Samsung posts another record profit in Q3, but warns of tough smartphone competition

Samsung Electronics reported another record quarterly profit in the third quarter and bounding growth in its handset business, but the behemoth warned that competition will intensify in the smartphone market in the fourth quarter as analysts ponder whether its growth may be slowing.

The company's total operating profit jumped 26 percent from the year-ago period to $9.6 billion and up 7 percent from the second quarter. Total revenue for the electronics conglomerate clocked in at $55.5 billion. In the company's handset and telecommunications equipment unit, sales rose 3 percent from the second quarter to $34.4 billion (of which handsets made up the bulk, around $33 billion).

The handset/network equipment unit reported an operating profit of $6.3 billion, up 7 percent from the second quarter and up from $5.3 billion in the year-ago period. Handsets and network gear made up 66 percent of Samsung's operating profit, the Wall Street Journal noted. However, the operating profit margin from Samsung's mobile communications business fell slightly to 18.3 percent from 18.8 percent.

Analysts estimate Samsung sold between 85 million to 89 smartphones during the quarter, including the company's flagship Galaxy S4, according to the Journal (Samsung does not report its total handset or smartphone unit sales). Research firms have not yet put out their estimates for Samsung.

Samsung said total smartphone shipments were up over the second quarter, led by increased sales of mass market models, while its high-end models stayed roughly the same as in the second quarter. The company said its handset earnings improved because of higher smartphone and tablet sales and "effective marketing cost management." Samsung spends hundreds of millions of dollars marketing it mobile devices each year in the United States alone.

"It vacuumed up most of the lower-end market share, which most of the second-tier players were fighting for," Park Kang Ho, a Seoul-based analyst at Daishin Securities Co., told Bloomberg.

Looking at the fourth quarter, Samsung said it expects the smartphone and tablet market to continue to grow "due to seasonality, while competitions to intensify further." Samsung said it expects to see smartphone shipments grow about 1 percent to 5 percent in the fourth quarter from the previous quarter.

There is a fear that the company's smartphone growth could be hitting a wall as the high end of the market gets saturated. Samsung's strength has been driven by its ability to offer a wide price range of smartphones.  "Although we expect demand to increase next quarter due to peak seasonality, lingering macroeconomic issues and intensifying market competition will remain in the fourth quarter," Robert Yi, head of Samsung's investor relations, said in a statement Friday.

"Samsung has done well, having rapidly caught up with Apple (NASDAQ:AAPL) in the smartphone market. But I'm concerned whether Samsung would be able to do better," Kim Sung-soo, a fund manager at LS Asset Management, told Reuters. "Like Nokia (NYSE:NOK), Samsung may hit a limit in increasing market share. Apple is also fighting back, signaling an uphill battle for Samsung. Samsung needs to show its new growth engines to revive momentum in its stock price."

"The Apple versus Samsung smartphone war is still focused squarely on the premium-tier for now," Strategy Analytics analyst Neil Mawston told Bloomberg. "Apple is feeling the heat from Samsung in the smartphone premium-tier and the slightly cheaper iPhone 5c is Apple's competitive response to the Samsung threat."

Samsung has been looking to wearable computing to help it drive further growth in mobile. Although the company's Galaxy Gear smart watch drew middling reviews, which questioned the products value and $299 price, Samsung is likely going to continue to iterate on smart watches. Further, Samsung registered a design patent in South Korea hinting at its own Google Glass-like wearable device.

"This design is of a type [of glasses] with earphones integrated, allowing [users] to take phone calls and listen to music during workouts," according to a memo attached to several drawings of the device, filed by Samsung earlier this year.

For more:
- see this earnings presentation (PDF)
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see this Reuters article
- see this TechCrunch article

Special Report: Wireless in the third quarter of 2013

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