Chips help save the day for Samsung

By Kim Yoo-chul

Samsung Electronics received lower-than-expected earnings in the second quarter hit by sluggish sales of flat-screen TVs and displays.

But its semiconductor and handset businesses have prevented Samsung from further falls in earnings because it shipped more memory chips to Apple for its iPhones and iPads, as well as the steady growth in Samsung’s smartphone business.

Apple is a critical buyer of the firm’s chips, while Samsung is apparently the sole competitor with the U.S.-based consumer electronics firm in the world of smartphones.

The world’s biggest memory chip maker Samsung is supplying its DRAM and NAND flash memory chips, the components to read and write the data used in almost all electronic devices, to Apple, though litigation fights have escalated.

On Friday, Samsung said the operating profit, sales minus the cost of goods sold and administrative expenses, during the April-June period fell 25 percent to 3.75 trillion won, in accordance with the company’s earlier guideline of 3.7 trillion won.

Net profit for the latest quarter also declined to 3.51 trillion won from 4.28 trillion won year-on-year, while sales in the quarter slightly improved by 4.1 percent to 39.4 trillion won, Samsung said in the filing to the Korea Exchange (KRX).

``Financial turmoil in Europe amid sluggish demand for digital devices hit us, though the sales rise in smartphones buffered Samsung from further falls,’’ Samsung Electronics said in a statement.

Stock analysts were generally negative over a big rebound in earnings for Samsung in the current quarter because it’s highly unlikely prices for memory chips and flat-screen displays will rise meaningfully, amid a murky outlook in the global consumer electronics industry.

``No clear factors are seen to lift Samsung earnings in the current quarter. Chip prices are still weak while there is little chance for its display business to find a big turning-point,’’ said Ahn Sung-ho, an analyst at Hanwha Securities.

Apple effect

Despite such dismal performances, Samsung’s semiconductor business has proved its competitive edge after the division reported 1.79 trillion won in operating profit after 9.16 trillion won in sales in the quarter.

Samsung said the fairly impressive performance for the division was mostly because of its increased shipments for value-added memory chips that use fine-tuned processing technologies.

``Amid the rising popularity of chip-intensive products ranging from smartphones to tablets, Samsung’s chip-making division fared well,’’ said an Samsung executive, adding its chip plant in Austin, Texas, has been boosting the output of mobile application (AP) processors to its overseas clients, helping it increase the division’s profit margin.

In a conference call to analysts, Samsung said the company will invest more in its key facilities from its earlier projection of 23 trillion won throughout this year and added it will allocate more for further memory chip output.

``Samsung expects more investment to come especially in our memory chip business in the third quarter. We will ship more premium DRAM and NAND flash memories to clients,’’ said the world’s biggest memory chipmaker in the call.

``According to market situations, Samsung will maintain a greater flexibility for mix-up in our chip products,’’ said Kim Myung-ho, a vice president from Samsung’s semiconductor unit.

Samsung’s revised-up target for chips comes after Apple sold 20.3 million iPhones in the second quarter globally, which exceeded earlier market expectations.

Apple is widely-expected to launch the iPhone 5 this year and Samsung’s Galaxy sequel, the Galaxy S II, has also been selling well, the good factors for Samsung’s chip and handset businesses, according to Samsung officials and analysts.

``Samsung will aggressively promote long-term evolution (LTE) enabled smartphones from the third quarter and we are positive to lead the new smartphone market,’’ said Lee Young-hee, a vice president from its handset division.

Samsung is late arriving in smartphones but it’s been rapidly gaining more stakes in the growing market looking to break Apple’s initial lead in the segment, making Apple wage a patent war.

Samsung also supplies chips to other leading firms such as Hewlett-Packard (HP), Dell and top-tier Taiwan-based computer makers.

``It will be up to Apple again whether Samsung continues stable earnings in the third quarter. Samsung chips are more competitive than those produced by other chipmakers, pushing Apple to buy more,’’ said Kim Jang-yeol, an analyst at Mirae Asset Securities, another leading local brokerage.

Against the healthy outlook in chips and handsets Samsung said its television and display businesses will see lower profits in the current quarter, citing lower demand.

Its display business reported a 210 billion won operating loss in the quarter, sending it to continue the losing streaks in second straight quarters and the company is planning to cut its investment for displays in the latter half of this year.

``We will increase the portion of smartphones out of the total to 20 percent level, while LED-backlit LCD televisions is taking up 55 percent out of the total LCD TV outputs this year.’’

Samsung’s flat-screen and display divisions account for about half the company’s overall revenue.

Samsung, which replaced the head of its display division this month, has forecast slumping sales of televisions and displays will continue in the third quarter as a slow economic recovery dampens consumer appetites for new electronics products.