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Samsung has ‘got its mojo back’ as smartphone profits surge 42%

It was just over a year ago when Samsung lost its lead in the smartphone market in both India and China with shipments declining fast globally.

Now the South Korean electronics giant has stabilized the ship and "got its mojo back," according to analysts.

On Thursday, Samsung reported operating profit of 6.68 trillion won ($5.8 billion) in the first quarter of 2016, a nearly 12 percent rise from the 5.98 trillion won recorded in the same period last year.

In the mobile segment, operating profit hit 3.89 trillion won, up 42 percent year-on-year, and was the biggest profit driver for the company for the first time since the second quarter of 2014, according to Reuters.

Behind the strength of the business was Samsung's Galaxy S7 and S7 Edge smartphones which helped lift profits.

"Samsung has had a real return to form with the S7 and S7 edge. It's focus on higher-tier, higher-margin products has certainly helped boost its earning. The new devices deliver a good story for anyone considering a Samsung device as an alternative to an iPhone," Ben Wood, chief of research at CCS Insight, told CNBC by email.

"Samsung certainly seems to have got its mojo back in mobile devices."



‘Streamlined’

Market and analyst reception was tame when Samsung released the Galaxy S6, but it was a turn in the road for Samsung. Until then, Apple's bigger screen iPhones were eating away at Samsung's share. With the S6 Edge, the company could not keep producing enough to keep up with demand but it laid the groundwork for the improved S7 Edge.

Samsung has managed to fend off the threat from Apple now. It currently holds a 24.5 percent market share and shipped 81.9 million devices in the first quarter of 2016, according to research firm IDC (International Data Corporation). This was a 0.6 percent fall from the same time last year. In comparison, Apple shipped 51.2 million iPhones, a year-on-year fall of 16.3 percent.


Luke MacGregor | Bloomberg | Getty Images

Much of the South Korean company's strategy relied on trying to offer a large portfolio of phones and tablets to hit all price points and customers. But a number of Indian and Chinese manufacturers popped up making high-spec phones and low prices, eating away at many of the markets in which Samsung was trying to compete. But the company shifted gear and trimmed down their portfolio to focus on profitability.

"What Samsung did really was to cut off the bits they didn't need like the loss making devices in the low end, any excessive models that weren't pulling weight. They have streamlined the supply chain and became more efficient, which has led to stabilization in profitability," Neil Mawston, executive director at Strategy Analytics, told CNBC by phone.


Can VR counter slowing smartphones?

But not all of the earnings were rosy. Operating profit for its chip business in the first quarter fell to 2.63 trillion won from 2.93 trillion won in the same period last year. This is seen as a high-margin business and is the second-biggest profit driver for the company.

And in the mobile division, the macro environment looks challenging. The smartphone market declined for the first time in history in the first quarter of this year, according to Strategy Analytics, which will be a headwind for Samsung and its rivals.

"Samsung is fairly diversified and plays across many categories like components and tablets, but that might not be enough to offset the slowdown in the smartphone market," Mawston said.

To counter this, Samsung has been trying to expand its product offering with services such as Samsung Pay – its mobile payments system – and new devices like its virtual reality headset (VR), the GearVR, and camera called the Gear 360. Virtual reality is seen as a big growth area for Samsung and others such as Facebook in the future, but for now, it won't have a big impact on earnings.

"Virtual reality is a long-term play with short-term financial upside so VR is growing rapidly from a low base, but it's a tiny base and won't contribute materially to Samsung's revenues for several years," Mawston said.