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LG Posts Record Loss From Handsets on Competition from IPhone, Smartphones

LG Electronics Inc., the world’s third-biggest mobile-phone maker, reported a record loss at its handset business after lagging behind Apple Inc. and smartphone makers in selling models that send e-mails and surf the Internet.

Losses from mobile phones totaled 120 billion won ($101 million) in the second quarter, compared with profit of 620 billion won a year earlier, Seoul-based LG said in a statement today. The loss, the division’s first in four years, was triple the size projected by the average estimate of five analysts surveyed by Bloomberg.

The stock fell the most in seven weeks as the results illustrated how Apple’s iPhone and Samsung Electronics Co.’s Galaxy S outsold LG in the fastest-growing segment of the mobile-phone industry. The company, which joined Nokia Oyj in reporting earnings that missed estimates, today said the division may recover in the fourth quarter as it aims to introduce about 20 smartphone models this year.

“Key for the second half will be whether the company can regain investors’ confidence in its mobile phones, especially smartphones,” said Im Jeong Jae, a fund manager at Shinhan BNP Paribas Asset Management Co. in Seoul, which manages $27 billion, including LG Electronics shares. “The overall environment doesn’t seem too bright.”

The handset business’s loss, the biggest since the company started tracking the division’s financials in 2002, drove down overall operating profit 90 percent to 126.2 billion won, missing the 290.6 billion won projected in the Bloomberg survey.

Shares Fall

LG declined 2.9 percent to close at 101,000 won on the Korea Exchange, while the benchmark Kospi index rose 0.3 percent. The stock has lost 17 percent this year.

Net income fell 33 percent to 856.4 billion won. That was almost double the average analyst estimate in the Bloomberg survey after the company changed the way it calculates gains from affiliate LG Innotek Co. The year-earlier figures were revised under International Financial Reporting Standards, which LG adopted from this year.

Profit at LG’s home-entertainment division, which makes televisions and DVD players, slid 90 percent to 28.1 billion won, compared with the 40.4 billion won average analyst estimate in the Bloomberg survey. Sales at the division increased 19 percent.

Global shipments of LCD TVs may rise 19 percent to about 169 million units in 2010, according to El Segundo, California- based ISuppli Corp. in May.

Profit at the home-appliances division, which competes against Whirlpool Corp. and Electrolux AB, increased 3.8 percent to 185.1 billion won, in line with analysts’ estimates.

Following Nokia

The handset division’s performance comes days after Nokia, the world’s largest maker of mobile phones, reported profit tumbled 40 percent as competition from the iPhone, handsets equipped with Google’s Android operating system and Research In Motion Ltd.’s BlackBerry phones squeezed margins. Apple last week reported net income jumped 78 percent, helped by sales of the iPhone.

“The Apple threat, the RIM threat, we’re in the eye of the storm right now,” said Neil Mawston, a London-based analyst at Strategy Analytics. “They’ve known for a good couple of years that the smartphone boom was coming in 3G and they haven’t been able to attack that so they are a bit behind the curve. Nokia’s known that finger-operated touchphones have been booming as well and they’ve been slow to attack that market too.”

Business Recovery

LG expects the business to recover in the fourth quarter as it “may not be easy” during the current period, Chief Financial Officer David Jung said at a briefing in Seoul today.

LG’s second-quarter handset shipments rose 2 percent to 30.6 million units and the company aims to increase revenue from the business by introducing smartphones in North America and South Korea, it said.

The company, which began sales of the LG-GW620 phone equipped with Google’s Android last year, said handsets based on the operating system will account for more than half its smartphone models this year.

Worldwide sales of smartphones rose 43 percent to 60 million units last quarter, with Nokia, BlackBerry-maker Research In Motion and Apple widening their lead over smaller producers, research firm Strategy Analytics said this month. Global sales of smartphones may increase 36 percent to 247 million in 2010 and expand 30 percent next year, ISuppli said in April.

“One concern is that by the time the new line-up is all set up, smartphones may not provide the high margins they used to because of tougher competition,” said Yoon Hyuk Jin, an analyst at Shinyoung Securities Co. in Seoul.

To contact the reporters on this story: Shinhye Kang in Seoul at skang24@bloomberg.net; Seonjin Cha in Seoul at scha2@bloomberg.net

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