Samsung forecasts record quarter

Samsung Electronics, the world’s largest technology company by sales, on Wednesday forecast that it would report record operating profit for the second quarter as supply shortages had driven up chip prices amid rising demand for consumer gadgets such as smartphones and tablet PCs.

However, analysts said they expected earnings to falter in the second half as Europe’s sovereign debt crisis would continue to damp consumer demand in Europe, which makes up an estimated 30-40 per cent of Samsung’s television and handset sales. They said the weaker euro might also erode Samsung’s earnings going forward.

Samsung recorded Won136,290bn ($117.8bn) in sales for the 2009 calendar year, pushing it ahead of HP to become the world’s largest technology company. This year, analysts are on average expecting the South Korean giant to generate a record Won153,000bn ($125bn) in sales, according to Bloomberg, and Won18,100bn in operating profit, compared with Won10,900bn last year. The company has not provided its own full-year estimates.

HP has said it expects full year sales this year to grow 8-9 per cent to $124.9bn.

Samsung was the first major global technology company to unveil second-quarter earnings estimates and it will report its official quarterly results later this month. The company said operating profit for the three months ended June 30 was expected to be around Won5,000bn ($4bn), up 87 per cent from Won2,670bn a year earlier. Sales should have gone up by about 14 per cent to Won37,000bn on a consolidated basis, which includes earnings from overseas affiliates.

“The numbers beat our expectations and the momentum is likely to continue throughout the third quarter. But earnings may falter in the fourth quarter because of seasonal factors,” said Jay Kim at Mirae Asset Securities. “The biggest risk that Samsung faces lies in the macroeconomic situation with the European debt problems expected to dent consumer demand in the region.”

More than half of Samsung’s operating profit is believed to have come from its robust chip business, which has staged a strong recovery after being hit hard by the global economic crisis in late 2008 and early 2009. The technology giant is planning to triple its capital spending this year to a record Won18,000bn to widen its lead over rivals.

Chip prices have risen almost 10 per cent this year as companies replace their aging PCs and demand for smartphones and other consumer electronics accelerated, but analysts say prices are likely to come under pressure in the fourth quarter after the industry ramps up its output.

The company is also expected to have enjoyed healthy earnings from its flat panel display business in the second quarter as the football World Cup boosted demand for its 3-D TVs and panel prices remained strong amid rising popularity of smartphones and tablet PCs.

However, analysts on Wednesday said they expected profit margins at the mobile phone business to have suffered due to the company’s weakness in the high-end smartphone business.

Samsung is trying to catch up with bigger rivals such as Apple and Nokia in the fast-growing market with the introduction of its latest Android-based smartphone, Galaxy S.

“Smartphones remain Samsung’s biggest weakness. There is no problem with hardware but the key issue will be how far Samsung can catch up in terms of software,” said Kim Yoo-jin at Taurus Investment & Securities.

The company is expected to gain ground in the second half as it spends heavily on marketing the Galaxy S and it is reported to be seeing unprecedented adoption by mobile networks in the US.

It may also benefit from troubles at rivals such as Nokia and Research in Motion. Nokia recently issued a second profit warning and RIM, the Blackberry maker, reported disappointing quarterly shipments as they both struggled to compete against Apple’s iPhone.

Shares in Samsung have lost more than 10 per cent over the past three months from a record high of Won875,000 on concerns about its business outlook, while the broader market fell 3 per cent during the same period.