SEOUL—As Samsung Electronics Co.'s mobile business stumbled over
the past year, the South Korean technology giant found a measure of
salvation in its surging semiconductor unit.
But no more. On Thursday, Samsung reported a 40% drop in net
profit for the last three months of 2015 to 3.2 trillion Korean won
($2.65 billion), as its chip business recorded its slowest quarter
of profit growth in more than three years.
Samsung's mobile business didn't fare much better, depriving the
company of its two key profit drivers as a broader global economic
downturn threatens to exacerbate a natural slowdown in the maturing
smartphone market.
"Samsung's main business units are all facing a downturn," says
C.W. Chung, an analyst for Nomura in Seoul.
Company executives suggested that there would likely be more
pain to come this year, helping send shares in the company down
2.6% on Thursday, wiping out about $3.5 billion in its market
capitalization.
Samsung mobile executive Lee Kyeong-tae warned that "competition
among smartphone players will intensify even further as a
consequence of market growth slowdown."
The company's investor relations chief, Robert Yi told analysts
that "it will be a challenge to maintain last year's earnings
levels" in the first half of the year, citing macroeconomic
headwinds and forecasts of slack demand for information-technology
products.
While Mr. Yi said he hoped for a modest improvement in the
second half of the year, other executives tried to emphasize
Samsung's longer-term prospects, pledging a renewed push to develop
an ecosystem of mobile software and services to attract and keep
more smartphone users.
They also said they would focus on winning consumers of low- and
midrange smartphones in developing markets, many of whom are buying
smartphones for the first time.
"Executives are touting a lot of new business pushes in
different areas, but they have yet to translate into solid
results," said Mr. Chung of Nomura, who noted that most analysts
now expect Samsung's operating profit to fall this year from the
$21.9 billion that it earned in 2015.
"If the company manages to sustain last year's profit levels
this year, that'll be impressive," he said.
Samsung isn't the only technology company to send a warning
signal on growth. Samsung's U.S. semiconductor peers Intel Corp.
and Qualcomm Inc. have reported weaker earnings as growth in demand
for smartphones and other IT products slows, while Apple Inc. on
Tuesday forecast its first revenue decline since 2003 as iPhone
sales slowed.
But Samsung is particularly vulnerable. It is the world's
biggest producer of smartphones and memory chips used in everything
from mobile phones to personal computers. Research firm Gartner
estimates global chip sales fell 1.9% last year, the first decline
since 2012.
Global smartphone shipments grew at just 6% in the fourth
quarter, according to data tracker Strategy Analytics.
Samsung has long touted its diversified approach to the
technology business, with cyclical downswings in chips offset by
gains in mobile devices, and stable if unspectacular revenue from
the company's television and home appliance businesses.
Indeed, those products were a rare bright spot for Samsung,
though TVs and appliances contribute less than 5% of Samsung's
overall operating profit.
In the longer term, Samsung executives laid out a road map to
competitiveness in the mobile business, creating a collection of
software and services unique to Samsung smartphones that can help
the company differentiate itself from a growing herd of Android
smartphone manufacturers.
Late last year, Samsung stripped its longtime mobile chief J.K.
Shin of his day-to-day duties, and promoted the mobile research and
development chief D.J. Koh. Instead of replacing Mr. Koh with one
mobile R&D chief, Samsung appointed two executives: one to
oversee mobile hardware R&D, and the other mobile software
R&D.
The reason, explained Mr. Lee, the Samsung mobile executive, is
to "accelerate innovation on software and services, while
developing and identifying new business opportunities." Mr. Lee
cited Samsung Pay, the company's mobile payment service, as a sign
of success, adding that the service would be rolled in China and
parts of Europe this year.
But Samsung's software and services ambitions will take several
quarters or more to hit the bottom line, if they succeed.
Meanwhile, Samsung will remain reliant on chips and phones to drive
growth—and the headwinds there are much stronger than a year
earlier.
In the fourth quarter, Samsung's operating profit from chip
sales inched up just 3.7% despite robust revenue, reflecting a
sharp fall in profit margin to 21%--the lowest level since the
second quarter of 2014.
In the mobile-phone business, Samsung continues to suffer from
stiff competition from low-cost Chinese brands that have squeezed
Samsung's mobile margins and eroded its market share.
While operating profit from Samsung's mobile business rose 14%
from the disastrous fourth quarter a year earlier, mobile revenue
slipped. Mobile profit margin edged up to 8.9% from 7.5% a year
earlier.
To lift its flagging share price, Samsung has vowed to return
30% to 50% of its annual free cash flow to investors through
buybacks and higher dividend payouts. The company said it had
already bought up and canceled 4.25 trillion won of shares in the
first phase of the buyback program.
On Thursday's earnings call, Mr. Yi said that while Samsung
would nudge its dividend higher, it hadn't yet determined how it
would meet its shareholder return target this year, saying that,
"given all the uncertainty in the market, it's difficult to have
visibility on any capital expenditure plans as of yet."
Even so, the company's cash levels piled up to 71.54 trillion
Korean won, the highest level in the company's history.
Write to Jonathan Cheng at jonathan.cheng@wsj.com and Min-Jeong
Lee at min-jeong.lee@wsj.com
(END) Dow Jones Newswires
January 28, 2016 05:35 ET (10:35 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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