Samsung Forecasts Decline in Operating Profit Fourth-Quarter Operating Profit Likely Fell 3.8% to 8.4%
SEOUL— Samsung Electronics Co. estimates its operating profit declined for the first time in more than two years, highlighting the challenges the company faces in 2014 as smartphone sales momentum continues to slow amid stiff competition.
In releasing its estimates for the quarter ended Dec. 31, South Korea's biggest company by market capitalization said its operating profit likely fell 3.8% to 8.4% from a year earlier. This contrasts with 26% growth in the third quarter of 2013.
Slowing growth has been an increasing concern that will continue to weigh on investors' minds this year as sales of mobile phones still account for more than half of the company's profits and the company copes with the strengthening of the won, which makes its products less competitive overseas.
Read more Samsung Looks to Connect Smartphones, Fridges Samsung Beefs Up Tablet Offerings for Businesses Digits: Samsung, LG Unveil Bendable TVs Since the start of the year, investors have been dumping shares of Samsung on concerns that its mobile division profits are slowing down. Shares of Samsung fell 5.5% during the first two trading days of 2014, wiping out $10.5 billion off its market value. Early Tuesday, Samsung shares slipped 0.2%.
In addition to smartphones, the company also makes memory chips, TVs and home appliances.
Samsung said Tuesday it expects an operating profit of 8.1 trillion won to 8.5 trillion won ($7.6 billion to $8 billion) for the fourth quarter. Sales will likely come in between 58 trillion won and 60 trillion won, the company said in a statement. In the fourth quarter a year earlier, Samsung posted an operating profit of 8.84 trillion won on sales of 56.1 trillion won.
The profit estimate came in well below market expectations. Analysts, on average, expected Samsung to post an operating profit of 9.65 trillion won on sales of 60.4 trillion won.
The company didn't disclose net profit estimates and final results are due later this month.
Last year, Samsung began to see the pace of growth at its mobile division slow due to hefty marketing costs for smartphones and falling average prices that squeezed its margins. The launch of its Galaxy Gear smartwatch didn't do much to lift its profitability.
Nevertheless, Samsung continues to market its smartwatch heavily both at home and abroad, having celebrities and sport stars wear them in TV commercials. The company also unveiled discounts for the smartwatch during the holiday season in a sign of lackluster demand. Samsung has said it shipped more than 800,000 Galaxy Gear watches since the launch in September.
Increased volatility in won against other major currencies such as the U.S. dollar and the Japanese yen will be another factor that will weigh on its earnings this year, analysts said. A stronger won tends to hurt the price competitiveness of Samsung's products overseas as it competes for sales of consumer electronics with global brands like Apple Inc., and Sony Corp.
IBK Securities analyst Lee Seung-woo estimates that an average 10 won drop in the dollar-won rate can result in a loss of as much as 600 billion won annually (US$563 million).
"Samsung Electronics is paying close attention to global foreign-exchange trends and is responding to [potential] currency risks by diversifying its currency portfolio," a company spokeswoman said, without providing further details.
Analysts say the company may also have to set aside more funds this year for litigation with Apple as the two companies continue to battle it out in global courts over patent infringement. Samsung owes nearly $1 billion to Apple in damages for a legal case in a federal court in California.
Still, steady profits from memory chips will likely cushion the earnings blow this year as strong chip prices and its dominant market position will allow the company to make them at lower costs.