By Jonathan Cheng And Min-Jeong Lee
SEOUL--The fortunes of the world's two biggest smartphone makers
crossed paths again this week, as contrasting earnings reports from
Apple Inc. and Samsung Electronics Co. put the two technology
giants back in a dead heat for leadership of the global smartphone
market.
Earnings reports from Apple and Samsung, released within a day
of one another, highlighted Apple's resurgence thanks to the
popularity of its bigger-screen iPhones, while underscoring the
stiff competition that Samsung is facing, particularly from
low-cost rivals in China.
Data from Counterpoint Technology Market Research showed Apple
overtaking Samsung in smartphone shipments for the last three
months of 2014 globally. Apple said that it sold 74.5 million
iPhones in the quarter, while Samsung said it sold between 71
million and 76 million smartphones.
Strategy Analytics said in a report Thursday that Samsung's
smartphone sales in the quarter amounted to 74.5 million--putting
it in a tie with Apple for first place.
"We've seen this happen with Nokia and with Motorola," said Tom
Kang, a Seoul-based analyst with Counterpoint. "It's definitely a
warning sign."
Samsung, which has seen its market share ravaged by low-cost
Chinese handset makers, reported a 64% drop in operating profit
from mobile phones on Thursday. Mobile phones, which accounted for
75% of Samsung's overall operating profit in the first quarter of
2014, now chip in just 37% of total earnings, as the South Korean
company's smartphone sales sag and its semiconductor business picks
up speed.
Samsung first overtook Apple as the leading smartphone vendor in
2011 as the South Korean firm rode the success of the first
smartphone in its popular Galaxy series.
The Galaxy smartphones became the central focus of a bitter
legal battle between Samsung and Apple over patents and innovation
that has played out over the last four years. The two companies
agreed last year to settle the legal case outside the U.S.
Since last year, Samsung's leadership has been under assault
from companies like upstarts Xiaomi Corp. in China and Micromax in
India. Its Galaxy S5 smartphone, which it started selling last
spring, was something of a flop with consumers, selling about 40%
fewer than expected, according to people familiar with the
matter.
Samsung is hoping to reassert its leadership with its successor
device, which is expected to be called the Galaxy S6, and is set to
be announced on the sidelines of an industry trade show scheduled
for the beginning of March in Barcelona.
The convergence of Apple and Samsung's fortunes comes as more of
the world's population adopts smartphones, leaving less room for
growth.
As a result, Samsung has turned its focus to selling low-end
smartphones, targeted at consumers who have never owned a handset
capable of accessing the Internet, which has led to a decline in
its profit margins.
Earlier this month, Samsung released a new smartphone in India
that sells for just $92. The phone, called the Samsung Z1, is
powered by its homegrown Tizen operating system, an alternative to
Google Inc.'s Android.
Samsung's mobile operating profit margin during the last three
months of the year was just 7.5%, a touch higher than the third
quarter's margin of 7.1% but well below the 19.8% margin that
Samsung's mobile unit enjoyed as recently as the first quarter of
2014.
In contrast, Apple, which has long championed a strategy of
targeting premium consumers with its high-end iPhones, saw its
gross margin rise to 39.9% in its fiscal first quarter ended
December from 37.9% a year earlier. That was largely because of the
success of its iPhone 6 and iPhone 6 Plus, which borrowed from
Samsung's large-screen smartphone strategy.
While the two companies are now neck and neck in smartphone
sales, in many ways Samsung and Apple are competing for different
consumers, says Mr. Kang of Counterpoint.
"Samsung should not even be trying to compete with Apple -- it's
a distraction," Mr. Kang argues.
In the Android market that Samsung still leads in globally, Mr.
Kang argues: "The majority of those users don't want to spend that
much money anymore."
While Samsung's earnings report showed the company continuing to
feel the pressure from Apple and other handset makers, the company
was also quick to note that the magnitude of its earnings slide is
moderating, suggesting that Samsung is finding its footing after
three consecutive quarters of sharp year-over-year net profit
declines.
Samsung said its fourth-quarter profit fell 27% to 5.35 trillion
won ($4.9 billion), better than the 49% year-over-year slump in the
third quarter.
Samsung is also finding a stronger footing in its semiconductor
business, which analysts say is likely to boost the company's
bottom line this year as the mobile division continues to
regroup.
A large number of Samsung's next flagship smartphones could come
equipped with an internally designed mobile processor, said a
person familiar with the matter, unlike previous models that relied
heavily on processors from Qualcomm Inc.
That change would help Samsung lift its mobile profit--albeit
modestly--and boost the chip unit that makes mobile processors,
analysts say.
Fourth-quarter operating profit fell 36% to 5.3 trillion won on
an 11% decline in revenue of 52.7 trillion won, Samsung said.
Samsung executives also sounded an upbeat note about its
non-memory chip business, which analysts say is likely to have
weighed down the company's overall semiconductor performance last
year.
Write to Jonathan Cheng at jonathan.cheng@wsj.com and Min-Jeong
Lee at min-jeong.lee@wsj.com
Access Investor Kit for Apple, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US0378331005
Subscribe to WSJ: http://online.wsj.com?mod=djnwires