LG Electronics Swings to Loss

JANUARY 26, 2011,    the WALL STREET JOURNAL

By JUNG-AH LEE

SEOUL—LG Electronics Inc. on Wednesday said it swung to a net loss for the fourth quarter, weighed down by its struggling handset business and sluggish demand for flat-screen televisions amid stiff competition and weakness in European markets.

This was LG's first loss in seven quarters, coming in below market forecasts, but the company said its profitability will improve on expectations its core handset business will start to pick up after heavily investing in new models.

"The first quarter is normally a low-selling season, including TVs, so sales may slow slightly from the previous quarter," said Chief Financial Officer David Jung at an investor-relations session.

"However, helped by our new product launches, including smartphones and LCD TVs, and our continued cutting cost efforts, our profitability will be improved from this quarter and LG may swung to a profit in the first quarter of this year."

For the three months ended Dec. 31, LG, which makes a wide range of consumer electronics and is the world's second-largest liquid-crystal-display TV maker and third-largest handset maker, posted a net loss of 256.4 billion won (US$229.3 million), sharply reversing from a net profit of 361.9 billion won a year earlier. The result was worse than the average 166 billion won net loss forecast by five analysts polled by Dow Jones Newswires.

The electronics maker also reported an operating loss of 245.7 billion won for the fourth quarter, reversing from a 113.8 billion won profit a year earlier, while sales edged up 1.8% to 14.70 trillion won from 14.44 trillion won.

For the full year, the company posted a net profit of 1.28 trillion won, down from 2.35 trillion won in 2009. Its 2010 operating profit was 176.5 billion won, falling sharply from 2.68 trillion won the previous year.

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Andrew Harrer/Bloomberg News

An LG Electronics Cyon mobile phone getting a wireless charge

All consolidated figures are based on International Financial Reporting Standards.

The deep loss comes as LG seeks to overcome a misstep in its handset operations, where it has fallen well behind global rivals such as Samsung Electronics and Apple Inc. in offering feature-packed high-margin smartphones. LG, the world's third-largest handset maker by shipments behindNokia and Samsung, has poured resources into developing smartphones in recent months and is in the process of releasing a new series of models as it seeks to return the key handset segment to profit.

"We are targeting to sell a total of 120 million cellphones globally this year and smartphone sales will be around 19% of that total shipment," said Mr. Jung. Last year, LG sold 116.6 million cellphones.

Sales from LG's handset division, which accounts for around 20% of the company's total revenue, fell 15% to 3.328 trillion won from 3.924 trillion won. But the unit's operating loss margin slightly narrowed to 7.9% from 10.2% in the third quarter. The company sold 30.6 million handsets in the fourth quarter, up from 28.4 million units in the third quarter.

Sales from LG's home entertainment division, which makes flat-screen TVs and plasma display panels and accounts for around 40% of total revenue, rose 5% to 6.205 trillion won from 5.928 trillion won.

For 2011, LG set a record sales target of 59 trillion won ($52.8 billion) and said it plans to invest a total of 4.8 trillion won in capital expenditure. LG posted 55.8 trillion won in sales in 2010.

"Under new senior management, the company will continue to invest in high-potential businesses such as solar energy, commercial air conditioning and water treatment," LG Electronics said in a statement.

Koo Bon-joon, a member of the founding family of the broader LG conglomerate, took over the leadership of the flagship electronics maker on Oct. 1 in 2010 after the resignation of Nam Yong in September due to the company's cellphone woes.

Analysts said LG's new line of handsets should help shore up the company's business.

"LG's handset business is expected to turn around in the first quarter and profitability will sharply improve as it launches smartphones such as the Optimus 2X and Optimus Black," said S.H. Lee, an analyst at Mirae Asset Securities.

LG rolled out the Android-powered smartphone Optimus 2X in South Korea last week through the country's largest mobile carrier SK Telecom. The device has a Tegra 2 dual-core processor made by Nvidia Corp. and will also be released in Europe and Asia.

Its Optimus line of smartphones has so far sold better than the market had expected, analysts say, but critics say the company should come up with new high-end devices with more powerful specs to compete better with other Android-powered handsets, such as Samsung's Galaxy S and the Droid line developed by Motorola Mobility Holdings.

Sales from its home appliance unit rose 14% to 2.819 trillion won from 2.479 trillion won, while its operating profit rose to 78 billion won from 12.2 billion won a year earlier.

Sales from its air-conditioning unit jumped 51% to 912.7 billion won from 606.3 billion won a year earlier. Operating profit was 9.7 billion won in the fourth quarter, reversing from 27.7 billion won loss posted a year earlier.