Samsung Electronics Co. said Tuesday its third-quarter operating profit is estimated to have fallen to the lowest level in more than three years, as Galaxy handsets sales slow.
Samsung estimated that the median forecast of its July-September operating income at 4.1 trillion won ($3.8 billion), lower than the median of analysts’ estimate of 5.2 trillion won according to FactSet, a financial data provider. That is a 60 percent plunge from record-high 10.2 trillion won a year earlier.
The Korean company’s earnings preview highlights the rapid decline of its mobile business as lower sales of its top-end Galaxy smartphones hurt sales at its component businesses, such as advanced display called OLED, and heavy marketing costs undermine profits.
“Smartphone shipments increased marginally amid intense competition. However, the operating margin declined due to increased marketing expenditure and lowered average selling price (ASP) driven by reduced proportional shipments of high-end models coupled with price decreases for older smartphone models,” Samsung said in a statement.
Uncertainty continues to cloud its phone business during the current quarter but it said “the company cautiously expects increased shipments of new smartphones and strong seasonal demand for TV products.”
Samsung estimated sales for the July-September period at 47 trillion won ($44.2 billion), a 20 percent decline from a year earlier. Analysts expected 50.4 trillion won.
Analysts have revised down their expectations on Samsung’s financial results as the Galaxy S5, released earlier this year, saw sluggish sales and Samsung complained about a large smartphone inventory as it failed to predict demand correctly.
In January, analysts estimated Samsung’s third quarter operating income to reach over 10 trillion won. That expectation has been steadily lowered to about half this month.
The steep decline in income, likely the widest fall in Samsung’s earnings history, shows how the company’s quick rise to the world’s top smartphone maker with the Galaxy phones faces what might be its biggest challenge. Its struggle is apparent in both the high-end phone segment where it competes with Apple Inc. and the low-end segment where it faces rising competition from the likes of China’s Xiaomi and Lenovo.
Its handsets no longer possess the key benefit that helped steal consumers away from rivals, such as bigger screens, as rivals release smartphones with larger displays. Analysts say the bigger iPhones released last month will likely take away Samsung’s consumers in the U.S. who have chosen Galaxy phones for bigger screens. In emerging markets like India and China, Samsung’s smartphone sales were overtaken by local rivals.
Samsung needs to revamp the designs of its phones, said Lee Seung-woo, an analyst at IBK Securities Co., as consumers are feeling “fatigue” with the design factors in the Galaxy phone series.
“Rather than seeking stability, Samsung should seek to distinguish (its phones) with Galaxy’s design policies,” he said. “The iPhone 6 will be a significant threat to Samsung.”
The company moved the launch schedules for the Galaxy Note 4, a large-size smartphone with a stylus, to late September from October after Apple announced iPhone 6. It also began sales of the Galaxy Note 4 in China last month, getting an early start in the world’s most populous country before Apple.
Last month, Samsung also received upbeat initial responses to its Galaxy Note Edge smartphone, a smartphone with a curved side screen that can display weather, news, apps and other information. But the supply volume for the Edge smartphone will be limited, likely not giving a big boost to its earnings, analysts said.
Samsung did not disclose net income in its quarterly earnings preview. Full financial results are to be released later this month.