Samsung Q2 Profit Forecast Misses Estimates, Analysts Blame Over-Dependency On Mobile Phone Business, Urge Branching Out To Wearable Devices

Samsung (KRX:005935) posted its earnings estimate for the second quarter ended June, on Friday, which fell short of expectations, deepening worries that the company’s growth rate may be slipping due to a slowdown in its mobile phone business.

Samsung estimated its operating profit for the three-month period ended in June at 9.5 trillion won ($8.3 billion) and revenues at 57 trillion won ($49 billion). However, most analysts expected Samsung to ride on the back of strong smartphone sales and post a profit closer to 10.16 trillion won in the current quarter.

“The slowdown in its handset business appears to be worse than expected and the disappointing result simply reinforces the market view that Samsung's smartphone growth momentum is slowing,” Lee Sei-chul, an analyst at Meritz Securities, told Reuters.

Should the company's estimates turn out to be accurate on July 26, when the South Korean tech giant is expected to release its earnings statement, the second quarter performance will give Samsung a 47 percent year-on-year increase in profit, up from a revised 6.46 trillion won in the same quarter in 2012, and a 20 percent year-on-year increase in revenues from 47.60 trillion won during the same period last year.

In the first quarter of the year, when the company usually experiences a seasonal lull in business, the company had beat expectations marginally to post a profit of 8.78 trillion won, up 54 percent year-on-year from the same period last year, and revenues of 52.87 trillion won, which were up from 45.27 trillion won in the first quarter of 2012.

Samsung released the Galaxy S4 in April and the smartphone quickly became the company’s fastest-selling phone ever, exceeding 10 million unit sales within a month of its launch. But, sales of the handset began waning subsequently to fall short of expectations.

“It sharply missed the market expectation, and that worries me,” Byun Han Joon, a Seoul-based analyst at KB Investment & Securities Co., told Bloomberg, adding that Samsung’s smartphone shipments for the second quarter totaled 74 million units, which was two million less than he expected.

Samsung’s recent success in the smartphone market has helped the company to top the worldwide smartphone market in the first quarter of this year. Last year, the company surpassed Nokia to become the world’s biggest mobile phone maker.

However, there have been concerns over the last few months that Samsung’s smartphone business could be slowing and eventually hurt the company’s profitability. Analysts believe that, in addition to the increased rivalry in the smartphone market, Samsung’s over-dependency on its mobile phone business has also made it difficult for the company to drive growth.

“One of the biggest risks for Samsung Electronics going forward is that 70 percent of total operating profit comes from mobile business,” Jeff Kim, of Hyundai Securities, told Reuters. “Diversification is key. Samsung needs to engage in active business transition until end-2014.”

"Wearable devices are the next stage in a saturated industry that needs constant innovation to survive. We'll see flexible smartphones in the fourth-quarter from Samsung and LG Electronics (NYSE:LG), and iWatch and Galaxy Watch are expected to be one of the first waves,” Kim added.

Samsung’s shares fell more than 2 percent on Korea's KRX exchange after the company released its latest earnings estimates. Its shares have fallen more than 15 percent since early June when many analysts downgraded their outlook for the company.