Mobile Internet company S Mobility SpiceMobiles.aspx has recorded sharp drop in profits for the second quarter as operating margins were severely hit in its handsets business and was compounded by decline in segment profits in services unit as well.
Poor results from the company that switched its business model from primarily a device maker to a mobile Internet company early this year, follows similar operational numbers for Q2 from OnMobile Global that also recorded shrinking operational margins even as net profit was buoyed by one time gain due to sale of stake in a firm.
S Mobility's revenues rose 12.5 per cent over Q2 FY'11 and 2.8 per cent sequentially over Q1 FY'12 to Rs 540.7 crore. This was led by 14.5 per cent Y-o-Y growth in its services business that generated revenues of Rs 62.3 crore in the quarter while devices unit saw 11.8 per cent revenue increase over Q2 FY'11. On a sequential basis too services business grew faster.
Part of B K Modi controlled Spice Group, S Mobility (formerly Spice Mobility) recorded consolidated net profit of Rs 10.2 crore declining over 80 per cent from Rs 52 crore in the second quarter last year. On a sequential basis, also net profit more than halved from Rs 24.3 crore for the quarter ended June 30.
A look at its expenditure gives a glimpse of what went wrong. The big increase in expenses came from purchase of finished/traded products, besides 15 times jump in raw material costs, over twofold increase in branding expenses besides other cost heads. Segment results show dip in profit margins for both devices and services business. While devices business witnessed almost 95 per cent drop Y-o-Y in segment profit to Rs 2.1 crore, services business also saw Y-o-Y decline of 30.5 per cent to Rs 8.3 crore. This also goes to show how the firm depended primarily on its services unit to generate profits.
Sequentially also the devices business saw a much sharper decline in segment profit compared to the services business. Although this seems natural in the long run given severe price erosion in the handsets business with fast product obsolescence, the margin contrast between the devices and services business just goes on to reiterate the challenge that consumer electronics makers across the world are facing, how to make money from products everyone loves to buy!
Given this scenario it also puts a question mark over profitability of other local handset makers who have managed to grab a portion of the market with their value offerings and also attracted PE investors too Micromax.