Samsung's Net Profit Plunges 30%

MAY 1, 2011 THE WALL STREET JOURNAL

By EVAN RAMSTAD
SEOUL—Samsung Electronics Co. Chairman Lee Kun-hee warned in September that the company would have difficulty this year exceeding its record-setting profit of 2010. So far, he's right.

The company on Friday announced a 30% drop in first-quarter net profit as its TV-component business dropped into the red and semiconductors brought smaller profits. Executives signaled a profit decline is likely in the second quarter, against another difficult comparison from a year earlier.

"We expect the adverse business environment to continue," Robert Yi, the company's chief of investor relations said. He forecast a better performance later in the year when seasonal demand rises for electronics and component supplies tighten, lifting prices and profitability for the chips and screens Samsung makes.

Samsung posted a net profit of 2.78 trillion won ($2.6 billion), down from four trillion won in the year-earlier quarter. Revenue was 37 trillion won, up nearly 7% from a year ago.

The company's semiconductor business had an operating profit of 1.64 trillion won and operating margin of 17.9%—the smallest margin since the last quarter of 2009. Its display panel business reported an operating loss of 230 billion won.

Samsung's cellphone business remained the company's main bright spot with an operating margin of 13.4%, the highest since early 2008, due to increased sales of higher-margin smartphones.

Even with the higher margins, Samsung lost market share in the quarter. The company announced that it shipped 70 million mobile devices in the quarter, up from 64 million a year earlier—and that smartphones grew to 18% of shipments from 4% a year earlier. Analysts said about one million of the 70 million devices were tablet computers, but Samsung declined to confirm the figure.

The cellphone division's growth was slower than several of its competitors and outside analysts estimate its global market share fell to 18% from 20%, still second-largest after Nokia Corp.
Samsung's most difficult problem is the persistently low profitability of its consumer-products business, which is its biggest by revenue and includes its name-brand TVs, computers, cameras, washing machines and other goods.
The business eked out a small operating profit of 100 billion won in the latest quarter, down more than 80% from 530 billion won a year ago but a return to the black after it lost money in the last two quarters of 2010.

Investors for years watched Samsung gain size in consumer products through low pricing that eroded margins. But after several years as the world's biggest maker of TVs, which account for 55% of the unit's revenue, Samsung hasn't been able to convert that scale into substantial or lasting profitability for consumer products.

Separately, the electronics maker escalated its fight with Apple Inc. over the appearance of smartphones by filing a new lawsuit in the U.S. late last week. That came after it earlier filed suits in South Korea, Japan and Germany to counter one that Apple filed against it two weeks ago.
With the suits, Samsung is betting it can show that technology matters more than design in the rapidly growing smartphone market, which has come to resemble the go-go days of PCs in the late 1980s and early 1990s, when manufacturers boasted of ever-increasing speeds and other features. In releasing their latest Galaxy S II smartphone last week, Samsung executives concentrated heavily on the capabilities of its processing chip and screen.

In response to Samsung's latest suit, an Apple spokeswoman repeated the statement the company made when it filed suit against Samsung, saying that Apple needed to protect itself "when companies steal our ideas."

Write to Evan Ramstad at evan.ramstad@wsj.com