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Samsung sees Galaxy S8 boost but warns of competition ahead

Company benefited from components sales in the first quarter and expects mobile to rebound with the Galaxy S8. But it's worried about the next iPhone.

Andrew Hoyle/CNET

Samsung's ready for the Galaxy S8 to turn things around in mobile, but it's also worried about tougher competition later this year.

The South Korean tech giant on Wednesday reported a slight rise in first-quarter revenue and a nearly 50 percent jump in operating profits because of its memory chip and display businesses. Its IT and mobile communications division saw revenue and earnings fall partly because of lower pricing for the year-old Galaxy S7.

But the Galaxy S8, which hit the market last week, should help Samsung's mobile business rebound in the second quarter. It also expects "robust memory performance" to help its overall results.

Samsung's optimism for the full year is a little more shaky as phone "market competition is expected to intensify in the second half." Samsung didn't name Apple specifically, but that's likely the competition it's talking about. This year marks the 10th anniversary of the first iPhone, and Apple is expected to release dramatic updates in this year's device.

Samsung on Wednesday confirmed it will launch a new flagship smartphone in the second half of the year, which likely will be the successor to its ill-fated Galaxy Note 7. It also said it will look to stay profitable through "robust sales" of the Galaxy S8 and S8 Plus, as well as by launching new mid- to low-end phones and "streamlining" its lineup.

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This quarter marks the first results since Samsung introduced its new Galaxy S8 and S8 Plus handsets, though the phones hit the market too late to contribute to the period's financial results. Samsung needs those devices to help it win back mobile customers and regain their trust after it scrapped last year's Note 7 because of overheating problems. But even when mobile struggles, Samsung's overall financial have benefited from its booming operations building chips and displays for use in smartphones and other devices.

"These financial results ... show that Samsung is a well diversified industrial conglomerate and that the company, contrary to Apple, has managed to reduce its dependency on smartphones," Forrester analyst Thomas Husson said.

Moving past the Note 7

The results come as Samsung tries to rebound from its Galaxy Note 7 fiasco. The company in October killed its large-screen phone after two battery flaws caused the device to overheat. The debacle cost Samsung an estimated $17 billion in sales. It also cost Samsung the lead in the global smartphone market, with Apple leapfrogging it in the fourth quarter of 2016 to become the world's biggest smartphone vendor. (The last time Apple had held the lead was in 2014 when it introduced its first big-screen phones, the iPhone 6 and 6 Plus.)

Samsung's counting on its new flagship smartphone, the Galaxy S8, to win back mobile customers. The device largely has gotten good reviews, and Samsung said earlier this week that preorders for the S8 and the bigger S8 Plus were the "best ever," up 30 percent from last year's Galaxy S7 preorders. Since the Galaxy S8 didn't go on sale until April, it's not included in the first-quarter results.

Samsung on Wednesday said revenue in its IT and mobile communications business -- which includes phone, as well as networking and other technology -- dropped 15 percent to 23.5 trillion won ($20.7 billion). In mobile alone, revenue dropped 17 percent.

The company said smartphone and tablet demand slid slightly because of "seasonal effects," but smartphone shipments slightly increased because of the new Galaxy A series and "solid sales" of mid- and low-end phones in emerging markets.

In the second quarter, Samsung expects market demand for smartphones and tablets to remain flat, and it said its overall smartphone shipments should stay flat because of fewer sales of mid- and low-end phones. Still, the Galaxy S8 and S8 Plus should help boost revenue and profits sequentially.

"The Galaxy S8 and S8 Plus, which were launched on April 21, show robust initial sales," Samsung said in a press release.

For the full year, smartphone market demand should "slightly increase" because of customers replacing their older mid- and high-end phones. But competition "is expected to intensify."

Chip, chips, chips

Samsung may be best known as the world's biggest maker of phones and TVs, but it's also a major player in the semiconductor industry. It's the world's largest vendor of memory chips and the second biggest processor maker overall after Intel. Along with designing processors for some of its own devices, Samsung manufactures processors created by other companies, like wireless chip giant Qualcomm.

Despite a financial hit from the Galaxy Note 7 in previous quarters, Samsung managed to generate strong results because of its components business.

The company on Wednesday attributed its strong results to that business.

Revenue from Samsung's semiconductor business jumped 40 percent to 15.66 trillion won ($13.8 billion), while sales from memory chips alone soared 53 percent.

The company said it benefited from focusing on high-density DRAM and NAND flash and "value-added products for datacenters, enterprise SSDs and flagship smartphones." Even though demand wasn't as robust for memory, pricing remained strong in the period because of limited supply. That tight supply should continue in the second quarter, Samsung said.

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Samsung's display panel segment also saw revenue jump, up 21 percent to 7.29 trillion won ($6.4 billion). It expects demand for its flexible OLED displays to rise in the second half of the year. Samsung has been rumored to be a supplier of displays for the next iPhone.

The company said its overall operating profit soared 48 percent to 9.9 trillion won (8.7 billion), while revenue for the quarter totaled 50.55 trillion won ($44.6 billion), up slightly from 49.78 trillion won a year ago.

The numbers are in line with Samsung's estimate from earlier this month. Its revenue projection was better than analysts expected at the time.

Samsung on Wednesday also said it completed a review of its corporate structure, and it ultimately decided not to convert to a holding company structure. "The review found that a holding company structure would not strengthen the competitiveness of the company's businesses and could potentially weigh on the company's operations longer term," Samsung said in a press release.

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