Technology: Companies

Has Samsung's strategy 'reached its limits'?

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Samsung's net profit slumped 39 percent on the year in the January-March period, the sixth consecutive quarterly decline, fueling further doubts over whether the tech giant will be able to turn around its beleaguered smartphone business.

First quarter net profit fell to 4.626 trillion won ($4.34 billion), from 7.574 trillion won a year earlier, as troubles in its mobile division amid cut-throat competition from both Apple and low-cost Chinese manufactures overshadowed success in its chip division.

"The earnings reflect that their smartphone strategy has reached its limits; it's not working," Tom Kang, research director at Counterpoint Research told CNBC.

Meantime, operating profit for the quarter came in at 6 trillion won, compared with the company's earlier guidance for 5.9 trillion won.

Mobile division profit for the quarter stood at 2.74 trillion won, lower than the chip division's profit of 2.93 trillion won. The mobile division now accounts for 46 percent of the company's overall operating profit, compared with the chip division's 49 percent contribution.

Samsung said its average selling price for smartphones in the quarter fell from levels in the fourth quarter, but the number of shipments rose.

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"The reason selling prices declined and volume rose is because most of their growth came from low and mid-tier devices," Kang said, noting that Samsung has stepped up promotions and discounts in key markets such as China.

Samsung, however, expects business performance to improve in the second quarter, citing the launch of its new flagship Galaxy S6 smartphones.

The Galaxy S6 along with the S6 Edge, hailed as the first smartphone with a curved display, received positive reception at their launch last month, boosting hopes that Samsung's struggling mobile division may finally regain its footing after its share of the global smartphone market shrank to 24.7 percent in 2014 from 32.2 percent in 2013, according to data from Strategy Analytics.

"The Galaxy S6 and S6 Edge are selling well so that will be reflected in second quarter sales," Kang said.

Lone bright spot

While Samsung's smartphone division has been a source of disappointment for investors, its chip business is another story.

The company said it saw robust demand for memory chips, while profitability for its system chip business also improved. Profit generated from the chip division in the January-March period was the highest since the third quarter of 2010, according to Reuters.

Samsung has arch rival Apple to thank for this, say analysts. The Cupertino-based company is its biggest external customer for components, according to The Motley Fool.

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"They are far ahead in their memory business compared to competitors," said Nam Hyung Kim, managing director at Arete Research Asia.

"We expect Samsung to be a major vendor to make Apple's processor for upcoming iPhones. This market has been dominated by [Taiwan's] TSMC, but now TSMC faces a big challenge because Samsung is getting very aggressive," he said.

Kim has a buy call on Samsung shares, with a 12-month price target of 1.7 million won for its stock - marking 22 percent upside from current levels.

The company's stock traded up around 1.0 percent on Tuesday at 1.37 million won.

--Leslie Shaffer, Katy Barnato and See Kit Tang contributed to this article.