Toshiba, the world's seventh-largest chip maker, competes with industry leader Samsung Electronics Co. Ltd. (005930.KS: Quote, Profile, Research) in the fast-growing market for NAND flash memories, widely used in digital cameras, camera phones and portable music players such as the latest additions to Apple Computer's (AAPL.O: Quote, Profile, Research) iPod range.

Japan's second-largest electronics conglomerate had been initially expecting an operating profit for the division of 22 billion yen ($192.8 million) in the April-September first half and 75 billion yen for the full year to March.

"The numbers aren't entirely in yet, but we should come in well above the 22 billion yen target for the first half," Toshiba Senior Vice President Masashi Muromachi said in a speech at CEATEC Japan, an electronics trade show held near Tokyo.

Muromachi's comments underscore roaring demand in the NAND flash market, which research firm iSuppli estimates will expand 42 percent to $9.4 billion in 2005, though Samsung is the clear leader in NAND, with a market share of about 60 percent.

Muromachi, who heads Toshiba's semiconductor operations, said the division was also on track to beat the forecast for the full year, predicting that flash memory demand would remain strong, especially for digital audio players and mobile phones.

"In reality, I think we can shoot for a little bit higher," he said. "I am very confident."

Toshiba expects its semiconductor sales to reach 1.04 trillion yen in 2005/06. The unit posted an operating profit of 82.7 billion yen on sales of 938.9 billion yen in the business year ended March 2005.

SAMSUNG STILL KING

Muromachi also said Toshiba would look to boost capital spending on semiconductors above its latest forecast for 169 billion yen in 2005/06 -- a number that was revised up from 151 billion yen in July -- as it increases output of NAND flash.

It invested 203 billion yen in the previous financial year.

Toshiba is rapidly expanding flash memory production capacity at a plant in western Japan that handles more efficient 300mm silicon wafers, aiming to compensate for sharp price falls that are driving demand but pinching profit margins.

The factory in Yokkaichi is owned by Flash Partners, a joint venture held 50.1 percent by Toshiba and 49.9 percent by SanDisk Corp. (SNDK.O: Quote, Profile, Research), the world's largest supplier of flash data storage cards.

"Prices dropped about 60 percent last year, but we managed to secure a certain level of profit," Muromachi said. "Prices should keep falling at an annual clip of about 40 percent going forward, but I expect this to stoke fresh demand in the market."

After Samsung, Toshiba is the world's second-largest maker of NAND flash chips, which are rewritable and do not require power to retain information. That makes them ideal for use in mobile devices like digital cameras and phones.

Samsung has been very aggressive in cutting prices, helping encourage Apple to switch to flash memory from hard disk drives for its iPods. Apple's new pencil-thin nano, which replaced the hard drive-based mini, uses flash memory to store songs.

iSuppi Japan president Yoshihisa Toyosaki said Samsung is in a much better position to cope with price falls in the NAND flash market because of its strong relationship with Apple and because it is more diversified than Toshiba.

Samsung could more easily shift production to other chips such as dynamic random access memory (DRAM) or image sensors if NAND demand slumped or price falls got out of hand, he said.

"Toshiba can only make NAND at Yokkaichi so there is no way to hedge the business risk. With prices to continue falling sharply, no matter how much it boosts output or raises shipment volumes, I believe its profitability will decline," Toyosaki said.