The Note - part phone, part mini-tablet - with a throwback stylus and screen half the size of the iPad, has sold more than 5 million since launching in October, and is proving a surprise money earner for the South Korean electronics giant that has a reputation as a 'fast follower' rather than design leader.

"Higher-than-expected shipments of the Galaxy Note seem to have given an upside to earnings," said Lee Ka-keun, an analyst at Hana Daetoo Securities. "Note sales will increase further in the second quarter, and handset profit will grow despite a rise in marketing costs related to the London Olympics."

Samsung, which raced to the top of the global smartphone rankings last year with close to a fifth of the market, from just 3 percent in 2009, is set to go head-to-head with Apple this quarter with the expected launch of a revamped Galaxy S, its flagship smartphone, and Apple's next iPhone.

"They will engage in a full-fledged war," said Hana Daetoo's Lee.

The Note sits somewhere between a small tablet and a big smartphone, and its early success illustrates that a maturing mobile device market can open up new opportunities as users and manufacturers experiment with form. Samsung has driven the Note with its marketing and distribution clout.

"We're seeing a shift in the marketplace and there's room for diversity," says Shivesh Vishwanathan, senior solutions architect at Persistent Systems.

Put together by Samsung's design chief Lee Minhyouk as a smartphone 'taboo breaker', the Note increases the pressure on gadget strugglers HTC, Nokia and BlackBerry maker Research in Motion.

HTC, the world's No.5 smartphone maker, said on Friday its January-March net profit slumped 70 percent to around $151 million, battered by competition from Apple and Samsung, though it hopes the launch of its One series will help win back some of that lost market share.

Samsung's January-March operating profit was 5.8 trillion won, almost double the year-ago level and above a consensus forecast of 5 trillion won from analysts surveyed by Thomson Reuters I/B/E/S. It also topped the preceding quarter's previous record of 5.3 trillion won. Revenue was 45 trillion won.

Asia's most valuable technology firm worth some $191 billion released its January-March estimates on Friday ahead of detailed quarterly results due on April 27.

HIGH-END MARGINS

Choi Do-yeon, analyst at LIG Investment & Securities, said the bigger-than-expected jump in Samsung's first-quarter earnings, while revenue was in line with forecasts, indicated handset margins were strong.

"Handset margins are estimated to have topped 20 percent and profits from the division also topped 4 trillion won. This is really a blowout result and there could be more surprises in the coming quarters as other businesses such as chips show recovery," he said.

Apple had an operating margin of more than 37 percent in the October-December quarter.

Samsung is expected to have shipped a record 44 million smartphones in the first quarter just ended, up by almost 25 percent from October-December levels, according to a Reuters survey of analysts.

CHIPPING IN

While Apple is Samsung's biggest rival in smartphones, the U.S. company is also its biggest client, gobbling up the South Korean firm's high-end displays and microchips for its iPhone and iPad. The two are also locked in a bruising global patent war that spans about 30 legal cases in 10 countries.

Earnings prospects for memory chips, where Samsung is also a world leader, have brightened since Japan's Elpida Memory filed for bankruptcy in February, prompting its customers to switch to rivals such as Samsung and SK hynix to secure supplies of the chips used in smartphones and laptops.

Choi Sung-jae, an analyst at SK Securities, estimates contract chip prices could rise another 10-15 percent in the second quarter as Apple, Dell, HP and others scramble to secure chip supplies.

"(While) 60-70 percent of (Samsung's) profit came from handset sales this quarter, ... with memory chip prices rising, chips will play a big part in second quarter profits," said Kim Sung-in, a chip industry analyst at Kiwoom Securities.

Samsung shares closed up 0.15 percent in a flat market.

The stock has risen by a quarter so far this year, and hit a life high of 1.351 million won ($1,200) on Wednesday. Over the same period shares in Apple have soared by more than half, taking the California-based firm's value to above $582 billion - more than three times that of Samsung.

($1 = 1129.5000 Korean won)

(Additional reporting by Hyunjoo Jin, Jumin Park, Jin Kyu Kang and Iktae Park; Editing by Ian Geoghegan)

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