Toshiba profit drops, wary on chip outlook

TOKYO (Reuters) - Japanese electronics group Toshiba Corp 6502.T posted a worse-than-expected 25 percent drop in quarterly operating profit after tumbling flash memory chip prices ate into margins.

The world's No.2 NAND flash memory chip maker now expects further microchip price falls in January-March, as arch-rival South Korea's Samsung Electronics Co Ltd 005930.KS shifts to NAND flash in the wake of a supply glut in computer memory.

“Samsung is focusing more on flash, and Toshiba is the one feeling the pinch,” said Tomomi Yamashita, a senior fund manager at Shinkin Asset Management Co. Ltd.

The resulting price falls halved Toshiba’s operating margin in its chip business to 4.8 percent in October-December from 10 percent in the previous quarter, and cut the unit’s profit by 60 percent.

“That hurts,” Executive Vice President Fumio Muraoka said at a news conference. Toshiba now expected a 50 percent annual price drop in its flash prices this business year from a previously estimated 40 percent drop, and it expected NAND spot prices to fall a quarterly 20 percent in January-March, he said.

NAND flash memory chips, used for data storage in portable devices such as Apple Inc's AAPL.O iPod digital media players, accounted for roughly half Toshiba's profit last year.

Profits were also slashed at two other Japanese tech companies that reported results on Tuesday, Advantest Corp 6857.T and NEC Corp 6701.T, while Elpida Memory Inc 6665.T reported a bigger-than-expected loss.

HD DVD BLUES

Toshiba, whose products range from washing machines to nuclear power plants, is also fighting losses in its HD DVD player business, he said, without detailing the size of the loss.

Toshiba slashed prices on its players by 40 to 50 percent after Time Warner Inc's TWX.N Warner Bros studio announced this month that it would release high-definition DVDs only in rival Sony Corp's 6758.T Blu-ray format.

Toshiba stuck to its outlook for a 290 billion yen ($2.7 billion) operating profit for the year to March, slightly lower than a consensus estimate of 292 billion yen by 13 analysts polled by Reuters Estimates.

Strong sales for PCs, industrial systems and medical devices, as well as a boost from its newly-acquired U.S. nuclear power unit Westinghouse, would make up for shortfalls in microchips and HD DVD, Muraoka said.

Toshiba, which been trimming its operations to focus on its core semiconductor and nuclear power businesses, said operating profit for October-December was 42.1 billion yen against 55.9 billion yen a year earlier. The average forecast of five analysts was for an operating profit of 52.2 billion yen.

Prior to the results, Toshiba shares ended Tuesday up 2.4 percent, against a 3.0 percent rise in the benchmark Nikkei average.

AGGRESSIVE SPENDING

To grab market share and combat price falls with scale, however, chip makers are committing to further spending.

Toshiba has said it would decide about new NAND flash memory plants by 2009 in its race against Samsung’s production capacity. The investment involved could total over 1 trillion yen.

DRAM maker Elpida also said it was considering spending 100 billion yen of capital spending in the year starting April.

Elpida would spend 65 percent to 70 percent of that amount on cutting-edge lines using smaller circuitry, and the rest to ramp up production at Rexchip, a Taiwan joint venture with Powerchip Semiconductor 5346.TWO.

“It is precisely because times are tough that it is essential that we squeeze costs and push forward development,” Elpida President Yukio Sakamoto told analysts at a meeting.

Elpida tumbled to a deeper-than-expected quarterly loss of 8.9 billion yen, against a 27.3 billion yen profit the previous year. Analysts had estimated a loss of 3.1 billion yen.

Elpida, which does not give a full-year earnings forecast, is banking on demand for specialty dynamic random-access memory chips to contribute to price recovery in March.

SECTOR-WIDE UNCERTAINTY

Advantest, the world’s largest supplier of microchip testers to chip makers, posted a 88 percent decline in quarterly operating profit to 1 billion yen as orders slowed.

The firm, which competes with Teradyne Inc TER.N, halved its annual outlook last week as chip makers squeeze spending on testers.

Despite cost cuts at its chip unit, electronics group NEC also posted a bigger-than-expected 54 percent fall in quarterly operating profit to 16 billion yen as Japanese wireless carriers delayed spending on base stations and handset sales remained sluggish.

NEC kept its outlook for operating profit in the full year to March 31 at 130 billion yen, slightly below a market consensus of 131.6 billion yen by 15 analysts.

Shares of Elpida closed up 5.4 percent, NEC rose 4.5 percent and Advantest shed 0.5 percent prior to the results.

(Additional reporting by Yoko Kubota, Editing by Michael Watson)