Samsung Warns Investors of Fourth Quarter Profit Decline as Smartphone Margins Shrink

It’s well known that the large and diverse Android-based ecosystem outsells iOS and other mobile competitors by a wide margin, but it’s also well known that many manufacturers relying on Android can’t match the profit margins of their Cupertino rival. These lower margins, coupled with increasingly stiff competition from both inside and outside of the Android ecosystem, have finally caught up with Samsung, the largest Android-based device producer in terms of shipments. The Korean firm Thursday released “preliminary earnings guidance” for its December quarter, warning investors of a significant decline in profits year-over-year.

Although final results won’t be released until late January, Samsung’s report predicts a profit of 5.2 trillion South Korean won (about US$4.7 billion) on revenues of 52 trillion South Korean won (about US$47.3 billion) for the December quarter of 2014. That’s about a 37 percent decline in profit and 12 percent decline in revenues compared to the same quarter last year. Although up from the third quarter, the disappointing fourth quarter results arrive at the end of five successive quarters of decline for the company.

samsung_quarterly_results_4q2014Samsung is involved in a wide range of industries, including its role as an important chip manufacturer for Apple, but the company’s bottom line has been significantly hurt by fierce competition in the smartphone industry. Samsung is the world’s largest smartphone manufacturer by volume, but has seen dozens of competitors pop up in recent years, most based in China, which have challenged the company’s share of the entry-level and mid-range smartphone market.

Samsung’s financial picture would look even worse, sources told Reuters, without the relatively strong performance of the company’s component division, with demand for Samsung-produced memory, processors, and displays producing healthy profits that partially subsidized the losses from the mobile side of the business.

The relatively good news for the company is that analysts predict that this quarter represents “the floor,” and that by refocusing its business on profitable areas and simplifying its mobile product line, Samsung will see a profit increase next quarter.

“Apple and Chinese producers are rivaling Samsung in smartphones, but they are also its biggest customers for components, especially in memory chips,” said Greg Roh, a Seoul-based analyst at HMC Investment Securities Co. “It’s about the right time for Samsung to find the sweet spot from its component businesses rather than from end-product units.”

Apple will also release its quarterly earnings report at the end of January, with a call to investors on January 27th. At its 4Q2014 call in October, the company offered guidance of gross margins between 37.5 and 38.5 percent on revenue between $63.5 billion and $66.5 billion.