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Samsung heads for first annual profit drop since 2011

Samsung heads for first annual profit drop since 2011.

Samsung Electronics is heading for its first annual earnings drop since 2011 after it revealed its July-September profit would be the lowest in more than three years and said short-term prospects for smartphones were uncertain.

The world's smartphone leader has seen its global market share decline in annual terms for the past two quarters, according to Strategy Analytics, out-classed by Apple's iPhones in the premium segment and undercut by Chinese rivals like Lenovo Group and Xiaomi at the bottom end.

Even so, Samsung's shares had jumped 1.1% by 10.29 p.m. EDT on Monday, reflecting expectations that the company's profits have bottomed and will pick up with the launch of cheaper smartphone models in the months ahead.

"Considering the operating profit guidance, it looks like the company dealt with unsold inventory issues during the third quarter," Alpha Asset Management fund manager Hong Jeong-woong said. "I think Samsung's earnings are at a turning point."

Samsung said in a regulatory filing on Tuesday that operating profit for the third quarter likely fell 59.7% to 4.1 trillion won ($3.8 billion), well below a mean forecast of 5.6 trillion won tipped by a Thomson Reuters survey of 43 analysts.

This would mark the South Korean giant's weakest quarterly profit since the second quarter of 2011 and the fourth consecutive quarter of earnings declines on a yearly basis.

Samsung said that although "uncertainty" persisted in the mobile business, which accounted for nearly 70% of its 2013 operating profit, it "cautiously expects" higher shipments of new smartphones and strong seasonal demand for TV products.

Many analysts and investors believe the best days are behind Samsung's mobile division as it will need to sacrifice margins to keep cheaper Chinese handsets grabbing more of its turf, even though new products like the Galaxy Note 4 will help nudge profits higher in the current quarter.

Operating margin for the smartphone business fell substantially in the quarter due to higher marketing expenditure and sharply lower average selling prices, as the proportion of shipments for high-end devices fell and prices for older models dropped, Samsung said.

HMC Investment analyst Greg Roh said Samsung's average smartphone selling price likely fell to $224 in the third quarter from $301 in the second quarter. In comparison, Counterpoint analyst Tom Kang says Apple's average sales price may rise to about $605 for July-September from $580 in the previous period, with the release of new iPhone models.

While smartphone prices will generally trend lower as the cheaper end of the market grows, Roh said Samsung should be able to make up for lower margins with stronger volumes once it revamped its product lineup.

The firm has released new premium smartphones such as the Galaxy Note 4 in recent months, featuring metal frames in a bid to address complaints about the use of plastic in the past.

Samsung also aims to launch more cost-competitive devices in the mid-to-low end segments. Analysts expect these products to appear by the end of October.

Nomura said in a note to clients in late September that Samsung would release a new mid-tier product late this month valued at between $300 and $400. The new device would use similar components to the flagship Galaxy S5 smartphone, priced at about $500, the brokerage said.

Samsung's chip division is a lone bright spot. The world's top memory chip maker said returns from its memory business in the third quarter improved sequentially due to strong seasonal demand.

On Monday Samsung revealed plans to spend $14.7 billion on a new chip facility near Seoul - its biggest investment in a single plant - as it leans on its semiconductor business to offset weakness in smartphones.

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