Even as the Note 7 smartphone fiasco and the arrest of top executive Lee Jae-yong loom over Samsung Electronics, the South Korean technology group has turned in its second-highest quarterly operating profit on the back of hot-selling memory chips.

The consolidated figure climbed 48% on the year to 9.9 trillion won ($8.72 billion) for the three months ended in March, preliminary data released Friday shows. Its operating profit is about two and a half times that of Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest contract chip maker, but only about a third that of Apple, when compared with their October to December results.

Segment earnings are unconfirmed at this point since they will be released in late April with final numbers. Nomura Securities estimates that the semiconductor business generated 6.16 trillion won in operating profit for the quarter, more than double the 2.63 trillion won raked in a year earlier.

Nomura's estimate also outpaces the 4.95 trillion won gained by the segment in October-December, and those first-quarter earnings could reach a record. Multiple South Korean analysts predict the semiconductor business will continue growing this quarter and onward, with operating profit in the neighborhood of 7 trillion won or 8 trillion won in the third quarter.

This success owes to the brisk demand for semiconductors. The global market will rise to a record $346.1 billion this year, according to an outlook by World Semiconductor Trade Statistics.

But the chips market is highly volatile due to the so-called silicon demand cycle, which is seen switching between boom and bust every four years. The current upswing began around the end of 2012, though a Samsung executive thinks the gains will "likely continue until 2018."

Experts say the market has entered a "supercycle" distinguished by long-term growth in demand. On top of an expanding market for chips found in smartphones and data centers, new target areas are being created by the "internet of things" and similar applications. The perception of tight supplies also gives a leg up to prices.

Prices for DRAM and NAND memory chips started climbing around last summer. DRAMs are hovering at heights not seen in roughly one and a half years, while NANDs are enjoying three-year highs. Samsung controls the biggest global slice for both types, letting the company reap the benefits.

Samsung's quarterly record for group operating profit stands at 10.16 trillion won, posted in July-September 2013. The company's information technology and mobile communications domain was by far the biggest moneymaker, with smartphones accounting for the most earnings. But the brand received a black eye after Galaxy Note 7 phones began combusting last summer. The segment aims to restore trust with the launch of its newest flagship phone April 21.

The South Korean conglomerate last year floated medical device unit Samsung BioLogics and announced an $8 billion acquisition of U.S. automotive technology maker Harman International Industries. The group plans to develop those two operations into core business segments that follow in the footsteps of memory chips. Lee, who is Samsung's vice chairman and de facto leader, personally directed the purchase of Harman.

Samsung's recent earnings bonanza "is the product of measures enacted two to three years ago," a person close to the company said. Lee, who has been indicted on bribery and embezzlement allegations, is not steering the ship at present, which may impact the development of new businesses that rely on large acquisitions and other bold strokes.

The good times for the semiconductor segment will not last forever. Samsung risks seeing quarterly results go south unless it engineers a truly diversified earnings base.

By: DocMemory
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