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Samsung's Mobile Profits Fall as Consumers Pass on Galaxy S9 Phones

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Samsung’s Galaxy S9+ smartphone


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Chris J. Ratcliffe/Bloomberg

SEOUL—

Samsung Electronics
Co.

may have misdialed on the $1,000 smartphone era.

Fewer buyers than expected have shelled out top dollar for Samsung’s new flagship device, the Galaxy S9, with top-end versions approaching the $1,000 mark. The consumer rebuke, plus heavier marketing expenses, caused second-quarter mobile-unit profits to nosedive by one-third from a year earlier.

The poor sales prompted a Samsung handset executive to make a rare acknowledgement that the world’s largest smartphone maker may have been too cautious in adding bells and whistles to its handsets, as rivals pushed forward with more cutting-edge hardware.

The company’s focus on delivering more surefire features “may have resulted in a conservative approach to adopting new technologies,” said Lee Kyeong-tae, vice president of Samsung’s mobile-communications business, on the company’s earnings call Tuesday. Mr. Lee also acknowledged rising price tags were “drawing market resistance.”

Samsung is absorbing the largest blow from a smartphone industry that is struggling with a historic sales slump. Prices can’t rise much more, if at all, and Samsung is losing ground to cheaper Chinese rivals wooing more budget-conscious users, from Europe to India, with feature-rich devices.

“If people don’t have money to buy the iPhone X, they don’t have money to buy the Galaxy S9 either,” said Tom Kang, a Seoul-based analyst at Counterpoint Technology Market Research. “Innovation has stopped, and people are looking for more value for their money.”

The smartphone industry suffered its first-ever decline in shipments last year. They fell 0.3% from 2016, according to IDC, a market researcher. Sales are projected to drop again this year.

The leaner times are prompting some industry shifts. During the April-to-June period, Huawei Technologies Co. is expected to have surpassed

Apple
Inc.

as the world’s second-largest smartphone maker, the first time the Chinese company has done so on a quarterly basis, according to IHS Markit projections. Samsung retains its No. 1 spot.

Huawei, which aggressively targets mid- and lower-tier segments, recorded 54 million phone shipments during the quarter ended June 30 versus IHS’s estimates for Apple of roughly 44 million units. Apple, however, is on track to hold onto No. 2 for 2018, with analysts expecting three new iPhones in September.

Huawei said Tuesday its unaudited revenue across the company during the first half of the year rose 15% to 325.7 billion yuan ($47.7 billion) from a year earlier with an operating margin of 14%. The privately held company, which also makes network equipment and other gadgets, didn’t disclose other figures.

Apple reports its quarterly results on Tuesday. Analysts expect the Cupertino, Calif., company to deliver a 2% increase in iPhone units and a 17% increase in sales on higher average selling prices, according to FactSet. Apple and Samsung account for the overwhelming bulk of the smartphone industry’s profits, with iPhones accounting for the lion’s share.

Though robust memory-chip sales elevated Samsung’s overall results, the company said Tuesday that mobile operating profit fell to 2.67 trillion South Korean won ($2.39 billion) for the quarter ended June 30, down 34% from 4.06 trillion won a year earlier. The unit’s revenue, which includes its telecom network-equipment business, fell 20%.

The mobile unit’s results “were much worse than expected,” said Ambrish Srivastava, an analyst at BMO Capital Markets, in a note to investors. The average sales price for Samsung phones dipped 13% from the first three s of the year, he added.

The phone struggles come just two years after Samsung faced a global recall of overheating Galaxy Note 7 devices, which ultimately cost it around $6.5 billion and led to a widespread ban on carrying the device onto aircraft amid fears it was a fire-safety hazard.

In the fiasco’s aftermath, Samsung’s mobile chief, D.J. Koh, had told the company’s engineers not to hold back on pushing ahead with innovations.

Chinese firms have still beaten Samsung to market with new advancements. This year, Huawei launched a phone with three rear cameras, while Oppo Electronics Corp. maximized screen size by adding a motorized, pop-up camera attached to the device’s back. Vivo Electronics Corp. earlier this year released a phone with an on-screen fingerprint sensor, a key leap because smartphone designs have dumped the physical home button in order to make room for edge-to-edge displays.

“These Chinese firms are coming so fast, they’re taking market share from Samsung,” said Jusy Hong, a Seoul-based director at IHS Markit.

Samsung gets a shot to reverse matters on Aug. 9, when its flagship Galaxy Note 9 debuts. Mr. Lee, the handset executive on the company’s conference call, reiterated that the Note 9 would be offered at “reasonable prices” and the launch would be backed by “all of our sales and marketing resources.”

He also pointed to two areas where Samsung could rebound with future potential breakthroughs: new phone designs and handsets equipped for fifth-generation, or 5G, wireless networks.

The Wall Street Journal reported July 18 that poor Galaxy S9 sales had spurred executives to pursue plans to introduce a foldable-screen phone by early next year. On Tuesday, Mr. Lee didn’t specify timing but said the firm was working on the phone’s durability and performance.

With 5G, Samsung could have three generations of phones released before Apple produces its own 5G device, said Patrick Moorhead, president of Moor Insights & Strategy, an Austin, Texas, tech consultancy firm.

“There is reason for optimism” for Samsung, Mr. Moorhead said.

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