July 5, 2011 / 5:39 AM / 8 years ago

Samsung's quarterly profit seen down on LCDs

SEOUL (Reuters) - Samsung Electronics, the world’s top maker of memory chips and televisions, is likely to report sharply lower second-quarter earnings this week, hit by a loss at its LCD display unit and as weak demand for computers hit sales of its semiconductors.

Robust sales of a new version of its flagship Galaxy S smartphone, however, may have saved the South Korean firm from a third consecutive drop in quarterly earnings. Samsung could also emerge as the world’s top smartphone vendor, overtaking Nokia’s more than 10-year reign.

Samsung’s earnings recovery will likely be slow because of its loss-making flat-screen business and a bleak outlook for computers and TVs in the second half.

“There’ll be little usual seasonal demand boost in the second half of this year as manufacturers brought forward their inventory build-ups right after the Japan earthquake for fear of tighter parts supplies,” said Lee Min-hee, an analyst at Dongbu Securities.

“Component prices had a temporary pickup in the second quarter due to the unusual restocking activities and that will lead to relatively lackluster component demand even ahead of the holiday season. Manufacturers are also concerned about the uncertain economic outlook, keeping the overall demand for televisions and computers weak,” Lee said.

The company’s biggest drain on earnings remains its underperforming LCD business. The operation vies for the top position with local rival LG Display. Each company has about one-quarter of the global market.

Reflecting a growing urgency to turn around the business, Samsung recently named the head of its semiconductor business to take over from LCD chief Chang Wonkie and combined the underperforming operation with the chip division.

“The restructuring reflects Samsung’s two main headaches — how to restructure the LCD business, which is now entering a low-growth phase due to chronic oversupply and slowing demand growth from flat-screen TV makers, and how to better deal with its component clients,” said Lee Sun-tae, an analyst at Meritz Securities.

“Patent litigation by the likes of Apple, who are major customers of Samsung, but also in direct competition with it in such areas as PCs, TVs and smartphones, have raised business risks for its component operations,” Lee said.

Samsung, Asia’s most valuable technology firm with a market value of around $134 billion, is due to report April-June guidance on Thursday or Friday before it announces detailed quarterly results in late July.

It is likely to report 3.9 trillion won ($3.7 billion) in April-June operating profit on revenue of 40.3 trillion won, according to a consensus of 32 analysts surveyed by Thomson Reuters I/B/E/S.

According to StarMine SmartEstimates, which places more weight on recent forecasts by top-rated analysts, Samsung’s operating profit may show a downside surprise of 6 percent to 3.67 trillion won. That would be down 27 percent from a year ago’s record 5.01 trillion won but up 24 percent from the preceding quarter.

Analysts expect Samsung to miss its second-quarter shipment guidance of a mid-teen percentage rise for DRAM chips and over a 30 percent gain for NAND chips due to weak PC demand and because smartphone production was crimped by the Japanese earthquake in March.

Research firms are slashing global estimates for PC shipment, which have grown by double digits in the past few years except for 2009. They are now forecasting single digit growth this year due to economic uncertainties as well as a lack of compelling PC products.

UBS expects PC DRAM (dynamic random access memory) chips, Samsung’s main memory chips, to decline another 15-20 percent in the second half of this year. Samsung controls around 40 percent of global DRAM market.


Samsung’s handset business, which saw its profit halved just a year ago due to a lack of compelling products to compete against the iPhone, staged a strong comeback to become its major profit center.

Samsung’s Galaxy S II, the sequel of its flagship smartphone Galaxy S, sold more than 3 million units since its debut in late April. Some analysts expect the ultra-slim phone running on Google’s free Android platform to become Samsung’s best-ever model with potential sales of 20 million units.

Samsung may have sold 19 million smartphones in the second quarter and easily beat its 2011 smartphone sales target of 60 million units, analysts said.

“Smartphone shipments would have jumped 67 percent from the previous quarter and topped market estimates...because there were few products in the market that can match Galaxy S II as Apple appears to be delaying new iPhone debut due to disruptions in parts supply, while Nokia continues to fail to introduce competitive lineups,” said Jin Sung-hye, an analyst at Hyundai Securities.

Analysts widely expect Samsung to snatch the No.1 spot in the global smartphone ranking from struggling Nokia in the second quarter and almost double its market share this year to around 17 percent from a year ago.

Samsung is expected to maintain strong profit growth from smartphone sales in the second half as it introduces the Galaxy S sequel in North America and expands sales of Galaxy Tab 10.1, which is thinner than Apple’s iPad 2 and carries the same U.S. retail price.

In the mid-end smartphone segment, Samsung is pushing for Galaxy variations such as the Ace and Mini, a market that Apple has ignored so far. Samsung wants to boost its volume shipments and lift the portion of the more profitable segment in its overall handset portfolio.

($1 = 1065.250 Korean won)

Editing by Matt Driskill

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