Samsung incurred higher operating expenses in Q2 to get rid of channel inventories
In the prior parts of this series, we discussed the business prospects for Samsung’s (SSNLF) main revenue streams—smartphones and tablets. But the problem for Samsung doesn’t end there. Part of the reason Samsung forecast a decline in earnings for Q2 was an increase in operating expenses. Samsung had to incur higher operating expenses in the form of promotional offers in order to unload older smartphones.
In a note to the public, Samsung said, “As such, Samsung executed marketing expenses somewhat aggressively to reduce channel inventories in preparation for the 3Q peak season and new model launch. Therefore, the second quarter earnings were negatively affected by substantial increase of marketing expenses from the previous quarter due to strong sell-out promotion to reduce channel inventories in addition to marketing promotions for new smartphone and tablet launch.”
Samsung’s was unable to control its operating expenses in the past also
Samsung has spent a lot on advertising to promote its products. Spending on advertising is fine as long as it benefits the company with increased sales. But, as you saw in the previous parts of this series, Samsung’s core business of selling smartphones and tablets is slowing.
Last year, Samsung was the highest spender on advertising among smartphone vendors in the U.S. This is despite the fact that Apple (AAPL) is by far the largest smartphone player in the U.S. in terms of market share.
According to a report from Kantar Media and as the chart above shows, Samsung topped the U.S. advertising spending list in 2013, at $363 million. Apple closed the gap with Samsung and spent $351 million. Interestingly, Nokia (NOK) spent 15 times more in 2013 compared to 2012 after it announced the sale of its device and services business to Microsoft (MSFT). Motorola spent three times more in 2013 than in 2012, while BlackBerry (BBRY) spent two times more.