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Fri 27 Jan 2012 12:51 PM

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Smartphones power record Samsung $4.7bn profit

South Korean giant says it will spend $22bn this year on chips, flat screen production

Smartphones power record Samsung $4.7bn profit
South Koreas Samsung Electronics has posted record profit and intends to spend $22bn this year to boost production of chips and flat screens

Samsung Electronics Co posted a record $4.7bn quarterly operating profit, driven by booming smartphone sales, and will spend $22bn this year to boost production of chips and flat screens to pull further ahead of smaller rivals.

The South Korean firm, the world's top technology firm by revenue, is locked in breakneck competition with Apple Inc in the red-hot smartphone market. Apple, overtaken by Samsung in the third quarter, regained its crown as the world's biggest maker of smartphones in the fourth quarter, with record sales of 37.04 million iPhones.

Samsung didn't give its own sales volume data, but research firm Strategy Analytics put sales at 36.5 million smartphones in October-December, with 3rd-ranked Nokia on 19.6 million.

Samsung's telecoms business earned a record 2.64trn won ($2.35bn) profit in October-December on increased sales of its flagship Galaxy smartphones.

"The battle of the two big smartphone powers, Apple versus Samsung, will go on," said Baik Jae-yer, fund manager at Korea Investment Management, which has around 9 percent of its portfolio in Samsung stock, according to end-September filings.

"The smartphone market will expand this year to more mid-and low-end models that are affordable to the wider public," Baik said. "Rather than focus on market share, I'd point out the strong contribution of Samsung's handset business to earnings growth and margins."

Samsung's October-December operating profit of 5.3trn won ($4.72bn) was broadly in line with its earlier estimate and topped the previous record of 5trn won in the second quarter of 2010.

Samsung will increase spending this year by 9 percent to 25trn won - more than the GDP of leading cocoa producer Ivory Coast - with 15 trillion won going to the chips division, 6.6 trillion won to flat screens and the rest to boosting overseas production capacity and new research and development centers.

The record investment dwarfs a combined 1.3trn yen ($16.6bn) that leading Japanese technology companies - Sony Corp, Toshiba Corp, Hitachi Ltd and Sharp Corp - have planned for the current year to end-March.

Samsung competes with Sony and LG Electronics Inc in televisions, Toshiba and Hynix in chips and LG Display in displays.

LG Display posted a narrower quarterly loss on Friday on demand from smartphone and tablet makers and as falling TV panel prices stabilize.

Samsung, which only entered the smartphone market in earnest in 2010 - some three years after the introduction of the iPhone with the touchscreen template - has adopted Apple's breakthrough concept probably better than others - and now seeks to offer the Apple experience at a better price, with better functionality.

Apple is Samsung's biggest client, buying mainly chips and displays, and the two firms are locked in a bruising patent battle in some 10 countries from the United States to Europe, Japan and Australia as they jostle for smartphone and tablet supremacy. A German court was due to rule later on Friday on a patent that Samsung claims Apple infringed.

Apple, though, is streets ahead in profitability. It generates half its revenue from the iPhone, boasts a 37.4 percent operating margin, versus Samsung's 11 percent, and its $17.3bn operating profit is almost four times what Samsung earned from selling phones, chips, flat screens and TVs combined.

"Apple had good sales, but it's very unlikely this will be a trend that will overwhelm Samsung later," said Kim Young-chan, analyst at Shinhan Investment & Securities, noting the likely boost to Apple sales from year-end promotions and the death of founder Steve Jobs.

"It's unlikely Samsung and Apple will fight over each other's market share, but they will eat up the market share of smaller companies like HTC and RIM," Kim said.

Samsung forecast its strong momentum in mobiles would continue this year and it aimed for 15 percent margins from the business, though it could come under renewed consumer pressure if and when Apple brings out next-generation iPads and iPhones.

"Samsung is playing catch-up with Apple in smartphone sales volume, but it's tougher to catch up in terms of margins," said Lee Yong-jik, fund manager at PineBridge Investment, which owns nearly 2.5 million Samsung shares, according to an end-November filing. Lee forecast Samsung would ship 150-170 million smartphones this year, from below 100 million last year.

"But price competition will intensify, putting its handset margins under pressure," added Kim.

Samsung faces headwinds this year, however, as global PC growth slows, likely denting sales of its core computer memory chips.

The company is looking to weather a squeeze on memory chips through new revenue sources such as mobile processing chips and high-end OLED displays. Rivals are increasingly turning to Samsung for components to power their tablets and smartphones.

Samsung makes mobile processors that power Apple's iPhone and iPad as well as its own Galaxy mobile products.

The company has warned that oversupply in dynamic random access memory (DRAM) chips will continue this quarter due to slack computer sales, while demand for flat screens is likely to remain subdued at least until March.

Yet Samsung is the only profitable DRAM chipmaker and is likely to fare better than rivals, as it invests heavily to cut production costs with finer processing technology.

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