Record profits, but Samsung sweats over euro

Record profits, but Samsung sweats over euro
Soaraway sales of the Galaxy smartphone will drive record quarterly profit of $5.9 billion at Samsung Electronics, though the South Korean tech giant is fretting over how Europe's debt crisis is denting demand in its biggest market for televisions and home appliances.

Samsung, valued at $170 billion and the world's leading maker of TVs, smartphones and DRAM memory chips, gives its April-June earnings guidance later on Friday, with its flagship Galaxy smartphones likely to have stretched their lead over rivals Apple and Nokia - despite a parts shortage that meant it struggled to keep up with stronger-than-expected demand for its latest Galaxy S III model.

While strong handset sales grab the headlines, more than doubling profit growth, other businesses such as chips and consumer electronics are battling weak prices and demand and a limping euro, which eats away at repatriated profits.

In a sign that the euro zone crisis is exercising minds in boardrooms around the globe, Samsung executives said this week the group was operating to a contingency plan.

"Europe is our biggest consumer electronics market and we may have to initiate cost cuts and product price increases should the euro fall further from the current level," said one executive who didn't want to be named as the plan is internal.

"Our smartphones are flying off the shelves, with some outlets reporting 40-60 percent sales growth, but that's distorting the overall trading outlook which is more challenging due to the weak global economy and a weak euro."

The euro has fallen around 5 percent against the Korean won since April, and about 8 percent in the past year, to 2-year lows.

"A sharp drop in the euro could hit Samsung's TV and home appliance sales as the region has traditionally generated some 30 percent of (consumer electronics) sales," said Brian Park, an analyst at Tongyang Securities. "If you take European sales alone, TVs may have swung to a loss ... but the division as a whole is profitable and is a very small part of Samsung's entire profit structure."

Samsung and local rival LG Electronics are among the few global TV makers making money and gaining market share from stumbling Japanese rivals Sony, Panasonic and Sharp.

But, spooked particularly by a weak chip market, Samsung shares have dropped 15 percent in the past two months, while the broader Korean market has fallen just over 5 percent, and Apple has gained almost 3 percent.

Kwon's first
Samsung is likely to say it expects its April-June operating profit to have jumped 77 percent to 6.67 trillion won from a year ago, according to a Reuters survey of 23 analysts. The average forecast, revised down slightly due to delays in shipping the latest Galaxy smartphone, is 14 percent higher than the previous record quarterly profit of 5.85 trillion won in the first quarter.

Full second-quarter results are due towards the end of this month. These will be the first quarterly results since Kwon Oh-hyun, formerly head of Samsung's component business, took over as chief executive.

Profit from the mobile division is likely to have more than doubled to around 4.4 trillion won from a year ago, with sales of around 50 million smartphones - at a rate of 380 every minute. Current quarter mobile profits are expected to forge further ahead as the latest Galaxy model enjoys a boom before the next iPhone launch - driving the company's profit to a record of nearly 8 trillion won. The mobile business brings in more than 70 percent of Samsung's earnings.

While the next iPhone, expected later this year, will likely slow Samsung's handset earnings growth, it will boost the Korean firm's semiconductor earnings as Samsung is the sole producer of processing chips used to power the iPhone and iPad, and also supplies Apple with mobile memory chips, NAND flash and display screens.

"Earnings should get an additional boost as Apple's new product launch will increase component sales," said Lee Se-chul, an industry analyst at Meritz Securities.

Copyright Thomson Reuters 2012

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