Samsung profit outlook weakens on chips, mobiles strong

By Miyoung Kim

SEOUL | Fri Jul 29, 2011 12:17am EDT

SEOUL (Reuters) - Samsung Electronics Co is relying on the smartphone market to boost group profits after its flat screen unit reported a second quarter of losses and the mainstay chip business struggled.

The South Korean technology conglomerate joins a host of global companies in warning that fragile consumer demand is hurting sales of TVs, flat screens, computers and semiconductors.

"Samsung's earnings momentum will revive in Q3, but the recovery will not be strong because of weak economies in the U.S. and Europe," said Lee Dong-Jin, fund manager at KTB Asset Management." There are also no new IT applications that can drive demand as Apple's iPhone and iPad did."

Samsung, which reported operating profit fell 25-percent from a record, warned of a challenging business outlook. Falling chip prices are the biggest concern for the South Korean company as it earned half of its profit from semiconductors in the second quarter.

On Thursday, Sony Corp and Panasonic Corp also warned of weak TV sales, especially in the United States and Europe, following Philips and Corning Inc in highlighting anemic demand.

Samsung is however betting big on its mobile phone business as it rolls out new versions of tablets and phones, helping it capture market share from Research in Motion and Nokia.

Samsung's shares, which hit a record high in late January, have lost 12 percent so far this year, while the broader KOSPI has gained 5 percent.

The company boasts a market capitalization of $134 billion, bigger than the combined value of Sony, Nokia, Toshiba Corp, Panasonic and LG Display.

Samsung, also the world's No.2 maker of mobile phones, reported a 3.75 trillion won ($3.6 billion) operating profit for April-June, versus the consensus forecast for a 3.7 trillion won profit according to Thomson Reuters I/B/E/S.

The result was broadly in line with Samsung's estimate earlier this month for an operating profit of between 3.5 trillion won and 3.9 trillion won.

Its operating profit compares with 2.95 trillion won in the preceding quarter and a record 5.01 trillion won a year ago.

Samsung's display business reported a second consecutive quarterly operating loss of 210 billion won, little changed from 230 billion won loss in the previous quarter.

"It will be difficult to boost earnings sharply in the third quarter as demand for memory chips and TVs will continue to remain depressed," said Song Myung-sup, an analyst at HI Investment & Securities. "Its loss-making flat-screen business will also report break even at best."

The operation vies for the top position with local rival LG Display. Each company has about one-quarter of the global market, which is grappling with oversupply and weak demand.

TELECOMS DIVISION GAINS

Operating profit from its telecoms division more than doubled to 1.67 trillion won from 630 billion won a year ago, helped by strong sales of a new version of its flagship smartphone Galaxy S.

Sales of the Galaxy S II have topped 5 million units since its launch in late April.

Samsung did not provide sales number of its handsets but said shipment rose by high single digit percent from the previous quarter's 70 million units.

The company is widely expected to close the gap with top-ranked Nokia, which sold 88.5 million handsets in the second quarter and may have overtaken the Finish firm and Apple to become the world's top smartphone maker, analysts said.

Operating profit from semiconductor business fell 11 percent to 1.79 trillion won and Samsung warned of weak shipment growth in the third quarter on a grim outlook for PC sales.

Contract prices of dynamic random access memory (DRAM) chips tumbled 16 percent in July alone, according to price tracker DRAMeXchange and analysts expect prices will fall further until August.

Despite its worsening business outlook, Samsung promised to increase its semiconductors investment, which it had forecast at around 10.3 trillion won, to widen the technology gap with smaller rivals.

(Additional reporting by Hyunjoo Jin; Editing by Jonathan Hopfner and Anshuman Daga)

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