in the top five of IDC's rankings to lose market share year-over-year in the second quarter.

Samsung "will have to release a model that other makers can't make," Yoo Jong-woo, an analyst with Korea Investment & Securities in Seoul, told the Journal. "High-end phones featuring flexible displays -- like the ones that are foldable -- will be the only way Samsung could seek an increase in its market share in the premium market." There is some speculation that Samsung might release the next Galaxy S phone earlier than it has in the recent past, which is usually around April.

For more:
- see these three separate articles from the WSJ (sub. req.)
- see this Bloomberg article
- see this Reuters article

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