Samsung Electronics reported Tuesday its net profit had risen 5.9 percent year-on-year in the first quarter to 7.57 trillion won ($7.3 billion) but operating profit declined for a second straight quarter on slowing smartphone revenue.
Alarm bells have been sounding for a while over Samsung’s reliance on smartphone sales in mature markets such as Europe and the United States, and increasingly competitive emerging markets such as China.
The world’s largest smartphone maker has a diverse product line ranging from memory chips to home appliances, but more than half its profits are generated by mobile devices.
This month saw the global roll-out of the latest version of its flagship Galaxy series smartphone, the S5, whose performance will be closely watched over the coming months.
While reviews have rated the S5 a top-class product, they note that it offers little in the way of real innovation that would set it apart from previous versions and models offered by competitors such as Apple.
Samsung made margin concessions with the S5, launching it at a slightly lower price than its predecessor the S4 and throwing in a premium software bundle estimated at more than $500.
The strategy appeared to have met with some success, as the net profit figure released on Tuesday beat most analyst estimates.
However, operating profit stood at 8.49 trillion won for the January-March period, down 3.3 percent year on year and following a 6.0 percent decline in the fourth quarter.
Overall sales in the first three months of the year inched up 1.53 percent to 53.7 trillion won, but were down 2.5 percent for the mobile business unit.
The firm’s Seoul-listed shares were down 1.66 percent in the morning, while the broader KOSPI market was 0.22 percent lower.
Samsung on Tuesday acknowledged it was faced with a tough road ahead as demand would remain sluggish in the second quarter.
– Expanding product line-up in China –
Kim Hyun-Joon, Samsung’s senior vice president for the mobile business, said the market for smartphones and tablet computers would “grow slightly” in the second quarter.
“But we will try to continue solid earnings growth by expanding sales of Galaxy S5,” Kim said.
The company was expecting sales of Galaxy S5 to beat its predecessor S4, he said, despite some scepticism from observers.
Samsung rarely discloses sales figures for its smartphones but J.K Shin — the head of the firm’s mobile unit — said in October that S4 sales had reached 40 million globally since its release in April 2013.
Seoul-based Korea Investment & Securities recently estimated its worldwide tally stood at 57 million units.
But sales of the S5 will likely be limited to around 51 million, it said, while another researcher HMC Investment & Securities put the estimated figure at 44 million.
Samsung has expanded its presence in faster-growing emerging markets thanks to increasing sales in China and the Middle East, Kim said.
Sales of its mid- and low-priced models such as Galaxy Brand or Galaxy Ace also rose in the developing markets, he said.
“We plan to meet the growing demand by expanding product lineup for China’s long-term evolution (4G) market that is expected to grow dramatically,” Kim said.
Previously moribund sales of its tablet computers also rose to reach some 13 million units in the first quarter, he added.
The company’s bottom line was also boosted by a 22.8 percent surge in memory chip sales from the first quarter of 2013 to 6.29 trillion won.
There is a general consensus that smartphone evolution has hit a barrier that will only allow incremental improvements on existing design and technology, rather than market-changing reinvention.
Samsung and South Korea’s other export powerhouses are also feeling some strain from the strength of the Korean won.
Samsung said sharp currency swings cost it 700 billion won ($676 million) in lost revenue in the fourth quarter of 2013.