LG's handset business defies recession with high end focus

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LG's handset business defies recession with high end focus

By CAROLINE GABRIEL

Published: 22 April, 2009

READ MORE: LG Electronics | Handset

Nokia's results announcement last week cheered the market because of the hopes it inspired for near term recovery, but the first quarter figures themselves were the worst in a decade. By contrast, LG is offering good news right now, with strong profit in its handset division, even though it swung to a KRW197.6bn ($148.5m) loss across the company as a whole.

The Korean group's net loss reversed last year's profit of KRW422.2bn, though it was in line with expectations, and operating profit was down 25% to KRW456bn, beating the consensus forecast of analysts polled by Reuters, which had expected only KRW307.4bn. Sales rose 2.1% to KRW7.074 trillion.

The better than expected performance was strongly helped by the phone division, where LG's strategy of shifting its focus more strongly towards high end devices seems to be paying off.

Lee Sung-Joon, an analyst at SK Securities, commented: "LG's mobile phone division showed strong profit, especially in China and North America. Instead of selling more in terms of quantity, LG sold more expensive phones." LG was also helped in exports by the weaker won, a factor that also enabled its flat screen TV division to turn a profit.

After a strong 2008, LG is not expected to see growth in 2009 on a companywide basis, but should see good growth in handsets. While the company expects revenues as a whole to rise by 10% in Q2 compared to Q1, it forecasts that its handset shipments will rise in the same period by a double-digit percentage. Its forecast for the cellphone market as a whole was in line with that of Nokia, at 10% decline for the full year. A spokesperson said: "LG is targeting over 10% growth quarter-on-quarter by focusing on high tier, feature rich products."

This will be a major feat, if achieved, since the greater emphasis on high end products has logically entailed lower volumes, as seen in the Q1 figures. In the quarter, LG sold 22.6m handsets, which was down from 25.7m in the last quarter of 2008, but the division's operating margin went up from 3.9% to 6% at a time when most rivals are struggling to hang on to margin. If LG really can add volume while preserving profits in Q2, it will look one of the most strongly placed phonemakers coming out of the downturn.

"We forecast LG's full year 2009 handset shipments will expand by 10% year-on-year to 111m units, compared with an expected 11% contraction in the global handset market," James Kim, an analyst at Nomura, told The Wall Street Journal.

Strong elements of the LG handset portfolio include CDMA, high end mediaphones like the Arena and Renoir, and strong sales to China. It is placing strong emphasis on Windows Mobile and on new categories of emerging internet devices in its 2009-2010 roadmap.