LG’s 2nd quarter results earlier this week saw high demand for its mobile phones as one of the key factors pushing revenue and profits to record levels.
The average selling price (ASP) of its phones grew about 4% to $127, lifting phone revenue to KRW 4.88 trn, which is growth of 25% over Q1 and almost 30% over the year.
Operating profit in the Handsets division more than doubled to KRW 538bn, from KRW 263bn in Q1. That lifted the operating margin to 11% from 6.7% in Q1, although it is not back to the almost 15% seen 12 months ago before the market turned down.
Almost all other divisions also improved their performance, with notable gains in air conditioning, so that company revenues grew 13% over the year to KRW 18.7trn while operating profit slipped 3% to KRW 1.41trn, although operating profit was up almost 7% on Q1.
In its outlook on the handset business LG said that it expects the market to grow 7% sequentially to 280m units, which would be a 6% drop from Q3 08. It said that its own sales are expected to grow steadily although it is expecting margins to decline slightly because of a move to lower tier models and increased marketing costs.
Analysis: This is a thumping set of results, brought on by having got key parts of its phone portfolio right at a time when other players are in transition with theirs. These results take LG emphatically away from the danger zone it was in at the end of last year.
It is especially good to see improving performance in most of the divisions of LG. During 2008 the handset division was the main profit source for the company. Now there are reasonable margins in most areas.
LG was on a strong upward trend in handset volumes in the 18 months to mid 2008, when the market turned downwards. Since then, volumes have fallen slightly but LG suffered low margins at the end of 2008, having fought very hard to sustain market share.
The volume increase in the current quarter is impressive, with growth coming in all regions. There is some boost for Korean vendors from the current weakness of the Won. But LG is clearly taking considerable share from Sony Ericsson and Motorola at present.
One key phone in the mix is the Cookie, the mid-range touchscreen device. Another is the KS360 consumer qwerty messaging device, whose success caught most people by surprise. Both have sold very well in the mid-range at a time when other vendors were guilty of not paying enough attention to that part of the market while they were focusing on producing higher-end smartphones.
The average sales price (ASP) for LG has recovered steadily over the last 6 months from $117 in Q4 08 to $127 now, refelecting improvements in the product mix. Some of that is seasonal, with a greater weight of lower end phones normally sold in the 3rd and 4th quarter.
The most impressive feature of the results, though, is the improvement in profitabilty. Shipping 7m extra phones is clearly a huge help. But LG has also benefited from improving the product mix towards mid- and high-end devices, and has seen results come through from its cost cutting programme.
As with other vendors I think LG is right to give a cautious guidance – and not just because of the overall market conditions. The factors that have helped it to be so successful in H1 of this year will not be as favourable in H2. Other vendors have addressed their mid-range portfolio weaknesses and will provide much stronger competition with similar form factor devices during the second half, plus there will be a greater share of lower-end phones in the mix.
Also, we have not seen much from LG yet in the way of services – unlike most of the other major vendors. LG has just launched its App Store in Australia and Singapore, supporting just 2 phones today. I would expect to see signficant investment from here on in various service areas as LG plays catch up with Samsung (and others) in this area.