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Samsung Hurt By Apple After Disappointing Second Quarter Results

NEW YORK (TheStreet) -- Even though Samsung said a strong Korean currency was one of the main reasons the company's second quarter earnings were disappointing, the company is being attacked by Apple (AAPL) at the high-end of the smartphone market and low-end Google (GOOG) Android devices.

Samsung announced second-quarter revenue was 52 trillion won ($51.5 billion USD), down more than 3% sequentially, and more than 10% from a year ago. Second quarter operating profits were estimated at 7.2 trillion won ($7.12 billion USD) - off more than 15% sequentially, and nearly 25% from a year ago.

The Korean electronics giant blamed a number of reasons for the poor showing, including the fact the second quarter is a "seasonally weak period" for sales in some regions and that the company is facing increased competition in the world's largest marketplace - China.

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Samsung noted that it sold fewer 3G phones in China because consumers seem to be waiting for faster 4G devices. Although still the Chinese sales leader, Samsung finds itself being squeezed at both the higher and lower ends of the marketplace there. The company is facing increased competition from local Chinese brands such as privately-held Xiaomi, which started selling smartphones only three years ago.

In the first half of 2014, Xiaomi shipped almost four times the number of phones it did in the same period last year - so many phones that the company is poised to overtake Lenovo (which uses Google's Android operating system) as the second most popular phone brand in China. Xiaomi revenues rose 149%, year-over-year, reaching 33 billion yuan ($5.3 billion USD).

In Apple's fiscal second quarter, the company reported net sales in China reached $9.3 billion - a year-over-year jump of 13%. On Apple's second-quarter earnings call, CEO Timothy D. Cook noted the company was "especially proud of our very strong results in Greater China, where we established an all time quarterly revenue record of almost $10 billion including the results from our retail stores."

In an email to TheStreet, Evercore analyst Rob Cihra said "we continue to estimate Apple's CQ2 iPhone shipment growth of +12% year-over-year (35 million) having surpassed Samsung's just flat year-over-year (approximately 76 million units). Potential for zero-sum competitive cannibalization will be particularly acute in the second half of 2014 when we expect Apple to launch its larger-screen 4.7" iPhone 6 in late-September, followed by a 5.5" competitor to Samsung's Galaxy Note."

Apple shares were off 1% to $95.00 in mid-morning trading in New York.

Though Samsung is struggling in China, smartphone sales in other regions are slipping too. Despite bragging about a 40% European market share, Samsung admitted weaker cell phone and smartphone demand, which caused "increased inventory."

Worldwide tablets sales aren't faring much better, with Samsung placing the blame on a longer replacement cycle for tablets (two-to-three years) than smartphones, as well as the higher numbers of 5-to-6 inch smartphone/phablets are being purchased to replace 7-to-8 inch tablets.

All of this had a ripple effect on a number of Samsung's other manufacturing divisions, as a phone and tablet slowdown negatively impacted the company's other divisions, including touchscreens, processors and memory chips.

Samsung noted it had also begun to spent a lot more to advertise slow selling products, as the company unveiled a number of promotions to reduce existing inventories in sales channels, thereby increasing the company's marketing budget compared to the previous quarter.

Despite the negativity surrounding the second-quarter, Samsung company "cautiously expects" a more positive outlook in the third quarter, with the coming release of new smartphones including an updated Galaxy Note 4 phablet.

-- Written by Gary Krakow in New York.

To submit a news tip, send an email to tips@thestreet.com.

Gary Krakow is TheStreet's Senior Technology Correspondent.

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