Samsung Blames Sinking Smartphone Sales On Supply SnafuSamsung Blames Sinking Smartphone Sales On Supply Snafu

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Samsung today warned that its second-quarter profit will be lower than initially estimated. It is largely blaming the drop on sluggish performance of its new flagship smartphones. Worse, Samsung miscalculated supply levels for the phones dramatically.

Samsung said it expects to record a profit of approximately $6.1 billion for the three months ending June 30. That represents a drop of 4% year-over-year. Moreover, revenue was down 8.4% compared to the year-ago period. With its semiconductor business firing on all cylinders, Samsung's mobile device business is shouldering the majority of the blame. 

So what went wrong?

To start, Samsung stripped out some popular features to make the Galaxy S6 and S6 Edge more like the iPhone. For example, in order to achieve the thin profile and classy design, Samsung was forced to seal up the battery. This became an achilles heel for the phones.

More importantly, Samsung screwed up its supply estimates for the two handsets. Initially, Samsung believed consumers would snap up one S6 Edge for every four S6 models sold. In reality, consumers were buying the phones at approximately even levels. The result was a short supply of the S6 Edge and a stockpile of the S6.

[Read about Smartphones to Watch in 2015.]

Samsung was quick to pledge more supply of the S6 Edge, but the company was forced to reconfigure its plants to do so. Changing production lines takes time and money. It didn't help that the S6 Edge's curved screen is difficult and costly to manufacture.

Samsung also messed up orders for the different colors. The device was announced in five hues: black, white, green, blue, and gold. The company made far too many white models, which haven't been selling. In the US, only the black, white, and gold models are available. The attractive blue and green colors are being reserved for other markets.

The result? A mess on Samsung's balance sheet.

This will mark the seventh consecutive decline in profits for Samsung's mobile division. Two years ago, its smartphone-making arm could do no wrong. Samsung's fortunes have changed quickly. Samsung no longer discloses its sales of smartphones, but estimates place them between 71 and 76 million for the quarter. The S6 and S6 Edge account for about 20% of those estimates. If there's any good news here, it's that Samsung is still in the black, and the second quarter's profit decline isn't nearly as disastrous as the first quarter's 30% profit plunge.

Surely there is some hand-wringing and head-scratching going on over at Samsung HQ. Interest in Samsung's flagship handsets peaked with the 2013 Galaxy S4. Sales of the 2014 Galaxy S5 were way off. So far the Galaxy S6 isn't off to a great start. Apple's iPhone 6 and iPhone 6 Plus are a one-two punch that appears to have Samsung against the ropes. Meanwhile, Samsung has all but abandoned the low end of the market, ceded to China-based competitors.

Samsung's next major handset will be the Galaxy Note 5, which is expected to arrive in early September at the IFA trade show in Berlin. Will it be able to turn Samsung's fortunes around?