Samsung to cut costs, find new focus after downbeat profit forecast

Analysts pit Samsung's chip company as its next growth industry.

Samsung Electronics is bracing for more cost cuts and a potential management change later this year as it struggles to halt a sharp slide in profit.

The world’s biggest smartphone maker by shipments said Tuesday its third-quarter operating profit  likely fell as much as 62 per cent from a year earlier, hit by weak smartphone sales. This would mark its fourth consecutive decline in operating profit and its steepest year-over-year decline in the past five years.

Samsung, South Korea’s biggest company by market capitalisation, is facing stiff competition from Chinese handset makers who are aggressively introducing less-costly phones. In the high-end smartphone market, it is battling Apple, which last month unveiled new iPhones with bigger screens that are popular with consumers.

Samsung’s weak guidance further highlighted the company’s overdependence on the mobile division to generate earnings growth.

“Samsung’s memory-chip business is now the only division that is doing well,” said C.W. Chung, an analyst with Nomura in Seoul. “Until the company’s mobile unit is able to recover, continued strength in the company’s chip business will be key.”

Critics said Samsung is struggling to figure out its growth strategy beyond its recent focus on smartphones, software and wearable devices. Samsung appeared to be shifting its emphasis to the semiconductor business when it unveiled an aggressive $US14.7 billion investment plan Monday to build a chip-manufacturing plant in South Korea. Shares of rival chip makers slumped after the move because of concerns about a potential supply glut.

Uncertainties about its future also loom as Samsung grapples with the transition of power to a new generation. Chairman Lee Kun-hee remains in a hospital after a heart attack in May. While Samsung said Mr. Lee’s health is improving, critics said the company apparently lacks visionary leadership to steer it into new growth areas, especially at a challenging time.

In recent months, Samsung affiliates have been carrying out a series of financial transactions that would help heir-apparent and Mr. Lee’s only son, Jay Y. Lee, assume control of the company from his father. The younger Mr. Lee, a vice chairman of Samsung Electronics, remains the biggest shareholder of the de facto holding company of Samsung Group, South Korea’s biggest conglomerate.

“There needs to be a smooth transition but we’ll have to wait and see if his son can play a similar role,” said Mr. Chung of Nomura.

Samsung’s mobile business—which generates more than 60 per cent of its operating profit—earlier this year forced hundreds of senior managers to take a 25 per cent cut in their first-half bonuses earlier this year, according to people familiar with the matter. Now, executives and senior managers are bracing for more cost cuts, a person familiar with the situation recently said. In a surprise move last month, Samsung quietly shifted about 500 of its software engineers from its mobile unit to other parts of the company.

Expectations for the third quarter had already been low because sales of Samsung’s flagship device, Galaxy S5, have been weaker than forecast, analysts said, and the company began to roll out its new smartphone-tablet hybrid, the Galaxy Note 4, only late last month. Even though Samsung has unveiled a number of mobile devices in the quarter, including a smartphone with a curved edge, analysts said the products aren’t resonating with consumers.

Samsung said in a written statement that while smartphone shipments increased in the quarter, its operating margin was weighed down by hefty marketing costs and falling average selling prices.

As a result, the company said its third-quarter operating profit likely fell 58 per cent to 62 per cent from a year earlier to between 3.9 trillion won and 4.3 trillion won ($US3.6 billion and $US4 billion), missing analysts’ expectations of 4.3 trillion won. A year earlier, Samsung reported an operating profit of 10.2 trillion won. It estimated revenue of 46 trillion won to 48 trillion won in the latest period, below the 59.1 trillion won reported a year earlier.

Samsung also sounded a cautious note about the fourth quarter, saying the outlook remains uncertain.

With the company’s mobile unit widely expected to drag down profit in the next few quarters, its memory-chip business is expected to cushion the blow thanks to tight global supply, analysts said. Chip profits could exceed those from mobile phones later this year, rising to at least 50 per cent of overall operating profit from about 20 per cent last year, some analysts predict. The last time Samsung’s chip profit topped its mobile profit was in the second quarter of 2011.

Still, Samsung faces strong competition in the microprocessor sector, with Taiwan Semiconductor Manufacturing winning orders for chips used in Apple’s iPhones. Samsung’s microprocessor business has been mired in losses, according to analysts’ estimates. The company didn’t disclose divisional figures in its guidance Tuesday.

Doh Hyun-woo, an analyst with Mirae Asset Securities in Seoul, said he expects Samsung’s operating profit from its chip business to rise 34 per cent to 11.5 trillion won in 2015, from an estimated 8.6 trillion won this year. He forecast mobile operating profit to fall 34 per cent to 9.7 trillion won next year from an estimated 14.8 trillion won in 2014.

Samsung is slated to release final third-quarter earnings results later this month.

This story was first published on The Wall Street Journal.

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