Seoul: LG Electronics Inc, the world’s No.2 TV maker, reported a bigger-than-expected 90% slump in quarterly profit, hit by a loss in its mobile phone business as it falls behind rivals in launching new models.
LG shares fell 3% on persistent worries its weak smartphone lineup will be a drag on earnings recovery and as it lags behind Apple and Samsung Electronics.
A fragile global economy and growing uncertainty over the euro zone debt crisis could also dampen demand for flat-screen TVs and other home appliances such as washing machines and fridges.
“It looks difficult for LG’s handset business to swing back to a profit within this year and next year’s outlook is also not that bright. It needs more competitive models to appeal to customers,” said Choi Hyun-jae, an analyst at Tong Yang Securities.
“Earnings may improve in the third quarter, but it is hard to say the worst is over yet on a slowing global economic recovery and its weak mobile phone business.”
A lot depends on how successfully LG launches its Google Android-based smartphone, which goes on sale this quarter globally through 120 carriers.
LG, which has failed to come up with a hit model to compete against Apple’s iPhone or Android phones made by Samsung and HTC, rolled out Ally and Optimus Q smartphones late last quarter but sales have been too weak to cover overhead costs.
LG reported a 120 billion won ($101.5 million) operating loss from handset sales in the second quarter versus a profit of 620 billion won a year ago.
LG’s mobile business has struggled since last year following a series of fumbles in smartphone development, which led to higher marketing costs and lower selling prices.
“The entire industry is moving towards smartphones right now. LG has always been strong in the feature phone sector, but not smartphones, so that’s something it has to work towards,” said Jeff Pu, an analyst at Fubon Securities in Taipei.
“Coupled with downward pressure on prices and falling demand, what LG really needs to do now is to have a top smartphone model so that it can compete with the likes of Apple and Motorola.”
LG trails Nokia and Samsung in mobile phones and competes with Sony Corp and Panasonic Corp in flat-screen TVs.
It posted an operating profit of 126 billion won ($106.6 million) in April-June versus 1.24 trillion won a year ago and a consensus forecast of 210 billion won by 12 analysts polled by Thomson Reuters.
Profit margins at its TV division fell to a razor-thin 0.5% last quarter from 5.9% a year earlier.
The TV division was hit as a nearly 10% fall in the euro against the US dollar last quarter inflated dollar-based settlement costs for flat screens and other production materials. LG is estimated to earn around 40% of its TV sales in Europe.
The maker of Infinia and Xcanvas TVs hoped the operation would overtake the handset business as a main growth driver this year but weak premium model line-ups and poor sales in Europe gave little boost to its profits.
Growing competition from Japanese rivals led by Sony to capture bigger market share will also increase pressure to lower product costs, further pressuring margins in the second half.