Samsung Electronics confident of reversing smartphone slump

A day after Apple announced record profits underpinned by booming iPhone sales in China, rival Samsung Electronics furnished new evidence of its struggles in that market - while voicing confidence that the worst of its smartphone slump is behind it.

As Apple's iPhone revenues surged 55 per cent in the first three months of the year - with sales of the device increasing 72 per cent in China - Samsung's mobile division suffered a year-on-year sales decline of 20 per cent.

Yet the division's operating profit of Won2.74tn ($2.6bn) was 40 per cent higher than the previous three months, as Samsung cut costs by focusing on a smaller range of low- and mid-range phones as part of a turnround plan. It expected a further boost from strong demand for its new Galaxy S6 flagship phone, which went on sale this month.

The quarter-on-quarter profit improvement in the mobile business, and the company's forecast of "continued growth" this year after last year's sharp contraction, helped push shares up 1.39 per cent after the quarterly results statement on Wednesday. The stock has risen more than a quarter since its trough last October.

"It's a good set of numbers for the low season - typically this industry is strongest in the fourth quarter," says Keon Han, an analyst at Credit Suisse.

The headline numbers were in line with guidance earlier this month: revenue fell 30 per cent to Won47.1tn, while operating profit declined 13 per cent to Won5.98tn.

Analysts had been awaiting the detailed report for signs of progress in Samsung's efforts to reverse the contraction in its smartphone business. The company was criticised last year for complacency in the face of competition from Chinese rivals such as Xiaomi, which are able to sell phones with similar technical specifications at a lower price.

Samsung did not reveal unit sales number but Strategy Analytics, a research group, estimates that the company sold 83.2m smartphones in the period - down 7 per cent from a year before, but 12 per cent up from the prior quarter. This would mean it moved ahead of Apple to regain top spot as the global smartphone leader by market share.

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The report said the company had benefited from the launch of better designed low- and mid-range phones at lower prices, and cutting costs by reducing the number of models it offered and trimming its marketing budget.

This helped boost the operating margin for Samsung's IT and mobile arm to 10.6 per cent. "This was a surprise [to investors who] had dismissed that as a mid- to high-single digit margin business," says Mr Han.

But questions remain over Samsung's strategy, says Mark Newman at Bernstein. He warned that its pricing levels had been "a lot more aggressive than they were before, but not as aggressive as they need to be".

The market performance of the Galaxy S6, which went on sale on April 10, will give a crucial indication of Samsung's prospects. The company said that early sales had comfortably exceeded those of last year's Galaxy S5, prompting problems with its supply chain as it has struggled to meet demand.

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But Samsung warned that any boost to profits will be tempered by higher marketing costs, which will offset some of the cost-cutting that helped margins in the first quarter.

The new phone's design, which includes a metal casing, and the curved screen in one version, have also pushed up production costs, according to IHS, the research group. It estimated this month that the curved screen Galaxy S6 Edge - which analysts expect to account for as much as 40 per cent of overall S6 sales - costs about $290 to produce. That compares with $240 for Apple's iPhone 6, which commands a US retail price $50 higher than the Samsung device.

Amid the uncertainty over its smartphone business, Samsung's performance has been bolstered by its semiconductor division, which remained the company's biggest earnings contributor for the third consecutive quarter, with operating profit rising 50 per cent from a year before to Won2.93tn.

Samsung has won a technological lead over rivals in the memory chip industry, accentuating the benefits from strong prices after consolidation in the sector. Its mobile processor business, which suffered losses last year, was boosted by Samsung's decision to use its own processors in the Galaxy S6, and will start producing chips for Apple later this year.

"The more important long-term story is components," says Mr Newman.

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