Samsung's steep Q3 profit decline shows ongoing struggles in mobile

The Korean electronics giant posts a 74 percent drop in its mobile business operating profits during the September period.

Samsung released its newest phablet, the Note 4, in mid-October. CNET

Samsung's third-quarter results were just as bad as the company warned, as tougher competition caused profits to tumble 74 percent year-over-year in its mobile business.

Overall, the South Korean electronics giant on Wednesday reported a 60 percent drop in company-wide operating profit -- its fourth consecutive decline and its lowest since the second quarter of 2011. The company also recorded a 20 percent decline in revenue for the September quarter.

Samsung earlier this month warned its third-quarter operating profit would tumble as much as 62 percent and its sales would fall as much as 22 percent. The company blamed higher marketing costs and competition for its problems.

Profits in Samsung's IT & mobile communications divisions dropped for the second period in a row in part due to a lower average selling price for smartphones. Customers sought out lower priced older models and bought a higher percentage of mid-range smartphones. The average selling price would have been higher if Samsung had sold more of its high-end, flagship Galaxy devices like the Galaxy S5.

Samsung also warned that while it "cautiously expects" earnings to rise in the current period because of its display and components businesses, conditions will remain tough for its mobile business. It didn't give any sign of when it expects a turnaround.

"Although the company anticipates a demand growth for the recently launched Galaxy Note 4 and new middle-end smartphone models, uncertainty remains for the [mobile] division, due to the year-end surge in competitor smartphone launches, which may require a potential increase in marketing expenses associated with year-end promotions," Samsung said in a press release.

At the same time, Samsung's consumer electronics division -- which makes everything from TVs to home appliances -- fell short of the company's internal expectations during the third quarter. Samsung attributed the shortfall to declines in the average selling price of TVs and an earlier-than-expected end to the peak season for air conditioners. It still expects the fourth quarter to experience "strong seasonal demand for TVs."

The fourth consecutive quarterly drop in operating profit underscores the continued pressures facing smartphone king Samsung, which has been hit hard by saturation in the high-end market and intensifying pressure on the low end. The tech conglomerate said earlier this month it believes "new smartphone lineups featuring new materials and innovative designs, as well as a series of new mid- to low-end smartphones with strong competitive positioning on both hardware specifications and price," can help boost its results. But for Samsung, things may get worse before they get better.

Samsung has long counted on its marketing and hardware prowess to attract customers seeking an alternative to Apple's iPhone. But the company is now facing new competition from low-cost phone vendors such as China's Xiaomi and India's Micromax, which offer cheap devices with high-end specs in their local markets. Apple also has become a bigger threat with its larger screen devices, the 4.7-inch iPhone 6 and the 5.5-inch iPhone 6 Plus. Simply wanting a bigger display is no longer a reason to buy Samsung's devices, and its smartphones can't reach the low prices of those from Chinese and Indian vendors.

The company on Wednesday said that for its mobile business in 2015, it "will focus on enhancing product competitiveness for each price tier and solidify longer term business fundamentals, in order to secure sustained growth and profitability." It also reiterated plans to differentiate its smartphones through flexible displays and metal frames, and its "new product development strategy will focus on streamlined strategic models in each price category to enhance product and cost competitiveness."

And Samsung plans to use "differentiated technologies and designs" in its tablets and further diversify its wearables business to make the market Samsung's "next growth engine." In its first year in the wearables market, Samsung introduced six watches, including the Gear 2 smartwatch and Gear Fit fitness band. The company has tried to get an early start in wearables, but it will face more competition when Apple's first smartwatch, the Apple Watch, his the market early next year.

Samsung's IT and mobile communications division, which typically accounts for two-thirds of the company's revenue, recorded a 74 percent drop in third-quarter operating profit to 1.75 trillion won. Sales in the division tumbled 33 percent, with mobile in particular dropping 34 percent. Samsung doesn't break out profits for just its mobile business, instead lumping it in with its other IT operations.

Overall, Samsung's operating profit totaled 4.06 trillion won ($3.9 billion), down from 10.16 trillion won in the year-earlier period. Sales fell 20 percent to 47.45 trillion won ($45 billion). The company also reported a net income of 4.2 trillion won ($4 billion), a 48.8 percent decline from the year-ago period.

Analysts had projected an operating profit of 5.1 trillion won on sales of 49.6 trillion won, according to Thomson Reuters.

Earlier this month, Samsung projected its third-quarter operating profit, based on the midrange of its view, likely dropped 60 percent to 4.1 trillion won ($3.8 billion) for the quarter ended September 30. The company also said it expected sales for the quarter to come in around 47 trillion won, a 20 percent decline.

Samsung plans to diversify its wearables portfolio beyond devices such as the Gear 2 and Gear 2 Neo, pictured here. CNET

At the time, Samsung said smartphone shipments increased marginally in the quarter, but margins were hurt by higher marketing costs and lower selling prices for the company's high-end handsets. Its flagship Galaxy S5, released in April, hasn't been selling as well as hoped, and it didn't release its Note 4 phablet, or phone-tablet hybrid, until mid-October in most markets, including the US.

The company on Wednesday reiterated that smartphone shipments posted "slight growth," but earnings fell because of the weak product mix. Samsung also saw only a "marginal impact" from the Note 4, which it released at the end of the period in a limited number of markets.

Samsung doesn't break out unit sales for its various gadgets, but analysts believe Samsung shipped 78 million to 81 million smartphones during the September quarter, according to The Wall Street Journal. That's down from an estimated 88.4 million units from a year earlier.

Rival Apple, meanwhile, last week reported fiscal fourth-quarter revenue and earnings that topped Wall Street expectations. It also projected stronger sales for the current period than analysts anticipated and sold more iPhones than anticipated. The only negative remained iPad sales, which dropped for the third consecutive quarter and fell below Mac revenue for the first time in years.

Apple sold 39.3 million iPhones in the most recent period, up 16 percent from the year-ago period. Analysts, on average, had expected Apple to sell 37.8 million iPhones, according to a poll by Fortune. The company's newest devices -- the 4.7-inch iPhone 6 and the 5.5-inch iPhone 6 Plus phablet -- went on sale September 19, so Apple will get a bigger boost from the products in the December quarter.

Updated at 5:30 p.m. PT with additional details.

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