LG sold 1.6 million G5 units in the first month, as mobile unit suffers Q1 loss

A proper name for today might be A Tale of Two Cities, except instead of dealing with Dickensian drama, it’s South Korean rivalry. While Samsung – based in Seocho-gu, Seoul – reported earnings that beat even its own estimates, LG Electronics – located in Yeouido-dong, Seoul – is having a somewhat mixed day of sorts: While the conglomerate itself saw a small profit increase for the first quarter of 2016, its mobile division has seen better.

Operating profit for Q1 2016 came in at 505.2 billion won ($420.25 million) which represents a 65.5% increase year-on-year. Sales stood at 13.36 trillion won, or $11.12 billion. This was largely accomplished by the Home Appliances division and the Vehicle Components division, both of which saw substantial gains. As broken down by LG:

The LG Home Appliance & Air Solution Company contributed the largest amount, KRW 407.8 billion (USD 339.23 million) in operating income for the quarter, while the LG Home Entertainment Company earned KRW 335.2 billion (USD 278.84 million) in operating profit, both up significantly from the first quarter of 2015. The LG Mobile Communications Company posted an operating loss of KRW 202.2 billion (USD 168.20 million) primarily due to increased marketing expenditures for the new LG G5 flagship smartphone, while the LG Vehicle Components Company reported a modest loss of KRW 15.8 billion (USD 13.14 million) reflecting higher R&D investments.

On the other hand, LG MC (Mobile Communications) is largely liable for the losses incurred. Sales stood at 2.96 trillion won ($2.46 billion) which is a 15.5% decrease year-on-year. Overall revenue decreased 19% when compared to Q4 2015. LG attributed this to “seasonality” and a lower ASP (Average Sale Price) for smartphones. Mobile phone sales, specifically, decreased 3%.

In addition, shipments of smartphones stood at 13.5 million devices, a 12% decrease both YoY and QoQ. This was, as LG worded it,  “mainly as a result of the business entering the slow season as well as declining shipments of existing flagship models due to high interest in the recently announced LG G5.”

Aside from the aforementioned issues, LG’s mobile division was also hit with increased expenses and marketing around the launch of its modular G5 smartphone, the G5.

The G5 factor

One of the main issues related to this financial picture is the effect LG’s G5 handset played. As some have already pointed out, as far as fiscal reports go, the LG G5 has yet to make money: The fiscal period in question ended March 31st, the same day the phone began to go on sale. Even then, it was not available in the US until several days later, the same delay present for additional other countries and territories as well. This was not the case with Samsung’s Galaxy S7 and S7 edge which were made available in early March and most certainly did help out its balance sheet.

What does factor in are the costs incurred to promote the device, something LG’s own report mentions. In addition, there is also the consideration that given LG’s early announcement of the hardware when compared to previous years, it may have had a negative result on Q1 sales due to interested consumers who would likely hold off purchasing a G4 or other hardware and wait for the G5.

Promising results

Indeed the LG G5 is finding itself with a fair amount of success, as evident by a new report from The Korea Herald. The news organization discloses that LG has stated sales of the phone are already at 1.6 million units worldwide. In addition, during a conference call LG was quoted as stating it would see shipments exceed 3 million units in Q2 2016.

In fact, looking at its mobile segment’s overall situation for the second quarter, LG indicated the G5 – along with the new K-series budget phones- could likely result in a turnaround, and predicted sales for the three month period which ends June 30th, could be as high as 3.6 trillion won, a break-even point. This doesn’t even factor in potential income from the various Friends modules, some of which are pictured below:

No mention was given, however, to the idea of the HTC 10 and the threat it may considerably pose to the success of the LG G5. Many have called the 10 a return to fame for the Taiwanese OEM responsible for it, and there has been a considerable amount of interest and attention paid to the product. While the G5 has also enjoyed its fair share of coverage, many of the positive prospects have been counteracted by negative notes, such as the plastic primer paint, “Gapgate” where the bottom module connects, and even the missing App drawer which LG has only just today released featuring the new UX 5.0.

Wrap up

While the mobile division suffered from sluggish performance this past quarter, LG managed to get solid earnings, and made a pretty plentiful profit in the process. What will Q2 hold in store? Make sure to check back in a few months!