Samsung earnings point to smartphones pickup

Samsung Electronics' earnings beat analyst forecasts in the first quarter, bolstering the South Korean company's turnaround hopes after a sharp fall in profits last year.

In preliminary guidance on Tuesday, the world's biggest technology company by revenue estimated operating profit of around Won5.9tn ($5.4bn) in the three months to March 31 - down 31 per cent from Won8.5tn a year before but up from a quarterly trough of Won4.1tn in the third quarter of 2014.

The company will publish detailed results later this month.

Analysts said the better earnings pointed to an improvement in Samsung's smartphone business - still the leader in global market share even after a fall last year. Analyst polls by Bloomberg and Reuters had forecast operating profit of Won5.5tn and Won5.3tn respectively, and Samsung's guidance sent its shares up 0.8 per cent on Tuesday morning.

This continued a steady strengthening of Samsung's market valuation since October, when the shares hit their lowest levels in two years as the company lost significant market share to Chinese smartphone producers such as Lenovo and Xiaomi.

Since then Samsung's share price has risen 36 per cent, adding over $50bn to its market capitalisation as investors welcomed a 40 per cent dividend increase and a favourable reception for the new Galaxy S6 flagship phone.

Samsung executives had stoked anticipation for the first-quarter results with bullish public statements. "We're done with recovery," Kim Hyun-seok, head of Samsung's television business, told local reporters last week.

Nevertheless, revenue was lower than expected, in part a reflection of weaker household electronics revenue in Europe and some emerging markets, whose currencies have fallen significantly in recent months.

And while the earnings figure was up from Won5.3tn in the prior quarter, it reflected significant margin shrinkage following strong profits in the first half of last year - a level of profitability Samsung will not regain in the near future, said CW Chung, an analyst at Nomura, pointing to the ever-fiercer competition in the smartphone market.

"Last year's smartphone profit in the first half was about Won11tn, but this year it will be maximum Won6tn," he said.

In recent months Samsung has tried to win back market share in emerging markets such as China with the launch of its mid-range Galaxy A smartphones. The company was criticised last year for complacency, after it offered phones in this market segment at higher prices and with lower technical specifications than Chinese rivals' products.

A far higher-profile launch was that of the Galaxy S6, which was unveiled on March 1 in Barcelona and will go on sale on Friday. The two versions of the device - one with a curved screen - received a markedly better critical response than last year's iteration, the Galaxy S5, which was deemed only an incremental improvement from earlier models.

Samsung's first-quarter results were boosted by early shipments of 3m Galaxy S6 phones, said Daniel Kim at Macquarie, citing guidance from the company. Last year Samsung had shipped 10m units of the Galaxy S5 within 25 days of its launch, although disappointing demand prompted a surge in marketing spending as the company struggled to offload unsold stock.

Analysts also pointed to an improvement at Samsung's logic chip business, which lost about $500m last year but has been boosted by increased utilisation after Samsung decided to use its own Exynos processor in the Galaxy S6.

A further increase will come in the third quarter when Samsung begins to produce processors for the next iteration of Apple's iPhone, according to people with knowledge of the situation.

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