Samsung Poised for ‘Ugly’ Quarter as IPhones Get Bigger

Samsung Electronics Co. the world’s largest smartphone maker, is heading for its roughest quarter in years amid rising competition from Apple Inc. and China’s Xiaomi Corp.

Analysts have been cutting their profit estimates almost daily, with at least 26 of 42 tracked by Bloomberg reducing their estimates in the past four weeks. Operating profit for the third quarter is projected to plunge 47 percent, while sales are projected to fall 15 percent, according to the average analyst estimates. Both are the steepest declines since at least 2009 with Samsung to announce results tomorrow.

Samsung is fighting to retain its dominance after Apple introduced bigger-screen iPhones and Xiaomi began selling its low-cost devices in more overseas markets. Samsung moved up the release date for its Galaxy Note 4 smartphone to the end of September, meaning device sales will aid third-quarter results.

“We all know Samsung’s third-quarter earnings will be pretty ugly,” Claire Kim, a Seoul-based analyst at Daishin Securities Co., said by phone. “The earlier release of its new phones could be reflected in its third-quarter earnings, it could give them a slight boost.”

Apple’s iPhone 6 and 6 Plus have screens of 4.7 inches and 5.5 inches, respectively, compared with 4 inches for previous models, and are comparable to the size of Samsung’s devices. Apple said it sold a record number of the new models during their debut weekend last month.

Share Slump

Product release dates are determined based on a range of internal and external factors that affect business operations, Suwon, South Korea-based Samsung said in an e-mailed response to Bloomberg News. The company introduced its Galaxy S series phones in June 2010.

Samsung rose 0.3 percent to 1,144,000 won as of 9:31 a.m. in Seoul. The stock has dropped about 17 percent this year, wiping out approximately $32 billion of market value.

At the annual IFA consumer electronics show in Berlin, Samsung said Sept. 3 the Galaxy Note 4 would be released in October. Apple introduced new iPhone models Sept. 9 and the phones went on sale starting Sept. 19 in select markets.

The Cupertino, California-based company will start selling new iPhones in China on Oct. 17 after the Ministry of Industry and Information Technology granted the smartphones a network access permit, the final step in the approval process.

The Note 4 is available through China Mobile Ltd. for 5,199 yuan ($847). In South Korea, the device is available through the nation’s three mobile carriers for 957,000 won ($901).

Note Release

“Samsung wanted to release the Note 4 in China ahead of Apple to give an earlier splash,” said Greg Roh, a Seoul-based analyst at HMC Investment Securities Co. “Although it’s the very-last minute release in September, it will definitely contribute to its third-quarter earnings.”

Samsung will start global sales of its 5.6-inch Note Edge in the fourth quarter, the company has said. The Edge allows users to read messages, news and stock tickers from an angle by extending the display down the side of the phone.

Starting in the 2010 financial year, Samsung adopted International Financial Reporting Standards for its earnings. That change means comparisons to results before 2009 aren’t on a like-for-like basis.

Subsidy Removed

Samsung and Apple face stiffer competition in the world’s largest market as China Mobile takes steps to eliminate $2 billion in smartphone subsidies, almost doubling the costs of some high-end devices for consumers.

That may benefit manufacturers like Xiaomi that offer cheaper devices packed with high-end features.

“The most important thing for Samsung now is to protect its fast-falling market share, especially in China,” said Daishin Securities’ Kim.

Samsung fell to fourth in Chinese market share in August with 10 percent, behind Lenovo Group Ltd.’s 17 percent, Huawei Technologies Co.’s 16 percent and Xiaomi’s 14 percent, according to Hong Kong-based research firm Counterpoint Technology Market Research Ltd.

Recapture Innovation

While the introduction of new smartphones aimed at low- to mid-range markets may help retain market share, it will take the release in 2015 of Samsung’s next marquee device, such as a successor to the Galaxy S5, for earnings to recover, according to analysts.

The company’s operating profit is expected to rise to 6.7 trillion won in the three months ending September 2015, according to analyst estimates.

Recapturing growth would be helped by ensuring Samsung innovates with new technologies that are hard for rivals to imitate, such as the wraparound screen on the Note Edge and the bendable screens it has been working on, said Song Myung Sup, a Seoul-based analyst at HI Investment & Securities Co.

“We can’t really expect good news from Samsung’s mobile business this year,” Song said. “To reverse the current tide, the company should bring out the Galaxy S6 with flexible screens.”

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