Samsung Electronics Co, the world's top memory chip maker, reported a 25 percent drop in quarterly profit, hit by losses in its flat screen business, overshadowing strong profit growth from mobile phone sales.

The world's biggest technology firm by revenue is set to recovery profits slowly as fragile global consumer demand hurts sales of computers, TVs, flat screens and semiconductors.

Samsung also faces key challenges in the booming but overcrowded smartphone market as Apple Inc prepares to introduce a new iPhone over the next few months.

It will be difficult to boost earnings sharply in the third quarter as demand for memory chips and TVs will continue to remain depressed, said Song Myung-sup, an analyst at HI Investment & Securities. Its loss-making flat-screen business will also report break even at best.

Samsung warned of a challenging business outlook and said uncertain economic prospects may keep demand for TVs and memory chips depressed. The company's biggest drain on earnings remains its lossmaking Liquid Crystal Display business.

On Thursday, Sony Corp and Panasonic Corp also warned of weak TV sales, especially in the United States and Europe, following Philips and Corning Inc in highlighting anemic demand.

Samsung's shares edged up in early Friday trade. The stock has lost 5 percent over the past three months, lagging a 3 percent fall in the KOSPI. The company boasts a market capitalization of $134 billion, bigger than the combined value of Sony, Nokia, Toshiba Corp, Panasonic and LG Display.

Samsung, also the world's No.2 maker of mobile phones, reported a 3.75 trillion won ($3.6 billion) operating profit for April-June, versus the consensus forecast for a 3.7 trillion won profit according to Thomson Reuters I/B/E/S.

The result was broadly in line with Samsung's estimate earlier this month for an operating profit of between 3.5 trillion won and 3.9 trillion won.

Its operating profit compares with 2.95 trillion won in the preceding quarter and a record 5.01 trillion won a year ago.

Samsung's display business reported a second consecutive quarterly operating loss of 210 billion won, little changed from 230 billion won loss in the previous quarter.

TELECOMS DIVISION GAINS

Operating profit from its telecoms division more than doubled to 1.67 trillion won from 630 billion won a year ago, helped by strong sales of a new version of its flagship smartphone Galaxy S.

Sales of the Galaxy S II have topped 5 million units since its launch in late April.

Samsung did not provide sales number of its handsets but said shipment rose by high single digit percent from the previous quarter's 70 million units.

The company is widely expected to close the gap with top-ranked Nokia, which sold 88.5 million handsets in the second quarter and may have overtaken the Finish firm and Apple to become the world's top smartphone maker, analysts said.

(Editing by Jonathan Hopfner and Anshuman Daga)

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