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Samsung’s 1Q profits beat forecasts as chip strategy starts to pay off

Samsung Electronics Co (SSNLF) said Tuesday it’s expecting profit in the first quarter of this year to be its highest in three quarters, beating expectations and suggesting that the tech giant is on track for an earnings recovery ahead of the launch of new flagship smartphones.

Operating profit likely reached 5.9 trillion won ($5.44 billion) in the first quarter, the South Korean manufacturer said, against a 5.3 trillion won average estimate by 41 analysts in a Thomson Reuters I/B/E/S survey.

This was also better than 5.3 trillion won reported for the final quarter of last year, even though the first quarter tends to be weaker seasonally. Samsung typically releases final first-quarter figures towards the end of April.

“These results are meaningful and will lead to very strong earnings expectations for the second quarter,” HMC Investment analyst Greg Roh said.

Even so, the company’s shares fell 0.5% in Seoul Tuesday, underperforming a broader market that was largely unchanged.

Investors and analysts expect the Galaxy S6 and S6 edge models–on sale from Friday–to revive handset sales and propel profits in coming quarters. Researcher Counterpoint expects Samsung to sell more than 50 million units of the new devices to consumers this year, a new record for the company.

Analysts expect profit at the company to rise to 6.7 trillion won in the spring quarter. For the full year, they’re predicting a 6% rise to KRW26.5 trillion. But after a big strategic re-focusing of the company last year, it’s chips rather than smartphones that are becoming the key driver for profits.

Chips likely out-earned phones for a third straight quarter in January-March, analysts said, reflecting Samsung’s dominance in memory chips and its growing market share for system chips. Samsung opted to use more of its own chips for its Galaxy S6 models, dropping Qualcomm Inc. (QCOM) and adding Nvidia Corp (NVDA) as a new contract manufacturing client.

The smartphone business likely also saw sequential shipments growth in the first quarter as new mid-tier handsets such as the Galaxy A and E models went on sale in major markets, analysts said.

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