Samsung Electronics said its quarterly profit should top the most bullish market forecasts, with smartphones becoming its main profit engine despite intense competition from bigger rival Apple.

On Friday, the South Korean firm estimated its quarterly operating profit at 4.2 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 was higher than the most bullish street estimate of 3.95 trillion won.

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.

Investors are looking for signs its telecom business can sustain strong growth in the 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 is 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. It sold about 1 million fewer smartphones than Apple in the second quarter. The firm will provide detailed earnings later this month.

Samsung shares, however, underformed, rising 2.4 percent in a broader market up 3.1 percent. Analysts blamed expectations of a tougher fourth quarter, with prices of memory chips and flat screens expected to remain depressed.

Earnings at the world's biggest technology firm, with sales of $130 billion last year, are set to slide to 3.4 trillion won in the fourth quarter, according to consensus estimates.

Profit from Samsung's telecoms division is 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 to deliver something fresh and exciting to rival Apple. It already makes the closest competitor by sales to Apple's iPad tablet.

It plans to release its first smartphone based on the latest version of Microsoft's mobile operating system this month, while 5.3-inch screen Galaxy Note, a hybrid of smartphone and tablet, is also set to go on sale later this year.

Samsung leads the pack of companies selling phones on Google's Android operating system.

The Galaxy S2 probably played a key role in boosting the company's earnings and it will continue to do so pretty much unchallenged, until Apple unveils a better version of next new iPhone, said Kyung Woo-hyun, a fund manager at Daishin Asset Management.

Samsung, which worked out how to make black and white TVs in the 1970s by tearing apart Japanese models, has become a top global brand over the past decade.

It boasts a market value of $118 billion, much bigger than the combined value of Sony Corp, Nokia, Research In Motion, Toshiba and Panasonic Corp.

Samsung's shares fell 5 percent over the past three months versus a 12 percent drop in Apple's shares.

APPLE CHALLENGER

Expectations for further momentum in Samsung's 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.

But an intensifying legal battle with Apple over patents and designs threatens to derail Samsung's 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 a 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)

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