LG Electronics Misses Estimates on Smartphone Marketing

LG Electronics Inc., (066570) the world’s third-largest smartphone maker, posted earnings that missed analyst estimates as marketing costs for its new flagship handset eroded profit.

Net income, excluding minority interest, fell 46 percent to 84 billion won ($80 million) in the three months ended Sept. 30, the Seoul-based company said today. That compares with the 201.3 billion-won average of 18 analyst estimates compiled by Bloomberg.

LG, which released its G2 smartphone in August, used much of its promotional budget to lure consumers in the slowing high-end segment, where growth has stalled as the market approaches saturation. Rising competition from Samsung Electronics Co. and Chinese makers selling cheaper handsets accelerated price cuts and led to a loss in the mobile unit, while tepid demand for televisions also damped profit during the quarter.

“What worries me is that although its mobile unit saw increased sales in the third quarter, it registered a loss,” said Choi Nam Kon, a Seoul-based analyst at TongYang Securities Inc. “That’s a signal the market is becoming increasingly competitive and difficult. LG has to slash handset prices further in order to survive in this cutthroat battle.”

Photographer: SeongJoon Cho/Bloomberg

An LG Electronics Inc. Optimus G smartphone at the company's flagship store in Seoul. Close

An LG Electronics Inc. Optimus G smartphone at the company's flagship store in Seoul.

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Photographer: SeongJoon Cho/Bloomberg

An LG Electronics Inc. Optimus G smartphone at the company's flagship store in Seoul.

The mobile division is estimated to have spent a record 200 billion won on marketing in the third quarter, Yoon Hyuk Jin, a Seoul-based analyst at Eugene Investment & Securities Co. (001200), wrote in an Oct. 7 note.

LG rose 0.6 percent to 70,100 won in Seoul trading, while the benchmark Kospi index rose 0.5 percent.

Mobile Loss

Operating income, or sales minus the cost of goods sold and administrative expenses, rose 27 percent to 217.8 billion won in the third quarter while sales gained 4.6 percent to 13.9 trillion won.

LG’s mobile division had a third-quarter operating loss of 79.7 billion won on sales of 3.05 trillion won. Smartphone shipments in the quarter were 12 million units.

The Korean electronics maker is banking on the 5.2-inch G2 handset, unveiled at New York’s Lincoln Center in August, to boost sales. Andy Kim, senior vice president of marketing at LG’s mobile unit, said marketing costs for the G2 device were the biggest in company history.

Marketing Boost

LG captured 5.3 percent market share and maintained its position as the world’s No. 3 smartphone seller in the three months ended June 30, researcher Strategy Analytics said in a July 26 report.

“We knew LG would spend massively on marketing for G2,” Lee Seung Woo, a Seoul-based analyst at IBK Securities Co., said before the earnings release. “The high-end sales are slowing but bigger players, like Samsung, are eating into most of the share in the low-end space.”

The home-entertainment division, which makes TVs and accounted for about 47 percent of revenue last year, had an operating profit of 124.4 billion won in the third quarter. LG ranks No. 2 in revenue share for flat-panel TVs, researcher NPD DisplaySearch said Sept. 3.

Falling TV prices caused by increasing competition from Chinese manufacturers are reducing LG’s profit, Lee Seung Woo, an analyst at Seoul-based IBK Securities Co., said by phone Oct. 21.

LG’s home-appliance division had an operating profit of 109.2 billion won on 2.97 trillion won of sales.

To contact the reporter on this story: Jungah Lee in Seoul at jlee1361@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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