Samsung warns of 'mounting challenges' in second half

Samsung's 'Galaxy' black hole

Samsung Electronics warned of "mounting challenges" ahead as a difficult environment for its smartphones dragged on its second-quarter earnings.

The South Korean manufacturer reported Thursday that its operating profit totaled 6.9 trillion won ($5.93 billion) in the second quarter, a 4 percent decline from a year earlier, but in line with the guidance it provided earlier this month.

Profit for the mobile division rose to 2.76 trillion won in the April-June period from 2.74 trillion won in the first quarter thanks to healthy demand for its flagship Galaxy S6 and curved-screen S6 edge devices launched in early April. However, smartphone earnings were sharply lower in year-on-year terms as demand for middle-to low-end models slows, the company said.

To address slowing handset sales, Samsung plans to "flexibly adjust" the price of the Galaxy S6 and curved-screen S6 edge devices and introduce a new premium model with a larger screen as well as a fresh range of mid-to-low end devices.

That may boost sales, but it will be at the expense of profits, Neil Shah, research director at Counterpoint Research said.

"Samsung is in quick sand: Cutting prices won't take it back to its peak days. It will give them volume share, but profit share will drop next quarter because of this," he said.

The company's share of global handset shipments slipped to 18.9 percent in the second quarter, down from 21.5 percent a year earlier, according to Counterpoint. It shipped a total of 89 million mobile phones over the three month period, down 6 percent on year. Rival Apple's market share, meanwhile, rose to 10.1 percent, from 8.0 percent in the corresponding period last year.

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Meanwhile, Samsung's new premium model - rumored to be the Galaxy Note 5 - is likely to be well received when it's unveiled in August, but it faces stiff rivalry from the iPhone 6 Plus and phablets -- or smartphones with large screens -- produced by low cost Chinese manufacturers, Shah noted.

Samsung's chip business remained a bright spot in the second quarter, with an operating profit of 3.4 trillion won, rising from 2.93 trillion won in the previous three months.

The company expects demand in the memory market to remain robust for the remainder of the year, helped by the launch of new smartphone models with higher memory density for enhanced specifications.

H2 outlook

With competition in the smartphone market continuing to intensify, the conglomerate is banking on its other divisions to pick up the slack going forward. It expects healthy earnings from its semiconductor and display businesses in the second half.

"While the second half of 2015 is expected to present mounting challenges, the company will try to improve earnings, as strong seasonality should drive growth in TV sales, while the 14-nanometer foundry business should also see sales growth," the company said in its earnings statement on Thursday.

"Meanwhile, despite risks posed by potential supply increase of LCD panels and premium DRAM products, the memory business and the display panel segment are expected to register solid earnings," it said.

Shares of the company lost 2.6 percent by mid-morning trade, compared with the benchmark index's 0.6 percent fall.