Samsung Electronics is warning investors of a third straight quarter of declining profits. For Q2, the company is expecting a 22-26.5 percent drop in profits from a year earlier, thanks largely to piles of unsold smartphones. Smartphone sales have been Samsung's primary driver of growth over the last few years, and the company is now facing a situation where many potential buyers already have a phone that's "good enough."
Despite being a massive electronics company that sells TVs, refrigerators, computers, cameras, and components, Samsung has become increasingly dependant on smartphone sales. Last quarter, smartphones accounted for 76 percent of the company's profit. As the Wall Street Journal points out, that's up from only 25 percent four years ago.
Samsung's biggest customer is itself. The company's component business (microprocessors, displays, and other items) sells to the electronics wing, which then builds final products out of the pieces. As a result, when smartphone sales tank, the effects are felt in the electronics division—but they also hurt the SoC and display divisions.
The company's proposed solution to its poor earnings projection is, of course, "emerging markets," which companies always seem to cite as a cure-all solution whenever they have financial problems. Samsung is one of the few companies with enough scale and global distribution to actually make good on its emerging market strategy, however, and if it wanted to, it could take on the Motorolas and Xiaomis of the world. Back in more traditional markets, Samsung has the Galaxy Note 4 coming up, though it will have to do battle with the iPhone 6.
Investors have been expecting a poor earnings report for the past month, causing shares of Samsung to fall 11 percent recently, a loss of $25 billion in market value.