Mobile

Samsung’s dire earnings preview should scare every smartphone maker

Above: The Samsung Galaxy S5 is truly water resistant. Don't try this with your smartphone.

Image Credit: Devindra Hardawar/VentureBeat

Samsung expects to post a massive drop in both sales and profit for the second quarter. The way Samsung spins it, that’s bad news for Apple, HTC, Xiaomi, and every other smartphone maker, not just the Korean electronics giant itself.

The world’s largest smartphone maker expects to rake in $7.1 billion in profits for the second quarter — still a huge chunk of money, but 24.5% less than the same period last year. This is the company’s third consecutive quarterly decline. Facing such blistering results, Samsung released a rare statement Tuesday morning explaining its crummy earnings forecast.

Analysts have long forecast smartphone market saturation, suggesting manufacturers will struggle to maintain sustainable growth across the developed world. Those conditions appear to be materializing in China and parts of Europe, where Samsung said it faced intense competition amid lower demand. Many of its mid- and low-end phones sat unsold as the increasingly crowded markets remained content with their current devices.

Research firm IDC predicts worldwide smartphone growth will drop from roughly 39% (in 2013) to 23% (in 2014) — a slowdown that will affect Samsung as well as other smartphone vendors.

“Most importantly to Samsung, the market is continuing to push toward a wide range of low-cost Android handsets,” Ryan Reith, IDC’s research director for mobile devices, told VentureBeat. These device use “components that are roughly a year or so old, but they create a ‘good enough’ experience for the consumer.”

While Samsung has a lot of low-end products, it’s facing increased competition in regions like China, India, Indonesia, Russia, and Brazil — the markets driving that 23% global industry growth.

“Apple will feel these same challenges, but [it hasn't] aimed to compete heavily in these low-cost markets,” said Reith.

Samsung expects some relief next quarter, calling the second quarter “a seasonally weak period for smartphone demand in China.” Samsung also predicts coming demand for 4G LTE products will help compensate for China’s current dissatisfaction with 3G devices. The company didn’t outline a specific plan for growth in Europe, where it commands 40% of the smartphone market.

Consumers worldwide have demonstrated an appetite for increasingly larger smartphones, but Samsung warned that those “phablet” devices are cannibalizing tablet sales. That’s bad news for companies that make both smartphones and tablets, especially iPad-maker Apple, which is expected to release an iPhone with a larger screen soon.

As more companies compete for fewer smartphone buyers across developed markets, they’ll have to introduce substantial innovations to maintain good growth trajectories. Smaller versions of flagship devices aren’t going to cut it.

But Samsung is particularly challenged because it is “misjudging” its ability to earn revenue from the devices it sells, Forrester analyst Frank Gillett told VentureBeat.

“The challenge for Samsung is to differentiate from smartphone producers [that] are just focused on the hardware, and add truly engaging customer elements with online services, the way Google and Apple do,” said Gillett. “Samsung is also faced with companies like Xiaomi [which] are innovating new business models that make money other than from the handset hardware.”

Samsung also highlighted the strong value of the Korean won, marketing expenditures, and weakness in its display business (another victim of weak smartphone demand) as reasons for its poor second-quarter performance. We’ve included the company’s complete statement below.

The earnings forecast is the result of the strong Korean currency throughout the second quarter as it appreciated against the dollar, euro and most emerging market currencies.

The company also witnessed a slowdown in the overall smartphone market growth and saw increased competition in the Chinese and some European markets. And this led to higher inventories for the medium- and low-end smartphones.

The second quarter is a seasonally weak period for smartphone demand in China. Samsung also saw an increase in inventory due to price competition and a weaker demand for 3G products ahead of the expected growth of 4G LTE products in the Chinese market. Weaker demand in the second quarter also led to increased inventory in Europe, where Samsung has a 40 percent market share approximately.

In the case of tablets, sales were sluggish due to a longer replacement cycle than that of smartphones, which is usually between two to three years. In addition, higher shipments of 5-to-6 inch large screen smartphones replaced demands for 7-to-8 inch tablets.

With the release of new smartphone devices in the second quarter, Samsung launched various promotions to reduce existing inventories in sales channels and this increased the company’s marketing expenditure compared to the previous quarter.

The weak demand for smartphones also affected the System LSI and the display businesses that provide key components and screen technologies.

The company cautiously expects a more positive outlook in the third quarter with the coming release of its new smartphone lineup. Samsung does not expect any major marketing expenditure to occur in the upcoming quarter.

Samsung expects stronger smartphone sales and this will have a positive impact on the company’s display panel businesses. In the memory business, following stable market conditions in the first half, seasonal increase in demand in the third quarter is expected to drive stronger earnings growth.

Samsung will continue to expand its B2B businesses and looks forward to exceeding consumers’ expectations by offering the most innovative wearable devices, smart home appliances, and Internet of Things (IoT) devices.

More information:

Samsung Group is a South Korean multinational conglomerate company headquartered in Samsung Town, Seoul. It comprises numerous subsidiaries and affiliated businesses, most of them united under the Samsung brand, and is the largest Sout... read more »

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32 comments
Michael Howard
Michael Howard

Uh oh, looks like Apple might be raking in huge profits instead of massive profits this year...

