11 Jul

Why Samsung predicts its profits will fall in the 2nd quarter

WRITTEN BY Puneet Sikka

Samsung announces its earnings guidance for Q2 2014

Early this week, Samsung (SSNLF) announced its earnings guidance for the second quarter of 2014. It mentioned that it expects its operating profits to decline from 9.5 trillion Korean won in Q2 2013 to around 7.2 trillion Korean won in Q2 2014. If this happens, it will be a massive 24% decline in operating profits.

This isn’t the first time Samsung has warned us in advance about a fall in its operating profits. Last quarter also, the company announced its earnings guidance, saying that its operating profits would decline 4.3%—from 8.78 trillion won in Q1 2013 to 8.4 trillion won in Q1 2014.

Why Samsung predicts its profits will fall in the 2nd quarter

Samsung’s operating margins continue to decline

As the above chart shows, Samsung’s operating margins continue to decline. As per Samsung, its operating margins could fall from 16.6% in Q2 2013 to 13.8% in Q2 2014.

The company cited a slowdown in demand for its smartphones and tablets as the main reason for its lower-than-expected results. Korean won appreciation also played a role in Samsung’s lower operating margins.

Plus, the company is unable to control its operating expenses increase. In Q2 2014, the company had to spend a lot unloading older smartphone models based on 3G technology in China—especially since consumers are bracing themselves for the rollout of next-generation 4G technology.

Increasing competition isn’t helping Samsung either

Samsung continues to face higher competition in both the high-end and low-end smartphone markets. At the high end, it has to with contend Apple’s (AAPL) iPhone. At the low end, Google’s (GOOGL) Android-based smartphones continue to eat away at Samsung’s market share. Microsoft (MSFT) and Lenovo (LNVGY) are also going aggressive in emerging markets by introducing low-cost smartphones.

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