By Joyce Lee and Heekyong Yang

SEOUL (Reuters) -Samsung Electronics on Wednesday said its preliminary third-quarter profit dropped by a smaller-than-expected 78%, as the battered memory chip market shows early signs of recovering from a severe downturn.

The world's largest memory chip and smartphone maker estimated its operating profit fell to 2.4 trillion won ($1.79 billion) in July-September, from 10.85 trillion won a year earlier in a short preliminary earnings statement.

The profit beat a 2.1 trillion won LSEG SmartEstimate, which is weighted toward forecasts from analysts who are more consistently accurate.

"It's better than expected. Although the situation is not great in the chip business... the decline in memory prices is easing, and further drops will be limited," said Ko Yeongmin, an analyst at Daol Investment & Securities.

Though down sharply from last year, Samsung's third quarter profit was well above the first quarter's 640 billion won, the lowest since 2009, and the second quarter's 670 billion won.

The company reported losses of 4.58 trillion won and 4.36 trillion in its chip business in the first and second quarter respectively, as memory chip prices plunged and its inventory values were slashed.

A global economic slowdown and high interest rates dampened demand for most consumer goods following a pandemic-driven boom, forcing chipmakers to cut production in an attempt to stem falling prices.

But in the third quarter, analysts said losses in Samsung's memory chip business likely shrank to around 3 trillion won as Samsung focused on more profitable, higher-end chips such as DRAM chips used in artificial intelligence, while continuing to cut production of older legacy chips.

Prices of some DRAM chips, used in tech devices, also began rebounding near the end of last quarter, while prices of NAND Flash chips used in data storage may start recovering as early as the current quarter, winding down the severe industry downturn that began last year, analysts said.

"When Samsung announces detailed earnings later this month, investors will be tuning in to what it has to say about any changes in prices of legacy chips such as NAND Flash or older DRAM, in order to form outlooks about the chip industry's more complete recovery," Ko said.

The detailed earnings release is due on Oct. 31.

Samsung's said its revenue likely fell 13% from the same period a year earlier to 67 trillion won.

The company's mobile business likely reported an operating profit of around 3 trillion won, similar to last year, according to an average of forecasts from five analysts. The company launched its premium foldable smartphones during the quarter, drumming up sales despite the sluggish global smartphone market.

($1 = 1,342.1900 won)