Samsung Shifts Focus to Costs, Cheaper Phones as 1Q Profit Seen Falling

Samsung Electronics Co Ltd is expected to report its second straight quarter of profit decline as its high-end smartphone business loses steam, a trend likely to sharpen the firm's focus on costs and the cheaper phone market.

The world's biggest smartphone maker is counting on the fifth version of its flagship Galaxy S smartphone, which goes on sale globally from Friday, to right the ship and prove the technology giant's staying power as a mobile innovator.

But the Galaxy S5 has already got off to a weak start at home, with its South Korean debut marred by a temporary ban on mobile carriers selling handsets and criticism that it lacks eye-catching new features.

Underscoring the challenges, Samsung priced the S5 about 10 percent cheaper than the S4 even though main rival Apple Inc is not widely expected to update its line-up until September. The firm also dialed back on marketing glitz to keep margins stable.

"This strategy gives them price competitiveness that can be leveraged to drive sales volume and defend overall profits," IM Investment analyst Lee Min-hee said.

"The Galaxy S5 isn't something that will awe investors ... and that's mostly the same with high-end phones at this point. Smartphones no longer offer much groundbreaking innovation and are equalising to a certain degree."

In this respect the Galaxy S5 marks a major shift for Samsung, dropping the emphasis on hardware innovation and instead highlighting features such as fitness aids and sleek design.

JK Shin, co-chief executive and head of Samsung's mobile business, has called it a "back-to-basics" strategy that will help the world's biggest technology company by revenue rein in component costs and make products of wider appeal.

Samsung is likely to estimate a 3 percent year-on-year decline in January-March operating profit to 8.5 trillion won ($8.1 billion) on Tuesday, according to a mean consensus of 40 analysts polled by Thomson Reuters I/B/E/S. StarMine's SmartEstimate, which gives greater weighting to the more accurate analysts, suggests further downside risk with profit of 8.35 trillion won.

This would mark the second consecutive quarter of decline - the first negative streak since a four-quarter slip in 2010-2011 - and analysts polled by Reuters expect the trend to continue through the July-September period. The company's full quarterly results are likely to be announced by April 25.

"The S5's boost to Samsung's bottom line will be weaker than the S4, as it will have fewer shipments in the crucial early launch period and then sales will taper off gradually," said Seo Won-seok, an analyst at Korea Investment and Securities.

"To offset that, Samsung is likely to focus more on cheaper models and broadening lineups."

Seo said he expected the Galaxy S and Note series' share of Samsung's total mobile profits to plunge to 59 percent this year, from almost three quarters last year. The mobile division accounted for about 68 percent of the company's operating profit last year.

SHARES LANGUISH

Samsung's share price is nearly 12 percent off from the record high hit in January last year, weighed by worries over slowing smartphone growth as it faces growing competition from cheap Chinese rivals.

In January the South Korean firm said it aimed to boost dividend payouts after hiking them by 79 percent to a record 2.1 trillion won for 2013. It has the money to pay more, given the 54.5 trillion won of cash and equivalents it held at end-2013.

Warren Lau, an analyst at Maybank Kim Eng brokerage, said in a report that as Samsung generated about $24 billion in free cash flow each year, it could allocate $5.2 billion in funds to repurchase shares and another $2.8 billion for dividends.

But the company's conservative management style means it has shied away from big acquisitions for the most part, and executives have not publicly commented on any buyback programme.

"High dividends give the impression that the company is no longer growing, and the most important thing for technology companies is growth; Samsung has repeated this message," IM's Lee said. "Given that fact, I don't think there will be a major share buyback or a dramatic increase in dividend payout."

Analysts believe Samsung's earnings bottomed in the January-March period, with handset sales for the current quarter expected to improve as the S5 rolls out worldwide.

Stronger returns from the memory chip business and television sales ahead of the 2014 soccer World Cup will also boost the company's bottom line. ($1 = 1058.6500 Korean Won)

(By Se Young Lee; Editing by Miyoung Kim and Stephen Coates)