Samsung profit tops estimates despite Note 7 recall debacle

Samsung’s operating income rose 5.5% to 7.8 trillion won on a preliminary basis in the three months ended September, beating the analyst estimate of 7.58 trillion won


Only two weeks after Samsung introduced its large-screen Note 7, the company had to recall about 2.5 million phones after reports emerged of devices exploding. Photo: Reuters
Only two weeks after Samsung introduced its large-screen Note 7, the company had to recall about 2.5 million phones after reports emerged of devices exploding. Photo: Reuters

Seoul: Samsung Electronics Co.’s operating profit topped analysts’ projections as demand for its high-margin memory chips and displays limited the impact of a global recall of its marquee Galaxy Note 7 smartphone.

Shares of the world’s largest maker of phones and memory chips rose on Friday after reporting that operating income rose 5.5% to 7.8 trillion won ($7 billion) on a preliminary basis in the three months ended September. That compares with the 7.58 trillion-won average of analysts’ estimates compiled by Bloomberg.

While the recall has dominated headlines since it was announced last month, Samsung worked to contain the fallout from exploding smartphones and insulate its component businesses. That helped maintain growth as new devices from rivals stoke demand for memory chips and displays. A fresh issue emerged this week when billionaire activist Paul Elliott Singer launched a campaign to get the family-controlled company to restructure.

“The recall-related costs have surely taken its toll on its mobile business in the quarter but its other businesses, particularly semiconductors, have fared extraordinarily well, ” Lee Seung-woo, an analyst at IBK Securities Co. in Seoul, said before the earnings release. “Even Apple has placed a huge order for chips from Samsung, I heard, and it can’t even keep up with explosive demand from China ahead of the typically strong fourth quarter.”

Sales were 49 trillion won in the quarter, the Suwon-based company said, compared with the 51 trillion won analysts expected. Samsung won’t provide net income or break out divisional performance until it releases audited results later this month. The company didn’t specify the financial impact of the recall. Analysts have estimated the cost at $1 billion to $2 billion.

Samsung’s stock rose 0.9% to a record 1.706 million, fueled by the preliminary results and Singer’s proposal to split the company and return cash to investors.

Singer has the Samsung group in his cross-hairs again, just a year after failing to torpedo a takeover that his firm deemed a bad deal. He’s now betting Samsung Electronics’ heir apparent, Jay Y. Lee, is so keen to modernize his family’s empire without losing control that he’ll embrace a complex plan to break up the company, people familiar with the matter said.

The billionaire is proposing that Samsung split into an operating company and a holding entity, dual-list the former on a US exchange, pay shareholders a special dividend of 30 trillion Korean won, and take on three independent board members. Singer’s demands are broadly in line with changes that Samsung’s Lee himself had been contemplating, the Wall Street Journal reported.

Only two weeks after Samsung introduced its large-screen Note 7 with more sophisticated features and a longer battery life, the company had to recall about 2.5 million phones after reports emerged of devices exploding.

The Note 7, which many analysts expected to become the next big hit and help sustain its smartphone supremacy, turned into a debacle as the shares rose to a record. The crisis came just as Apple Inc. released its latest iPhones.

Analysts have cut their estimates of Note 7 sales to 8 million units this year, 38% lower than the earlier projection of 13 million units before the recall, according to the average projections of six analysts surveyed by Bloomberg News. Operating income from the phone division probably was 2.7 trillion won in the quarter, according to the analyst survey.

“The biggest swing factor for the earnings is how big Samsung has set its provisions for the Note 7 recall in the third quarter,” said Song Myung-sup, a Seoul-based analyst at HI Investment & Securities Co. “Regardless, it’s inevitable to see the sales decline of the Note continue into the fourth quarter.”

Operating income at the semiconductor business probably was 3.3 trillion won in the third quarter on sales of 12.9 trillion won, largely helped by price rebound, according to the analyst survey. A slew of new smartphone releases and PC demand also helped to drive sales of Samsung’s cutting-edge semiconductors as well as flat displays.

Signs of a demand recovery in semiconductors are also witnessed by Samsung’s bigger chip competitor Intel Corp. The world’s biggest maker of semiconductors said last month that it has raised its forecast for third-quarter sales, largely bolstered by growing optimism for the personal computer market, which helped boost prices.

DDR3 4-gigabyte dynamic random access memory chips rose for a second straight quarter, reaching $2.01 on 30 September, according to data from inSpectrum Tech Inc. That compares with a 31 March price of $1.68.

“The memory chip demand-supply condition looks tighter than thought. The strong memory demand stems from higher-than-expected smartphone demand in the US and in China,” KTB Investment & Securities Co. said in a September report. “The memory chip prices will rise sharply in the fourth quarter from the third.”

The company’s display division, which also makes screens using organic light-emitting diodes, probably posted a profit of 760 billion won while the consumer electronics unit, which encompasses TVs and appliances, was estimated to be 76% higher at 635 billion won, according to analyst surveys. Bloomberg

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