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TheStreet Open House

Samsung Disappointing Numbers Will Be Worse With Apple's Next iPhone Release

NEW YORK (TheStreet) -- Samsung's dismal quarterly performance, leading to a 25% decline in profits, are likely to get worse before they get better, as the company warned that the second half of the year would be "a challenge" and Apple (AAPL) is likely to refresh its iPhone later, starting in Sept.

That challenge is coming not only from Apple's iPhones at the top-end of the smartphone business, but from mid and low-priced handsets made by small manufacturers and selling well in China and the world's emerging markets.

IDC analyst Ramon Llamas says Samsung is really "feeling the pressure from every area." In a phone interview, Llamas said Samsung is the top manufacturer and it's also "the biggest target." He thinks Samsung's problems are three-fold: it's struggling in the low-end marketplace, competitors such as LG and Motorola are currently offering high-quality alternatives and that "the writing is on the wall" for Samsung once Apple introduces its larger-screen models.

Read More: iPhone 6 Coming at Right Time as World Moves to Large Smartphones

Samsung announced a net profit of $6.1 billion in the second quarter,  down from $7.6 billion in the year ago quarter. Operating profits of $7.02 billion fell 15% sequentially, and 25% from the same quarter last year.

Nick Spencer of ABI Research thinks Samsung is "caught in the middle ground" between low-cost Chinese phones and the iPhone.  In an email, Spencer added, "Samsung has also always relied on supply chain excellence (scale and manufacturing its own components) to allow it to create dozens of different models to satisfy every conceivable price point, form factor and regional taste. This is inefficient, which is fine when you have margin to play with and have the lowest manufacturing costs, but both of these are being squeezed by Chinese manufacturers."

For the past few years, Samsung's distinct marketing advantage has been larger smartphone screens than its competition, but that may soon change. Apple is expected to announce two new iPhones that should challenge Samsung's main talking point, one with a reported 4.7-inch screen rivaling the Galaxy S5, and the other is said to sport a 5.5-inch display. Apple recently reported fiscal third-quarter results, which saw the company ship 35.2 million iPhones. According to analysts surveyed by Thomson Reuters, Samsung's problems will continue into the second half of this year. Analysts polled expect Samsung to see a 7% revenue decline in profits and an EPS drop of 14% in the third quarter and a slightly better (-2% revenue and -3% EPS) in the fourth quarter.

Samsung has yet to respond to a request for comment.

Early in July, Samsung warned its second quarter would disappoint blaming a number of factors - a slowdown in growth for the entire smartphone industry, increased competition at the high and low ends of the smartphone spectrum, a strengthening home currency in relationship to the US dollar and the second quarter being an historically slow period.

IDC just reported Samsung's global market share dropped 7% YoY despite the fact that the past quarter was the first for its latest flagship smartphone, the Galaxy S 5. The company was hoping sales of the new phone would boost its bottom line accordingly. But, without announcing exact numbers, it revealed S5 sales were not what they had hoped for - especially in European markets. Samsung said it faced overstocked warehouses in the region and was forced to spend more than it had expected on advertising in an attempt to sell more devices.

The recent weakness could be a problem for the company's boss, co-CEO JK Shin, according to The Wall Street Journal. Shin is coming under increasing scrutiny to improve the bottom line. Hundreds of the company's senior managers have reportedly taken 25% cuts in their first half bonuses to help with the situation.

The news is not all bad for Samsung though, according to IHS analyst Daniel Gleeson. "One thing that Samsung does have in its favour is that it is able to regularly make a profit on its handsets; something that HTC, Motorola, LG and virtually every other Android manufacturer struggles to do," Gleeson said via email. "If it can maintain profitability, it should be able to use its massive advertising budget to eventually push some of its smaller competition out of the market. Retaining a large market share in the high-end of the market is essential to maintaining its profit levels."

According to the latest numbers from Kantar Worldpanel's just-released ComTech smartphone survey the Galaxy S5 phone sales were running neck and neck with Apple's iPhone 5s in the United States in the second quarter. It reportedly sold particularly well on Sprint S and T-Mobile TMUS. Buyers noted Samsung's large screen was a draw (67%) as well as its 4G/LTE capability (57%) and strong battery life (54%). Phones running Google's (GOOG) Android OS made by Chinese companies such as XiaomiHuawei and Wiko sold especially well in the new survey.

Read More: How the iPhone Air Gives Apple a Boost

-- 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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