LG Electronics Inc <066570.KS> the world's No.2 TV maker, faces more pressure to turn around its mobile business and tackle its underperforming shares after it missed forecasts with a 90 percent slump in quarterly profit.
As Apple Inc and Samsung Electronics <005930.KS> launch new models in the lucrative smartphone sector, LG's handset unit is falling behind as profit margins tumble at its TV business due to a weak euro and rising competition.
A fragile global economy and an uncertain outlook due to weak European economies could also hit demand for flat-screen TVs and other home appliances.
What LG needs most is a hit smartphone model to turn around the business and investors will have to wait another six months to see LG finally managing to pull it through, said Cha Kyung-jin, a fund manager at Golden Bridge Asset Management, which holds LG shares.
In the second quarter, LG posted an operating profit of 126 billion won ($106.6 million) versus 1.24 trillion won a year ago and a consensus forecast of 210 billion won by 12 analysts polled by Thomson Reuters.
LG trails Nokia and Samsung in mobile phones and competes with Sony Corp <6758.T> and Panasonic Corp <6752.T> in flat-screen TVs.
It bled a record 120 billion won loss from handset sales and warned of similar losses in the current quarter.
That loss is also wider than analysts' forecast of between 28 billion won and 116 billion won, and versus a profit of 620 billion won a year ago.
LG shares fell as much as 4.4 percent before ending down 2.9 percent lower in a broader market <.KS11> up 0.3 percent.
Analysts said its shares would be under pressure until its handphone business gained some foothold in the market.
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, said Choi Hyun-jae, an analyst at Tong Yang Securities.
The company is betting on its Google Android-based smartphone, which goes on sale this quarter globally through 120 carriers, to get a chunk of the booming market.
We believe smartphone market will become a mass market and our strategy is to boost market share first with mid-end models such as Optimus series we are planning to launch this quarter, LG Chief Financial Officer Jung Do-hyun told analysts.
Ahead of the quarterly results, the company was forecast to report a 19 percent rise in net profit to 1.9 trillion won for the full year, according to 17 analysts polled by Thomson Reuters I/B/E/S.
NO BLOCKBUSTER MODELS
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 <2498.TW>, rolled out Ally and Optimus Q smartphones late last quarter, but sales have been too weak to cover overhead costs.
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.
Our handset business will continue to experience difficulties in the third quarter and would start recover from the late fourth quarter, Jung said.
The company, which trails behind Samsung in the TV making business, said profit margins at its TV division fell to a razor-thin 0.5 percent last quarter from 5.9 percent a year ago.
The TV division was hit as a nearly 10 percent fall in the euro against the U.S. dollar last quarter inflated dollar-based settlement costs for flat screens and other production materials. LG is estimated to earn around 40 percent of its TV sales in Europe.
The maker of Infinia and Xcanvas TVs had expected TVs to overtake the handset business as a key growth driver this year but it has been hit by weak premium model line-ups and poor sales in Europe.
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. ($1=1181.9 Won)
(Additional reporting by Jungyoun Park, Chyen Yee Lee, Seo Jiwon in SEOUL and Kelvin Soh in HONG KONG; Editing by Jonathan Hopfner and Anshuman Daga)