By Se Young Lee
SEOUL (Reuters) - Samsung Electronics Co Ltd. on Thursday reported its worst quarterly profit in two years and flagged uncertain earnings prospects for its key handset business, fuelling worries about its ability to return to growth.
The downbeat guidance, as well as Samsung's decision to keep its interim dividend unchanged from last year, put the shares of South Korea's biggest company by market value on track for their worst daily percentage decline in nearly eight months.
Samsung expects July-September handset shipments to pick up by 10 percent from the previous quarter and said it planned to release a new premium smartphone employing a new design and material, underscoring efforts by the world's largest smartphone maker to regroup.
With its flagship Galaxy S5 smartphone outsold by Apple Inc's (AAPL.O) iPhone 5S in May and its cheaper devices feeling the squeeze from Chinese rivals like Xiaomi, Samsung also vowed to revamp its mid-to-low-tier product lineup with more aggressive pricing and a focus on a smaller set of products.
Those plans were mostly in line with market expectations and Samsung remained downbeat about its third-quarter prospects, with its mobile division expecting a decline in average sales price in the current quarter from the April-June period.
"Considering intensifying competition of price and specifications as well as the release of new competing models, it is difficult to expect earnings to improve from the second quarter," Senior Vice President Kim Hyun-joon said about the mobile business during a conference call with analysts.
PROFIT SLIDE CONTINUES
For April-June, Samsung said operating profit fell 24.6 percent annually to 7.2 trillion won (£4.14 billion), matching its guidance. It was the third straight quarter of profit decline and its weakest result since the second quarter of 2012.
Profit for the mobile division fell to 4.42 trillion won from 6.28 trillion won a year ago, also the lowest in two years.
Samsung warned that business conditions for the second half would remain challenging, deepening investor concerns about its prospects. Samsung shares were down 3.8 percent as of 0532 London time, underperforming the wider market's (.KS11) 0.5 percent decline.
"There needed to be a positive guidance for third-quarter results but it looks like the company is saying the outlook isn't too bright aside from its semiconductor business," said IBK Asset Management fund manager Kim Hyun-su, adding that he would hold off on buying more Samsung shares until there was a clear turnaround.
Samsung's mobile division executives returned a quarter of their first-half bonuses and have downgraded to economy seats for shorter flights, evidence the South Korean tech giant is tightening its belt as it tries to bounce back.
But analysts say the pressure on the business to turn momentum around will persist and could lead to a reshuffle if the current management could not deliver.
Researcher IDC said on Wednesday that Samsung's second-quarter global smartphone market share slipped to 25.2 percent from 32.3 percent a year ago, underscoring its troubles.
"Nothing on the smartphone end has particularly changed, and there likely won't be any change in the story aside from effects of cost reduction," said IM Investment analyst Lee Min-hee.
Some analysts say Samsung should introduce curved displays or metal casings rather than much-criticised plastic for its premium products. Some have suggested a whole new brand to separate its high-end products from cheaper devices.
Samsung finds itself facing the first annual profit decline in three years just as Apple prepares to launch a larger iPhone that would challenge the South Korean giant on its home turf of out-sized, high-end devices.
The weak second-quarter results will put the spotlight on the next Galaxy Note handset, expected to be launched in September. The company once again hinted at a significant change in design for the device but offered no specifics on Thursday.
"They'll have to make sure that the Note 4 isn't a flop," Counterpoint analyst Tom Kang said before Samsung's earnings disclosure.
Samsung's chips business reported a profit of 1.86 trillion won, in line with solid results for rival SK Hynix Inc , as tight supply for DRAM memory chips for personal computers and servers boosted the bottom line.
Samsung's guidance on its memory business was bullish, tipping its 2014 shipment growth for both DRAM and NAND memory chips to outpace the broader market.
Samsung said it planned 24 trillion won in capital expenditure this year, in line with 2013, with 14.4 trillion won of that for its chips business.
(Additional reporting by Kahyun Yang; Editing by Stephen Coates)