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Samsung posts first annual profit decline in three years

By AFP - Jan 29,2015 - Last updated at Jan 29,2015

SEOUL — Samsung Electronics posted its first drop in annual net profit in three years Thursday and saw resurgent archrival Apple barge in on its pole position as the world's top smartphone maker.

The South Korean firm, whose key mobile phone operations have struggled in the face of intense competition from cut-price Chinese rivals, also warned that it expected 2015's "business environment... to be as challenging as 2014".

The tech giant said Thursday it recorded a net profit of 23.4 trillion won ($21.45 billion) in 2014, down 23.2 per cent from a year ago and the first decline since 2011.

Operating profit fell 11.7 per cent to 25 trillion won in the year and sales also tumbled 10 per cent to 206 trillion won.

Under growing pressure to boost shareholder returns, the company still managed to announce an increased dividend of 19,500 won a share, up from 13,800 won a year earlier.

The Samsung results contrasted sharply with the triumphant surge in the fortunes of California tech titan Apple, which reported a fourth quarter net profit of $18 billion, the largest ever made by a public company.

Apple's performance was driven by the sale of 74.5 million iPhones, which included a doubling of sales volume in the crucial Greater China region.

Samsung's fourth quarter net profit, meanwhile, was down 27 per cent at 5.3 trillion won.

Chip cushion  

The fall was cushioned by a boom in high-margin chip sales that helped offset the downturn in the key mobile sector, with operating profit in the semi-conductor division rising 35.7 per cent to 2.7 trillion won in the October-December period from a year earlier.

Samsung shares closed the day down 1.31 per cent at 1,360,000 won.

The annual profit figure marked a dramatic reversal for the company, which is also facing a once-in-a-generation leadership change after several years of stellar growth, driven by the once all-conquering mobile division.

The popularity of the iPhone 6 helped Apple catch up with Samsung to share the title of world's top smartphone vendor, market researcher Strategy Analytics said Thursday. 

Apple shipped 74.5 million handsets in the fourth quarter of last year with a market share of 19.6 per cent, on a par with Samsung, whose shipments and market share slipped markedly from a year ago.

Samsung had held the global smartphone vendor crown on its own since dethroning Apple in 2011.

Samsung's flagship Galaxy phones have suffered in the high-end market thanks to the popularity of the iPhone 6, while its dominance of the middle- and low-end handset segment has been challenged by Chinese firms such as Huawei, Xiaomi and Lenovo.

New strategy 

Samsung plans to slash the number of smartphone models it issues in 2015, while boosting production of remaining models that can be sold more cheaply to compete with Chinese rivals.

Streamlining the product mix should increase sales in the current quarter, Samsung's head of investor relations Robert Yi predicted, while nevertheless warning of a tough year ahead.

"When we look at 2015 as a whole, we fully expect the business environment... to be as challenging as 2014," Yi said.

Handset sales will be driven by growth in emerging markets including China and India, indicated Park Jin-young, vice president of Samsung's mobile unit.

Sales of tablet computers are expected to grow, largely boosted by sales of mid-priced and low-end products, Park said.

A more fundamental restructuring is assumed to be in the pipeline, with control of the family-run conglomerate's main business expected to pass from ailing patriarch Lee Kun-hee to only son Lee Jae-yong.

Needing cash to pay for what will be a massive inheritance tax bill, Lee and his siblings are expected to pare down and simplify the byzantine system of cross-holdings that link the many branches of the Samsung empire.

The anticipated reforms have helped keep Samsung on the "buy" list of many analysts, despite the recent profit downturn.

Thursday's dividend increase will help appease disgruntled shareholders who watched Samsung's stock price take a battering last year.

The company is currently in the middle of a $2 billion share buyback process announced in November.

With a market capitalisation of about $185 billion, Samsung accounts for nearly 17 per cent of the weighting on South Korea's benchmark Kospi composite index.

With its hot-selling large-screen iPhones released last year, Apple has roared back to the top of the pack with South Korea's Samsung in the smartphone market.

A separate survey by IDC analysts said Samsung had a tiny edge over Apple with 75.1 million units sold.

Apple "beat everyone's expectations", said Ryan Reith at IDC. 

Even more surprising is that Apple managed to increase the average selling price of its phones at a time when many consumers around the world are looking to low-cost handsets.

Another surprise was growth of iPhone sales in the US, "which is considered a saturated market", according to Reith, and in China, where competition is intense.

"Sustaining this growth and higher [selling prices] a year from now could prove challenging, but right now there is no question that Apple is leading the way," Reith said in a statement.

Strategy Analytics said Samsung now faces "intense competition from Apple at the higher-end of the smartphone market, from Huawei in the middle-tiers and from Xiaomi and others at the entry level."

"Samsung may soon have to consider taking over rivals, such as Blackberry, in order to revitalise growth this year," it added.

Even Apple has been surprised by its growth. Chief Executive Tim Cook said during an earnings call this week that iPhone demand "has been staggering, shattering our high expectation".

IDC's Ramon Llamas told AFP that Apple is still seeing strong demand in early 2015 but that "it's going to be difficult to maintain that breakneck pace."

He said: "The fact that they attracted a number of Android users gives them growth prospects for 2015."

According to analysts, the smartphone market appears to be diverging with Apple dominating the high end and other manufacturers scrambling at the low end.

"There's been so much scepticism for so many years about Apple's ability to continue to make its unique business model work over the long term, and Apple continues to prove them wrong," said Jan Dawson at Jackdaw Research in a blog post. 

Rise in China  

IDC said overall global smartphone sales hit a new record for the quarter and for the year: 375.2 million units shipped during the fourth quarter, a 28 per cent increase from a year earlier, bringing the annual total to 1.3 billion, a gain of 27.6 per cent.

Strategy Analytics said more than a billion Android-powered phones were sold last year, representing 81 per cent of all handsets.

Chinese firms made headway in the smartphone market, led by Lenovo, which completed its acquisition of the Motorola brand last year.

IDC indicated that Lenovo sold 24.7 million units for a 6.6 per cent market share, edging out Huawei which delivered 23.5 million for a 6.2 per cent share.      The rising Chinese star Xiaomi captured the number five spot, selling 16.6 million units with a 4.4 per cent market share. Xiaomi's growth from a year ago was 178 per cent, IDC said.

But "Xiaomi's grip on the number five spot is tenuous at best, with [South Korea's] LG and [China's] ZTE following close behind," the IDC report said.

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