Samsung's smartphone woes continue with Q4 profit drop

The maker of Galaxy phones has been struggling to compete with Apple, Xiaomi and others, and 2015 isn't likely to be any easier.

Shara Tibken Former managing editor
Shara Tibken was a managing editor at CNET News, overseeing a team covering tech policy, EU tech, mobile and the digital divide. She previously covered mobile as a senior reporter at CNET and also wrote for Dow Jones Newswires and The Wall Street Journal. Shara is a native Midwesterner who still prefers "pop" over "soda."
Shara Tibken
4 min read

Samsung's new devices, including the Galaxy Note Edge, haven't helped it bounce back yet. Sarah Tew/CNET

It's tough to be Samsung right now.

The South Korean electronics giant on Wednesday reported a 36 percent drop in companywide operating profit from a year earlier, to 5.3 trillion won ($4.9 billion).

The fifth consecutive quarterly decline in operating profit year over year underscores the continued pressures facing the smartphone king. Samsung has been struggling to compete against Apple in the high-end phone market and against newcomers such as Xiaomi at the low end. Apple in particular 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.

Samsung has been attempting to reinvigorate its mobile business by introducing new phone designs and cheaper devices with better specifications. It launched metal handsets -- which many people had been requesting over its typical all-plastic designs -- and this month started selling the first phone based on its Tizen operating system in India. The company also said it planned to cut the number of smartphone models it produces this year by 25 percent to 30 percent. Those efforts haven't paid off yet, and rivals have continued to gain.

In one example, market researcher Canalys on Tuesday said Apple in the December quarter surpassed Xiaomi and Samsung to become the biggest smartphone vendor in China for the first time ever. China, with its hundreds of millions of potential new customers, is viewed as a key smartphone market. Samsung had dominated the Chinese smartphone market for 10 straight quarters until Xiaomi took over that position in the second quarter of 2014. Samsung held the No. 3 spot in the holiday quarter, Canalys said.

Another blow came Wednesday when researcher Strategy Analytics said that Apple had pulled even with Samsung in global smartphone market, with each company accounting for 20 percent of phone shipments in the fourth quarter. Apple was trending upward slightly, but Samsung was downward bound from 30 percent in the year-earlier period.

Meanwhile, Apple on Tuesday posted its best quarter in its 38-year history. The company's earnings, revenue and margins for the December period smashed Wall Street expectations. The iPhone far and away drove those results. Customers spent $51.2 billion on 74.5 million iPhones in the quarter, more than ever before and blowing past analysts' estimates.

"This volume is hard to comprehend," Apple CEO Tim Cook said on Tuesday's conference call with analysts. "On average, we sold over 34,000 iPhones every hour, 24 hours a day, every day of the quarter."

Samsung Galaxy Note Edge rocks a curved sidebar screen (hands-on pictures)

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Samsung, in contrast, has seen its smartphone sales suffer. The company doesn't disclose how many handsets it sells, but analysts polled by The Wall Street Journal estimate Samsung shipped 74 million to 77 million smartphones in the fourth quarter, down from 86 million a year earlier.

The company's IT and mobile communications division, which typically accounts for two-thirds of the company's revenue, recorded a 64 percent drop in fourth-quarter operating profit to 2 trillion won ($1.8 billion). Sales in the division tumbled 22 percent, to 26.3 trillion won ($24.2 billion), with mobile in particular dropping 23percent, to 25 trillion won ($23 billion). Samsung doesn't break out profit for its mobile business, instead lumping it in with its other IT operations. Samsung said it expects competition for its smartphone business "to intensify" throughout 2015 and it forecast a decline in smartphone and tablet demand in the current quarter.

As Samsung's mobile business struggles, investors increasingly turn their attention to the company's processor business. Samsung is the world's biggest maker of memory chips and also manufactures application processors that serve as the brains of devices, including many of Apple's iPhones. Operating profit for the chip business rose 36 percent, to 2.7 trillion won ($2.5 billion), offsetting Samsung's slumping smartphone results. Samsung predicted "solid" growth for the year.

For the company overall, sales fell 11percent to 52.7 trillion won ($48.6 billion). The company also reported net income of 5.35 trillion won ($4.9 billion), a 27percent decline from the year-ago period.

Samsung earlier this month said its operating profit for the quarter likely tumbled 37 percent to 5.2 trillion won ($4.7 billion) and estimated its sales dropped 12 percent from the previous year to 52 trillion won ($47 billion).

Analysts polled by Thomson Reuters most recently projected operating profit of 4.8 trillion won ($4.4 billion) on sales of 52.1 trillion won ($47.9 billion).

Before its recent string of declines, Samsung had posted five consecutive quarters of record profits.