July 25, 2008 / 1:20 AM / 12 years ago

Samsung Elec Q2 net disappoints, outlook grim

SEOUL (Reuters) - Samsung Electronics Co Ltd (005930.KS) posted a lower-than-expected quarterly profit and faces a tough second half with a sluggish memory chip market and lower margins in flat screens and mobile phones.

An employee of Samsung Electronics checks its liquid crystal display (LCD) televisions displayed for customers at its home appliances store in Seoul July 25, 2008. REUTERS/Jo Yong-Hak

Shares in the $85 billion South Korean group, the world’s top maker of both memory chips and LCDs and its second-biggest handset maker, tumbled more than 4 percent on Friday after the results were released.

“It’s unlikely that we will be achieving a sharp recovery (in the third quarter),” said Chu Woosik, executive vice president of investor relations at the technology giant, which is ranked as Asia’s third most valuable global brand after Toyota and Honda.

Visibility for the memory chip market was “quite low”, he added.

Next year looks equally daunting for the world’s top maker of memory chips and liquid crystal display (LCD) screens, with the global economic slowdown set to impact all consumer electronics, from flat-screen TVs to mobile phones and personal computers.

“Recovery in the memory chip sector will not come anytime soon as the macro backdrop remains weak, though it will not get worse from here,” said Jay Kim, an analyst at Hyundai Securities.

Samsung’s April-June net profit rose 51 percent to 2.14 trillion won ($2.12 billion) from 1.42 trillion won last year during a market slump for dynamic random access memory (DRAM) chips used mainly in personal computers. It earned 2.19 trillion won in January-March.

Analysts had predicted a net profit of 2.30 trillion won.

Operating profit for April-June rose to 1.89 trillion won from 911 billion won a year ago, below the 2.08 trillion won predicted by analysts. First-quarter operating profit was 2.15 trillion won.

April-June revenue rose to 18.14 trillion won from 14.63 trillion won a year ago.

Samsung stock had jumped 4.6 percent on Thursday on talk of a share buyback, but Samsung instead announced a modest interim dividend. It said it had not yet decided whether to buy back shares this year.

WEAK CHIP OUTLOOK

Operating margins at Samsung’s semiconductor unit rose to 6 percent from 4 percent in the first quarter, helped by technological advances, but were still a far cry from the 31 percent profit margin posted in late 2006.

Makers of DRAM chips had hoped that spending cutbacks and a demand pickup heading into the Christmas shopping season would trigger a second-half recovery, but the prospects for a significant rebound are fading.

Many analysts predict the tailspin could drag on into the second quarter of 2009.

On Wednesday, Powerchip 5346.TWO and Nanya Technology (2408.TW), Taiwan’s two largest DRAM makers, posted their fifth straight quarter of losses.

In another sign of the industry’s distress, world No. 2 memory chip maker Hynix (000660.KS) said on Thursday it would suspend production at its U.S. plant and consider selling it.

Steep price drops have also hurt earnings from NAND flash memory chips, used in portable gadgets. Samsung said it expected NAND oversupply to persist through the second half.

SILVER LINING?

Samsung’s display division posted a strong quarter, helped by robust sales of flat-screen TVs, though margins slipped to 21 percent from the first quarter’s 23 percent.

But Samsung suffered margin erosion in its TV business due to a price war with Sony Corp (6758.T).

Samsung, second only to Nokia NOK1V.HE in the handset market, sold 45.7 million phones in April-June, a slight dip from 46.3 million in January-March.

Mobile margins also eased to 13 percent from the first quarter’s 15 percent, but the company vowed to maintain margins in the double digits.

Despite the difficulties ahead, Samsung sounded upbeat in its intention to increase its dominance in the market, saying smaller competitors were more sensitive to the effects of the downturn.

Slideshow (3 Images)

It said it aimed to boost its DRAM market share, currently in the mid-30 percent range, by 1 or 2 percentage points each year.

By 0318 GMT (11 p.m. EDT on Thursday), Samsung shares were down 4.72 percent at 585,000 won, while the broader KOSPI stock index .KS11 was down 1.82 percent.

Additional reporting by Kim Yeon-hee and Park Ju-min; Editing by Jonathan Hopfner and Ian Geoghegan

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