Samsung Electronics estimated its quarterly profit will exceed the most bullish market forecasts, indicating the booming smartphone business is emerging as the South Korean company's main profit engine.
Samsung, the first major technology company to flag earnings, however underperformed the market, up 1.9 percent, as it braces for a tougher fourth quarter, hurt by depressed prices of memory chips and flat screens.
Investors are looking for signs its telecom business can sustain strong growth in the crucial year-end holiday season as its flagship Galaxy line of smartphones and tablets square off against Apple's new iPhone going on sale next week.
Samsung's estimates are far better than expected. Its telecommunications business is seen very positive as shipments of smartphones and other high-end handsets expanded, said Park Jong-min, a fund manager at ING Investment Management.
On Friday, Samsung estimated its quarterly operating profit at 4.20 trillion won ($3.5 billion) versus a consensus forecast of 3.4 trillion won by analysts surveyed by Thomson Reuters I/B/E/S. That would be down 14 percent from a year ago but up 12 percent from the preceding quarter.
The profit estimate easily topped the most bullish street estimate of 3.95 trillion won.
The company will provide detailed earnings later this month.
The key to Samsung's earnings recovery is the chip market. The chip market will not be worse than now, but it will not improve significantly either. Its handset earnings are seen easing when there is a traditionally inventory adjustment, Jong-min said.
Profits from Samsung's telecoms division are widely expected to top earnings from the semiconductor business at the world's biggest memory chip maker.
Analysts say Samsung is one of the best placed companies to deliver something fresh and exciting to rival Apple. It already makes the closest competitor by sales to Apple's iPad tablet.
Samsung is widely expected to report record profit from handset sales and overtake Apple as the world's biggest smartphone vendor in unit terms in the third quarter, after selling just about 1 million fewer smartphones than Apple in the second quarter.
Expectations for further momentum in its smartphone business grew after Apple's newest iPhone left investors and Apple's fans wishing for more than a souped-up version of its previous device introduced more than a year ago.
I previously thought Apple's new iPhone would slow Samsung's handset earnings momentum, but there was no iPhone 5, and the iPhone 4S will not be a burden on Samsung in the fourth quarter, said Ahn Seong-ho, an analyst at Hanwha Securities.
Powered by its flagship Galaxy models running on Google's Android operating system, Samsung is seen as the most credible challenger to Apple's mobile devices.
But an intensifying legal battle with Apple over patents and designs threaten to derail its handset and component business. Apple is also Samsung's biggest customer, buying mainly chips and displays.
Smartphones may now account for one-third of Samsung's handset portfolio, up from 26 percent in the second quarter and 12 percent a year ago, lifting the profit margin of its overall handset business to around 14 percent, analysts said.
I am very surprised at the (profit) numbers. I am guessing either a particular lineup of products with higher margins sold well, or cost cutting measures were aggressively implemented, said James Song, an analyst at HI Investment & Securities.
Some analysts were expecting one-off gains such as reduced provisioning costs relating to royalty payments to Microsoft Corp over smartphones and tablets using Android operating system, or cheaper won currency to boost profitability.
The South Korean won tumbled 9.4 percent against the dollar in the third quarter, making Korean producers cheaper to overseas consumers.
Chips and flat screens are underperforming as consumers delay buying TVs and computers in a slowing global economy. This has pushed down prices of key components.
Prices of dynamic random access memory (DRAM) chips used in PCs tumbled about 50 percent in the third quarter and many analysts, including those at Citi and UBS, believe Samsung was the sole profitable DRAM maker in the third quarter.
Major global technology companies from Hynix Semiconductor to LG Display and Sony Corp are expected to report operating losses from their core businesses in July-September.
(Additional reporting by Hyunjoo Jin and Jungyoun Park; Editing by Jonathan Hopfner and Anshuman Daga)