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Samsung Galaxy S3

SEOUL -- Samsung Electronics will say on Friday that its July-September operating profit likely hit $6.8 billion, a record for a South Korean company, as strong sales of its Galaxy smartphones more than offset reduced orders for chips and screens from Apple (AAPL), the group's main rival and leading customer.

But a run of four straight record quarters will come to an end in the current three-month period to December as Samsung spends more on marketing to counter Apple's latest iPhone and other rival products in a crowded $200 billion plus global smartphone market.

This year's expected profit of $25 billion will also trigger higher performance related payouts to many of Samsung's 206,000 staff early next year. And Samsung may have to set money aside this quarter if it fails in an appeal to overturn an Aug. 24 U.S. court ruling that awarded $1 billion in damages to Apple for patent infringements by the Korean group.

From levels just ahead of that ruling, Samsung shares have since risen 6.2 percent, while shares in Apple, which last month launched the iPhone 5, have gained just 1.2 percent.

EARNINGS LULL

Analysts expect earnings at the world's top technology firm by revenue to decline until the second quarter of next year as a slump in computer sales and the weak global economy sap demand for chips and electronics products.


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Samsung, valued at $197 billion and the world's leading maker of TVs, smartphones and memory chips, gives its July-September earnings guidance later on Friday, with its handset division likely to report more than doubled profits, as sales of Galaxy S III smartphones reached almost 20 million.

"The mobile business has been the main driver for Samsung, but its momentum will slow as differentiating to really wow consumers becomes even more challenging, and high-end models come under more price pressure as markets get crowded," said Lee Seung-woo, an analyst at IBK Investment & Securities. Lee predicted profit at Samsung's mobile business would dip to 17 trillion won next year from 18 trillion won estimated for 2012.

CHEAP AS CHIPS

Weak prices of Samsung's mainstay dynamic random access memory (DRAM) chips, used in computers and mobiles, will squeeze near-term earnings. Tablets and smartphones, the real growth areas, use far smaller memory storage.

Contract prices of DRAM chips dropped 14 percent in July-September, and now trade below what it costs most manufacturers to make them, analysts say. "Meaningful DRAM price increases may be difficult in the near term without more aggressive production cuts," Goldman Sachs said in a client note this week.

Samsung is expected to reduce its investment in chips next year due to the drop in demand, which could be bad news for semiconductor equipment manufacturers such as ASML. Kwon Oh-hyun, promoted to Samsung CEO in June, said late last month that the group has yet to finalise its 2013 investment plans.

Samsung is likely to say on Friday its July-September operating profit climbed 77 percent to 7.6 trillion won from a year ago, according to a Reuters survey of 16 analysts. That would be 13 percent higher than its previous record of 6.72 trillion won earned in the April-June quarter. Full third-quarter results are due towards the end of this month.

BRANDING BOOST

Profit from the mobile division is likely to have more than doubled to around 5 trillion won, with sales of some 58 million smartphones, including 18-20 million Galaxy S IIIs.

Samsung is beefing up its product line-up, with the latest phone-cum-tablet Galaxy Note expected to go on sale in the United States this month, and its ATIV smartphones that run on Microsoft's new Windows system to compete with Nokia's Lumia series.

Despite a bruising series of patent disputes and the reputational risk of the U.S. court defeat in August, Samsung's brand value has surged this year as it shipped more handsets and smartphones than any of its rivals. The value of the Samsung brand has jumped to 9th in the world - up from 17th last year - at $32.9 billion, according to brand consultancy Interbrand. That's more than Toyota Motor, but less than half of second-ranked Apple's $76.6 billion.