Samsung Proves Its Business Remains Sound Despite Note 7 Fiasco

  • Chinese demand, supply shortages spurring semiconductor prices
  • Company also expected to benefit from demand for OLED screens

Chips Help Samsung Beat Note 7 Woes

Samsung Electronics Co. underscored the resilience of its business when it reported its best operating profit in three years, weathering the death of its fire-prone Galaxy Note 7 with the help of its workmanlike chip and display divisions and cheaper smartphones.

The world’s largest maker of mobile devices posted a 50 percent surge in quarterly operating profit after demand from Chinese smartphone brands pushed up memory chip prices and buoyed the unit that makes organic light-emitting diode screens. Samsung also touched up an older phone line-up with new colors and features, helping tide it over in the Note 7’s absence.

Samsung is emerging from its biggest corporate crisis, when reports of incendiary Note 7s forced the Korean company to kill its most profitable gadget. It still hasn’t revealed the results of a subsequent investigation into an episode that cost Samsung more than $6 billion and assured Apple Inc. of the lead in premium devices over the holidays. It’s now counting on its next marquee phone to repair its reputation.

“Despite the Note 7’s vacuum, Samsung acquitted itself well on the back of sound S7 sales,” said Lee Seung-woo, an analyst with IBK Securities Co. in Seoul. “After a softer landing in the first quarter, Samsung is on track for record June quarter profit with the new S8 coming to market.”

Operating income rose to 9.2 trillion won ($7.8 billion) in the quarter ended December, its biggest profit in three years, the Suwon, South Korea-based company said in preliminary results Friday. That compares with the 8.29 trillion-won average of analysts’ estimates compiled by Bloomberg in the past four weeks.

Read more: a Gadfly column on how Samsung’s Lee scored

Shares of Samsung rose 1.9 percent to 1,812,000 won as of 1:52 p.m. in Seoul. The stock surged 43 percent in 2016, snapping a three-year losing streak. Samsung, which settles most component sales in U.S. dollars, also got a lift from a weaker Korean won. The U.S. dollar appreciated to 1,157.4 on average in the fourth quarter compared with 1,121.4 won in the previous three months, according to Bank of Korea data.

Samsung is counting on its flagship Galaxy S line this year to fire up a beleaguered mobile division. The next iteration of the phone is said to feature a bezel-less display and voice-enabled digital assistant. But the company’s also warned of slowing key markets and growing uncertainty around trade protectionism and currency fluctuations.

Sales were 53 trillion won in the quarter, the company said, compared with the 52.1 trillion won analysts expected. It won’t provide net income or break out divisional performance until it releases final results later this month.

While it awaits the next Galaxy S, Samsung should be able to rely on its components divisions to pick up some of the slack.

Samsung’s semiconductor division was probably its best performer in the fourth quarter on the back of stronger prices, lifting its shares to new highs in past weeks despite the company’s challenges. Operating income from the chip business probably came to 4.5 trillion won in the quarter, according to the average of six analysts surveyed by Bloomberg, which would mark a record high.

DDR3 4-gigabyte dynamic random access memory chips averaged $2.48 in the fourth quarter, compared with $1.75 in the previous three months, according to data from InSpectrum Tech Inc.

Samsung’s main U.S. semiconductor competitor painted an optimistic outlook for the industry last month. Micron Technology Inc., the largest U.S. maker of memory chips, predicted stronger-than-expected sales on demand for phone and computer parts. Greg Roh, an analyst at HMC Investment Securities Co., expects chip prices to rally another 30 percent or more in the first three months of 2017.

The company’s display division probably posted a profit of 1.1 trillion won. The proliferation of OLED screens should help in coming quarters: Apple is said to be planning to adopt the technology in at least one new iPhone later this year.

Earnings at the consumer electronics unit, which encompasses TVs and appliances, probably fell to 800 billion won because of rising panel prices, according to the analysts surveyed. 

The most publicly visible mobile arm continues to struggle. Operating income from the unit was probably 2.3 trillion won in the quarter, bouncing back from a record-low 100 billion won profit in the preceding three months, according to the analysts’ survey. Expectations are so low however, it may work in Samsung’s favor.

“Many in the market no longer expect a great job from the mobile business, and even with zero gains from mobile, Samsung’s semiconductors and displays will perform better this year,” said Lee Do-hoon, an analyst at CIMB Securities. “Given the lowered expectations, if that business does well, it’s a nice plus.”

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