Samsung Electronics Co. ( 005930.SE +0.96% ) estimated its third-quarter operating profit more than halved from a year earlier, hit by weak smartphone sales, forcing the company to rely more on its chip business to drive future earnings growth.
As stiff competition from Chinese vendors continues to pressure its mobile division profit—it derives more than 60% of its profit from the sale of mobile phones—investors have sold off Samsung shares on concerns about its outlook. Its stock is down about 15% so far this year.
The world’s largest smartphone maker by shipments said Tuesday its third-quarter operating profit likely fell 57.8% to 61.8% from a year earlier to between 3.9 trillion won ($3.6 billion) and 4.3 trillion won ($4.0 billion). Last year, Samsung reported an operating profit of 10.2 trillion won. A poll of seven analysts expected Samsung’s operating profit to come in at 4.3 trillion won.
Expectations for the quarter have already been low as sales of Samsung’s flagship device, Galaxy S5 have been weaker than expected and the company only began to sell its new smartphone-tablet hybrid the Galaxy Note 4 last month.
Samsung said in a statement that while smartphone shipments increased in the quarter, its operating margin was weighed down by hefty marketing costs and falling average selling prices. It didn’t provide specific figures.
It also sounded a cautious note for the fourth quarter noting the outlook remains uncertain.
The weak earnings guidance comes as Samsung struggles to figure out its broader growth strategy and amid expectations of a major restructuring later this year, according to people familiar with the situation.
Chairman Lee Kun-hee remains ill following a heart attack in May. While Samsung said Mr. Lee ’s health is improving, critics said the company lacks a visionary to steer the company into new growth areas especially at a challenging time.
Meanwhile, Samsung affiliates have been carrying out a series of financial transactions that will help heir-apparent and Mr. Lee’s only son, Jay Y. Lee, inherit the company from his father. The younger Mr. Lee, a vice chairman of Samsung Electronics, remains the biggest shareholder of a de facto holding company of the Samsung Group, South Korea’s biggest conglomerate.
Fortunately for Samsung, its lead in memory chips and tight supply is expected to cushion the blow from weak mobile phones sales this year. Analysts say chip profits could exceed those from mobile phones later this year.
The last time Samsung’s chip profits exceeded mobile profits was in the second quarter of 2011.
To continue to stay on top, Samsung on Monday announced plans to build a $14.7 billion plant over the next three years, to address future chip demand for various electronic devices ranging from smartphones, to tablet computers and robots.
“Samsung does make good memory chips,” said Doh Hyun-woo, an analyst with Mirae Asset Securities in Seoul, noting that the company will have to shift its gear to rely less on mobile phones and more on chips for profit growth.
He expects Samsung’s annual chip profits to rise 34% to 11.5 trillion won next year, from an estimated 8.6 trillion won this year. He forecasts that mobile operating profit will fall to 9.7 trillion won in 2015 from an estimated 14.8 trillion won this year.
Samsung didn’t provide a breakdown of profit estimates by businesses.
It will release final earnings figures later this month.
Write to Min-Jeong Lee at firstname.lastname@example.org