LG has released its second quarter results, and the overall picture shows a 4% gain compared with this time last year. However, the mobile division remains disappointing, showing a similar loss compared with the second quarter in 2016.
LG is blaming poor flagship smartphone sales for this disappointment: the mobile division managed an operating loss of over $117 million. This is broadly similar to the second quarter performance in 2016, but for 2017 the company’s flagship smartphone has been slightly better received. It’s perhaps no wonder the company described the situation as “challenging.”
In the details, LG’s results were buoyed by increased sales and revenue from the company’s three other business divisions – the Home Appliance & Air Solution Company, LG Home Entertainment Company and LG Vehicle Components Company all showed gains in their respective industries. However, it is the LG Mobile Communications Company that we are more interested in, and where the business has struggled. LG’s notes explain that flagship handset sales were weaker than expected and component costs are rising. In other words, the company isn’t selling as many premium, higher-margin LG G6 devices (and the LG V20) and the cost of building these units is increasing. The LG G6 is often on sale and customers aren’t paying the recommended retail price for the device.
Elsewhere in LG’s range, it appears that their mid-range and lower device sales are encouraging with the company announcing a 13% increase for the “mass-tier” lineup. Unfortunately, LG as with other smartphone manufacturers, makes comparatively less money on the less expensive devices. Although these use cheaper components, they usually do not cost less to design, test and manufacture, and so the profit margin is much less. LG’s sales are up but it’s making less per unit sold – and component pricing is also going up, which hurts the profit margin in less-expensive devices even more. LG will attempt to boost its mid-range portfolio with the LG Q6.
What can LG do? The LG G6 is a solid offering as a smartphone and whilst it is not best in class, it is generally liked across the industry. It’s difficult for LG to differentiate it’s flagship product, apart from how it uses last year’s flagship chipset. We’ll see what the company does in quarter three to try and rebound its struggling department, and that could all start with a new and robust LG V30.