Samsung’s Galaxy S7 Drives Second-Quarter Operating Profit

Updated July 6, 2016 9:18 p.m. ET

SEOUL— Samsung Electronics Co. SSNHZ 0.00 % expects its second-quarter operating profit to come in at about 8.1 trillion Korean won ($7.00 billion), marking the company's most profitable quarter in more than two years and underscoring the rebound in demand for its smartphones.

On Thursday, the world's largest smartphone maker by shipments forecast an quarterly operating profit of between 8 trillion won and 8.2 trillion won, a roughly 17% increase from the 6.9 trillion won posted a year earlier.

Revenue likely rose 3% to about 50 trillion won from 48.5 trillion won a year earlier. Final earnings results are set for release later this month.

Samsung's guidance provides further evidence to back the idea that the worst of the company's recent struggles are over—at least for now—thanks to the sustained popularity of the Galaxy S7, the latest refresh of its premium smartphone series.

Samsung's results come in contrast to those of longtime rival Apple Inc., AAPL 0.57 % which in April reported its first quarterly revenue decline in 13 years, raising questions about the sustainability of smartphones as a profit engine.

The Galaxy S7 launch, which Samsung moved forward to early March this year from its customary late-April event, allowed the company to capture consumer enthusiasm for the handset in its first quarter earnings report.

And the Galaxy S7 appears to have continued to sell briskly into the following months, helping the company recover after a bruising two years that saw its mobile profit margins dip as low as 7% after Chinese brands flooded the market with competitive models at much cheaper prices.

The jump in operating profits amid a modest uptick in sales suggests that Samsung's mobile profit margins have strengthened further in the second quarter. The company didn't disclose profit estimates by division. In the first three months of the year, Samsung's mobile profit margins rose to 14%, the highest le vel since the second quarter of 2014. That number could rise higher once final second-quarter results are reported, analysts estimate.

Thursday's robust earnings report suggests that Samsung has found a way to avoid commoditization, turning its curved-screen design and slick interface into selling points that have allowed it to improve profit margins.

Mehdi Hosseini, an analyst for Susquehanna Financial Group, estimates that Samsung shipped 78 million smartphones in the second quarter compared with a previous estimate of 76 million units, with all of the upside coming from the premium Galaxy S7 smartphones that enjoy the fattest profits.

"Some of the features that Samsung introduced in the Galaxy S6 and copied over onto the Galaxy S7 are now being accepted by consumers," Mr. Hosseini said, referring to the curved edges and a mobile payment system installed on the handsets. "Call it a delayed reaction."

Samsung's chip unit, which accounted for about a third of the company's total operating profit in the previous quarter, likely saw little profit improvement as prices for memory chips remained weak amid general market oversupply.

Expectations around Samsung's profit had been rising in recent weeks, and analysts had forecast operating profits of about 7.7 trillion won and about 54 trillion won in revenue ahead of the preliminary report.

Thursday's operating profit forecast of 8.1 trillion won would be the highest quarterly operating profit for the company since the beginning of 2014.

Investors have taken well to Samsung's improved smartphone fortunes, pushing Samsung's stock up to within striking distance of a new three-year high. Before a 3.3% stumble on Wednesday that was its biggest one-day decline in three months, shares were up 17% for the year. Samsung's shares edged up 0.3% in Thursday morning trade in Seoul.

Write to Jonathan Cheng at jonathan.cheng@wsj.com

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