Samsung says it will be 'flexibly adjusting' Galaxy S6 prices as Q2 numbers disappoint

Samsung Electronics' mobile sales and profit fell in the second quarter, as the company's flagship Galaxy S6 and S6 Edge phones failed to meaningfully boost revenue or earnings compared to last year. Samsung signaled it will be cutting the price of its premium phones as it tries to regain momentum

Overall, the electronics conglomerate, which makes chipsets and appliances, said that net income in the second quarter came in at $4.9 billion (5.75 trillion Korean won), down 8 percent from $5.3 billion in the year-ago period. Total company sales slipped 7.2 percent year-over-year to $41.3 billion.

Sales in the company's mobile division fell 7.3 percent from a year ago to $21.73 billion. Operating profit in the mobile unit was $2.35 billion, up slightly from the first quarter but down 37.6 percent from $3.76 billion a year ago. Overall, the unit's closely watched operating profit margin was 10.6 percent, down from 15.5 percent in the year-ago period and about the same from the first quarter of the year, according to The Wall Street Journal.  

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.

"The new Galaxy S6 and S6 edge arrived with mixed results as a limited supply of the edge models did not keep pace with the demand for the new curved handset," IDC noted. "Older Galaxy models, however, sold briskly thanks to deep discounts and promotions throughout the quarter. All eyes will now be on the early release of the pending Note 5 and rumored S6 edge plus to come this August."

Research firm Strategy Analytics said Samsung remained the world leader in terms of total handset sales in the second quarter, with 89 million total phones (smartphones and feature phones) sold, down 6.6 percent from 95.3 million a year ago. "Samsung has stabilized volumes in the high-end, but its lower-tier mobile phones continue to face intense competition from rivals such as Huawei in Asia," Strategy Analytics analyst Neil Mawston said in a statement.

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 and underestimated demand for the S6 Edge. The company scrambled to recalibrate its production but the miscalculation clearly hurt Samsung's sales; Samsung said supply issues have been addressed. 

Samsung said in a statement that overall mobile revenue improved slightly from the first quarter due to the Galaxy S6 andS6 Edge, "despite a drop in overall smartphone shipments caused by declining shipments of older middle- to low-end models." Samsung seemed to acknowledge that it misjudged S6 Edge demand and said "although revenue increased, profits increased marginally" from the first quarter "due to supply difficulties from higher than expected market demand for the Galaxy S6 Edge, as well as increased marketing expenditures that typically accompany flagship product launches."

Samsung said its average selling price for smartphones improved in the second quarter due to the expansion of S6 sales. However, Samsung also pointed to price cuts ahead for the S6 line. It said the smartphone market is expected to grow year-over-year in the second of the half of the year, but that the growth rate is expected to slow down. "The Mobile Business plans to firmly maintain its sale of premium smartphones by flexibly adjusting the price of the Galaxy S6 and S6 Edge, and launching a new model with a larger screen," Samsung said.

At an event in New York City on Aug. 13 Samsung is expected to unveil the Galaxy Note 5, its latest phablet, as well as potentially a new larger-screened variant of the S6 Edge dubbed the Galaxy S6 Edge Plus.

"Supply issues concerning the Galaxy S6 Edge have been addressed," Samsung said. "Moreover, the IM Division plans to enhance efficiency across the board, including product line-ups, marketing and R&D."

Samsung intends to add more middle- and low-end models to its lineup and cut spending in the mobile unit. "In order to drive up the shipment, we will actively respond to the market, which could have a negative impact on our average sales price," Park Jin-Young, vice president of mobile communications, said during a conference call, according to Bloomberg. "There's a possibility that the third-quarter sales price could slightly drop."

"Poor sales of S6 only proved that it can't beat Apple in brand loyalty among users and just ended up being one of the many Androids," Yoo Eui Hyung, an analyst with Dongbu Securities Co. in Seoul, told Bloomberg. "The price cuts may increase sales, but I highly doubt it could promise bigger profit growth."

Samsung faces challenges in China, the world' largest smartphone market, not just from Apple (NASDAQ: AAPL), but also from Huawei, Xiaomi, ZTE and others. "China is becoming a problem child for Samsung that it needs to fix," Mawston told Bloomberg

For more:
- see this Samsung release
- see this IDC release
- see this Strategy Analytics release
- see these two separate WSJ articles (sub. req.)
- see this Bloomberg article
- see this Reuters article

Special Report: Wireless in the second quarter of 2015

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