Samsung aims to tackle Apple with price drops

30 Jul 2015 | Author: | No comments yet »

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Seoul – South Korean giant Samsung Electronics posted an 8.0 percent fall in second quarter net profit on Thursday and promised “flexible” pricing of its new flagship smartphone after less-than-stellar sales contributed to a slump in its mobile unit’s earnings.Samsung Electronics Co Ltd on Thursday offered a downbeat outlook for the second half of the year as smartphone market growth slows and ahead of the expected release of new iPhones from arch rival Apple Inc.Samsung experienced “supply difficulties from higher-than-expected market demand for the Galaxy S6 Edge,” the company said in a statement released alongside their second quarter financial results.

The showdown between activist hedge fund Elliott Management and the family controlling Samsung had dominated headlines about Samsung Electronics over recent months. The world’s largest smartphone maker said net profit for the April-June period stood at 5.75 trillion won ($4.9 billion), down from 6.25 trillion won a year ago and slightly below analyst estimates.

The conglomerate has now seen its net profit decline for five straight quarters year-on-year, mainly due to heightened competition in an increasingly saturated smartphone market that it had dominated for years. The answer might also describe how Paul Singer was feeling after shareholders of Samsung C&T (ticker: 000830.KR) rebuffed the Elliott Management CEO and voted in favor of an $8 billion takeover by sister company Cheil Industries (028260.KR) that would tighten the founding Lee family’s grip on Samsung Electronics (005930.KR): Not so good.

Samsung has faced a double challenge from US arch-rival Apple in the high-end smartphone market and rising Chinese firms like Xiaomi in the mid- and low-end market. Samsung’s dominance is being chipped away at the low-to-mid end by Chinese rivals such as Huawei Technologies Co Ltd and in the premium segment by Apple, while some markets show signs of saturation. Operating income was down 4% to KRW6.9 trillion, in line with the guidance the Suwon-based company had issued in early July when it warned of falling profits. In an effort to see off smaller rivals nipping at its heels in emerging markets, Samsung slimmed down its line of low- and mid-range smartphones last year, and ramped up production of those that remained in a higher-volume, lower-price strategy.

The company’s recent slump has stood in stark contrast to the performance of Apple, which has seen profits gain sharply on strong sales of its latest iPhone series. Shares of Samsung Electronics tumbled nearly 4% on Thursday to levels around KRW1,218,000, extending a 19% slide since mid-March as worries about shrinking smartphone shipments, structural changes in the semiconductors industry and corporate governance weighed on the chaebol.

Apple sold 47.5 million iPhones in the quarter, with sales up 85 percent in Greater China where the company’s overall revenue more than doubled to $13 billion. It expects smartphone shipments to rise in the third quarter from the second, but said average selling prices could fall due to price adjustments for S6 models aimed at boosting sales. And it’s looking to other parts of its business, such as semiconductors, display panels, smart TVs, and health equipment, to help make up for lost mobile sales. While there may be value to be found in the dirt cheap valuation, with analysts generally seeing more upside potential than downside risk, pressures also abound.

Thursday’s conference call made no specific mention of further merger plans, as Samsung’s founding Lee family seeks to boost control over the conglomerate ahead of a generational power transfer. The smartphone segment, which had previously been the pillar of growth, was still far from a picture of health, while the semiconductor segment continued to show strong form.

This month, the company scraped through a shareholder vote on the proposed merger of two affiliates, after a US hedge fund led an unprecedented investor revolt against the deal. Samsung doubled its interim dividend, but did not comment on potential stock buybacks and hinted that it would not repeat 2014’s “special increase”. Although the anti-merger camp lost the final vote, its muscular campaign marked a watershed moment for shareholder activism in South Korea, where family-run conglomerates, or “chaebol”, like Samsung dominate the economy and are used to running their businesses with minimum investor interference. Investors hoped the company, faced with limited earnings upside in the near term, would use its 61.8 trillion won cash and equivalents to boost the stock price. The more promising low-end segment is becoming the playground of low-cost Chinese vendors like Xiaomi and ZTE ( 763.HK ), while the high end of the market favors Apple’s ( AAPL AAPL -0.31609661209272166% Apple Inc.

U.S.: Nasdaq USD122.99 -0.39 -0.31609661209272166% /Date(1438203600261-0500)/ Volume (Delayed 15m) : 35337600 AFTER HOURS USD122.56 -0.429999999999993 -0.34962192048133994% Volume (Delayed 15m) : 1674053 P/E Ratio 14.202078521939955 Market Cap 703601845420.99 Dividend Yield 1.6911944060492723% Rev. per Employee 2409500 More quote details and news » ) iphones. “We expect Samsung’s smartphone market share to further shrink with flat shipment growth in 2015,” writes BNP Paribas analyst Peter Yu. Verified email addresses: All users on Independent Media news sites are now required to have a verified email address before being allowed to comment on articles.

However, things aren’t looking as bright as they used to be for the DRAM chip segment, which accounts a hefty 75% of Samsung’s semiconductors business. But here’s a catalyst worth noting: While Samsung’s second quarter results were no doubt poor, the speed of revenue and profit declines has been easing. As UBS’ Gaudois puts it, Samsung’s success is built on key pillars like management style, strong execution and the capability to bounce back from crisis.

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