File photo Bloomberg

File photo Bloomberg

Samsung’s Q3 profit seen down; upside in handsets eyed

Samsung’s Q3 profit seen down; upside in handsets eyed

Seoul: Samsung Electronics is set to report sharply lower quarterly earnings on Friday on persistent declines in chip prices, while investors look for signs its telecom business can sustain its booming growth.

File photo Bloomberg

Expectations for further momentum in its smartphone business grew after Apple’s newest iPhone left investors and Apple’s fans wishing for more than a souped-up version of its previous device introduced more than a year ago.

“Major concerns for Samsung had been that its smartphone momentum will decelerate with Apple’s new iPhone, but that’s now less of a concern as the new iPhone failed to excite many," said Kim Young-chan, an analyst at Shinhan Investment Corp.

“Samsung’s got broader product lineups and better offerings for the lucrative high-end segment such as 4G models and that will put it in a better position in the fourth quarter."

Powered by its flagship Galaxy models running on Google’s Android operating system, Samsung, the world’s biggest technology firm by revenue, is seen as the most credible challenger to Apple’s mobile devices.

But an intensifying legal battle with Apple over patents and designs threaten to derail its handset and component business. Apple is also Samsung’s biggest customer, buying mainly chips and displays.

Samsung is widely expected to report record profit from handset sales and overtake Apple as the world’s biggest smartphone vendor in unit terms in the third quarter, after selling just about one million fewer smartphones than Apple in the second quarter.

Smartphones may now account for one-third of Samsung’s handset portfolio, up from around 26% in the second quarter and 12% a year ago, lifting the company’s profit margin of its overall handset business to around 14%, analysts said.

Samsung, Asia’s most valuable technology firm with a market value of around $114 billion, reports July-September guidance on Friday before it announces detailed quarterly results in late October.

It is likely to report 3.4 trillion won ($2.8 billion) in July-September operating profit on revenue of 41.9 trillion won, according to a consensus of 28 analysts surveyed by Thomson Reuters I/B/E/S.

The profit will be down 30% from a year ago and 9% from the preceding quarter.

Profit from its telecoms division is estimated at between 1.8 and 2.1 trillion won and accounts for around 60% of overall earnings.

Samsung competes with Nokia , HTC and Apple in handsets, Hynix Semiconductor Inc , Elpida and Toshiba Corp in memory chips, LG Display and AU Optronics in flat screens, and Sony Corp and LG Electronics Inc in televisions.

Chips, screens down

The sectors that continue to be drags on earnings are chips and flat screens as consumers delay buying TVs and computers amid a slowing global economy. This has pushed down prices of key components.

Prices of dynamic random access memory (DRAM) chips used in PCs tumbled about 50% in the third quarter and many analysts, including those at Citi and UBS, believe Samsung was the sole profitable DRAM maker in the third quarter.

Samsung’s performance was mainly driven by a relatively high portion of non-PC DRAM products in its overall product mix and its ahead-of-the-curve investments to cut production costs at a time when its rivals reduce spending for technology upgrades due to reduced cash flows.

Major global technology companies from Hynix to LG Display and Sony are expected to report operating losses from their core businesses in July-September.

“It’s difficult to expect for Samsung to report sharply improved earnings in the fourth quarter due to an uncertain economic earnings are likely to decrease further as chip and flat screen prices are not showing a strong rebound," said Ahn Seong-ho, an analyst at Hanwha Securities.

Samsung also makes mobile application processing chips that are used in its own Galaxy S phones and Apple’s iPhones. Booming demand for smartphones and tablets is helping these chips and OLED displays become fresh profit generators, cushioning crimped earnings from its mainstay DRAM chips and LCD flat screens.

Operating profit from Samsung’s non-memory system chips, which include lucrative mobile processors and foundry chip manufacturing, is likely to quadruple to 2 trillion won by next year from 500 billion won in 2010, according to Hanwha Securities.

Its LCD flat-screen operation is likely to report its third consecutive quarterly loss and may post another loss in the fourth quarter, due to plunging prices and falling demand for TV panels from key clients such as Sony.