Samsung Electronics, the world's top maker of memory chips and flat screens, is likely to report a third consecutive quarterly drop in earnings for the January-March period, hit by tumbling prices of flat screens and TVs.
Samsung is the first major global technology firm updating the market since the devastating earthquake and tsunami hit Japan on March 11, raising uncertainty about the longer-term effects of the disaster on a broad range of manufacturers.
Disruptions to the global supply chain threaten to create bottlenecks in some key components for Japanese factories and analysts believe South Korean firms such as Samsung may benefit as customers look for new suppliers. The company also looks set to benefit from a recovery in the memory chip market.
For Samsung, which counts Sony Corp as its biggest customer, bringing in nearly 7 trillion won ($6.4 billion) of sales annually, a protracted suspension of flat-screen TV production in Japan results in lost revenue, but it also benefits from a tightening supply of chips, for which it competes with the likes of Japan's Toshiba Corp.
Samsung, Asia's most valuable technology firm with a market value of around $142 billion, is due to report January-March guidance on Thursday before it announces detailed quarterly results in late April.
It is likely to report 3.17 trillion won in January-March operating profit on revenue of 38 trillion won, according to a consensus of 29 analysts surveyed by Thomson Reuters I/B/E/S.
According to StarMine SmartEstimates, which places more weight on recent forecasts by top-rated analysts, Samsung's operating profit may show a downside surprise of 10 percent to 2.9 trillion won.
That would be its lowest profit since the second quarter of 2009, and down 42 percent from a year ago and 4 percent from the preceding quarter.
On a global basis, Japan supplies more than one-third of NAND-type flash memory chips, used in tablets and smartphones, and 14 percent of computer memory chips.
This will be the low point for the year. Sequential earnings growth can be expected for the next three quarters as memory and LCD margins expand and the strong season gets under way, Matt Evans, a CLSA analyst, said in a note.
Most LCD flat-screen makers are widely expected to have suffered losses in the January-March quarter due to weak demand from TV makers. From Sony to Dutch electronics group Philips, TV makers are struggling, hit by fierce competition from ever cheaper TV brands and fragile consumer spending. Many firms are warning of another unprofitable quarter.
SOLID MEMORY CHIPS, WEAKENING TABLETS
Earnings at Samsung, which controls nearly 40 percent of global dynamic random access memory (DRAM) and NAND flash memory market, will improve from the current quarter on stable panel prices and a rebound in the battered memory chip market. Contract prices of DRAM chips have risen 3 percent since the quake and NAND chips have risen 15 percent.
Memory chips will lead Samsung's profit recovery as major electronics firms are placing more orders to Korean firms following the Japan quake and demand is also expanding thanks to growing smartphones and tablet markets, said Kim Young-chan, an analyst at Shinhan Investment Corp.
Earnings growth from the telecoms division at Samsung, the world's No.2 handset maker after Nokia, may have slowed due to weakening sales growth of its tablets and growing pricing pressure since Apple introduced the iPad 2 with aggressive pricing plan last month, analysts said.
Much of the initial market hype that Samsung's tablet will sell over 10 million units this year is now fizzling out because sales momentum has weakened and telecoms operators are also getting concerned about inventory buildups, said Seo Won-suk, an analyst at NH Investment & Securities.
Apple is estimated to have sold about one million units of the iPad 2 in the first weekend of its U.S. launch early last month. By comparison, Samsung may have sold a similar number of Galaxy Tabs in the past three months and sales growth will remain weak. Follow-up models will be on the market in June at the earliest.
In the booming global tablet market, which is likely to grow to around 55 million units this year, Apple is seen as taking the lion's share and Samsung, the most aggressive contender to Apple with three different sizes of tablets, is still playing catch-up.
Samsung is widely known as one of the fastest followers in the fickle electronics industry. To better compete with Apple, Samsung redesigned its new 10.1-inch tablet, first introduced in February, in just several weeks to make it the thinnest in the category after Apple set the trend with the slimmer iPad 2.
Expectations for tablets have driven Samsung shares since November, but it has so far failed to live up to that expectation. Whether Samsung's share can rise again will largely depend on how strongly its follow-up tablet models do in the market, said Lee Seung-woo, an analyst at Shinyoung Securities.
Shares in Samsung have dropped 7 percent from a record high hit in late January, lagging a steady performance in the KOSPI during the same period.
(1 = 1087.050 Korean Won)
(Reporting by Miyoung Kim; Editing by Matt Driskill)