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Samsung predicts a 25% drop in Q2 profits - is the golden era of high-end smartphones over?

Samsung has released an earnings forecast, saying it will see a drop of 25% in its profits for Q2, due to a slowdown in overall smartphone market growth.
July 8, 2014

Samsung has released a Q2 earnings forecast in which the electronics giant says it will see a drop of 25% in its operating profits for the three month period ending June 2014. The company says it has “witnessed a slowdown in the overall smartphone market growth and saw increased competition in the Chinese and some European markets.” Coupled with a stronger Korean currency, which has appreciated against the dollar and the euro, the company is expecting its Q2 operating profit to be $7.1 billion, down from $9.4 billion a year ago.

The release of the OnePlus One is a perfect example of the increased competition that Samsung is facing.
Q2 is often a weak period for smartphone demand in China, and this together with the increased competition has meant that Samsung has higher inventories of medium- and low-end smartphones. Also the demand for 3G devices is waning as consumers move over to 4G LTE products.

The release of the OnePlus One is a perfect example of the increased competition that Samsung is facing. The device uses the same processor as the Samsung Galaxy S5, also has a full HD display like the S5, uses Corning Gorilla Glass 3 – just like the S5, it also supports 4G – just like the S5 but yet it is much cheaper. $299 gets you the base 16 GB model of the OnePlus One, and the 64 GB black edition will set you back just $349. This is the off-contract price and unlocked to work with any SIM. An off-contract Samsung Galaxy S5 will cost you double that!

Samsung’s tablet sales have also taken a hit. The company says that tablet sales “were sluggish due to a longer replacement cycle than that of smartphones, which is usually between two to three years.” It also notes that the popularity of 5-to-6 inch large screen smartphones has dented the demand for 7-to-8 inch tablets.

Samsung cautiously expects a more positive outlook mainly due to the coming release of its new smartphone lineup.

As a result of the higher levels of inventory, Samsung has launched various promotions to reduce stock levels. This in turn has increased the company’s marketing expenditure compared to the previous quarter.

The knock-on effect of the weaker demand for smartphones has also affected the System LSI and the display business units which provide components and screen technologies for phones and tablets.

As for the future, Samsung “cautiously expects a more positive outlook” mainly due to “the coming release of its new smartphone lineup.” Samsung released the Galaxy S5 earlier this year, however it is expected to update its Galaxy Note range during the next few months.

What do you think? Can Samsung continue to compete with the likes of OnePlus, Xiaomi, Huawei and ZTE (plus the smaller OEM’s like ThL) with such high prices? Is it unrealistic for Samsung to continue to make quarterly profits in the billions?