Mattia Deserti
Mattia Deserti

This is what you deserve when advertising your brand new first class super hyper smartphone as... waterproof.

Peter Duff
Peter Duff

They released too many phones too quickly. That meant that there wasn't enough effort going into development before they were released. I refused to keep up with them and decided to go HTC instead as they were just taking the pee pee :P

keith maxx
keith maxx

I like my LG Nexus. One maker's loss is another's gain, and I hope that it means we get more innovative products that disrupt the markets anew.

Myles Formby
Myles Formby

That's what happens when your product isn't original, it can easily be replaced by a cheaper competitor. I don't think Apple needs to worry just yet.

Andrew Busa
Andrew Busa

apparently everyone is ignorant besides you Devin Christy lol

Andrew Busa
Andrew Busa

and i never would think that they would throw away inventory.. come on now.. but its not like they turn a profit on that, if they do, its a fraction of the margin, and the infrastructure that you have to have in place for that just continues to speak to my point. national corporate metrics? did you make that up? the metrics I look at is gross profits efficiency, and value per user. Apple excels in all of those. if bigger top line numbers make you jump, then I wont be taking investment or business advice/consulation from you lol

Devin Christy
Devin Christy

Seeing as apple has very little market share in any other country , your statement is incredibly ignorant my friend. Maybe the fact that apple only sells 1 or 2 inferior products at a time is the reason they have low market share... It's simple math. If you can offer more phones to more niches, and make more money then selling one pghone to one niche, the cost would balance the left over phones... this also shows that you don't have a clue about in-house electronic recycling. It's like you think they just throw the unused models away or something. Apple systematically sells inferior products, that's why the countries that actually think for themselves don't use them. Silly guy that doesn't understand national corporate metrics.

Devin Christy
Devin Christy

WOAH. A smartphone accidentally calling someone? Must mean the entire company is shit. So ignorant... I've been an android user for 7 years. You have no idea what you are talking about. Get outtah here.

Yannick Boucher
Yannick Boucher

Is this article about people finally realizing that Samsung is shite? :)

Manish Patel
Manish Patel

Eventually we are no longer tantalized by a phone a month. Get back to basics. Better battery life and less crashes and oh yeah.....much better network performance so the phones do as advertised and we are not all stuck watching spinning circles or wheels waiting for things to happen.

John Kneeland
John Kneeland

looks like nokia was ahead of the game by crapping out early

Beau Vrolyk
Beau Vrolyk

The author of this article simply does not think clearly about the numbers, and often confounds unit volume for either profit or revenue. One of the worst simple math mistakes is referring to competition for a declining number of customers. The total number of customers isn't declining, the number of potential smart phone buyers isn't declining, it is the number of new buyers that is growing more slowly. As a result, as is the case with every maturing market, sales move to upgrades and renewals. Who wins then? The answer is obvious, the vendor with the highest brand and product loyalty - Apple. This author is really a newbie to this market.

Rob Green
Rob Green

+ Comfortable in pocket like Nexus 4 / iPhone.

Mayank Kumar
Mayank Kumar

they are already doing the same, but it seems like, they are in trouble... Samsung is now developing and selling shit. Smartphons are lagy and sometimes making a cal or msging becoms a task for user...

Cory Weston
Cory Weston

Battery on my HTC One M8 lasts over 15 hours and that is with pretty moderate use.

Mayank Kumar
Mayank Kumar

Samsung to release another shit in same design... lol

Andrew Busa
Andrew Busa

Idk how this is bad for apple. They have one product (technically two with the C class phones), one brand. Samsung and everyone else should have been doing this all along, you have the tech, make the same phone just 2 or 3 price points. Not 20+ phones. more phones means more inventory, so when you cant move that, you will suffer significantly worse than if you had less products (inventory). less is more. silly asian conglomerates

Rob Green
Rob Green

I wouldn't mind a phone with a battery that lasts more than 12 hours, I'll give my money to the first one that cracks that.

Anshul Dayal
Anshul Dayal

Looks like Samsung is just waking up to realise that offering cheaper phones just to win market share is a race to the bottom.

Werner Strydom
Werner Strydom

I don't know of anyone developing native apps for phones where android is the primary development target. The focus always seems be iOS first with android being an after thought... As for web applications, it's always mobile safari first.

Chung Yang
Chung Yang

Actually, nowhere in the article did Samsung say other smartphone makers are in trouble. No other phone makers is suffering from an rising won (except maybe LG). Also recent Samsung offering is just not compelling to the consumer. There is a lack of differentiation in Samsung mobile devices from everything else on the market. And the Samsung brand, while they done a good job in raising consumer awareness, does not help it overcome the lack of differentiation of their mobile products. Conversely what is happening to Samsung actually helps all other non-Korean mobile phone makers. HTC just turned a profit after few quarters of losing money - this came at the expense of Samsung. Finally, Apple is a market maker so their offering is not affected by the Android ECO system. The demand for Apple product has high end luxury good will always be there. Even with a relatively weak iPhone5s feature set, Apple is making record profits. iPhone6 new feature set will most likely help Apple gain farther market share.

Ah Huat Yeo
Ah Huat Yeo

Are the Samsung Executivea high on anything?

Andi Arbeit
Andi Arbeit

Seems like Smartphones are getting oldschool.