Samsung Reports 30% Drop In 3Q Profits, Note 7 To Blame

October 27, 2016 - Written By David Steele

Samsung Electronics has just released third quarter profits and announced a 30% drop, accounted to the mobile division. Third quarter revenue stands at 47.82 trillion won ($42 billion), down 3.87 trillion won ($3.4 billion) from this time last year whilst third quarter operating profit is down by 2.19 trillion won ($1.9 billion) to 5.2 trillion won ($4.4 billion), year-on-year. The company officially revealed that the drop in earnings and revenue is directly attributed to the Galaxy Note 7, which was released in August but subsequently recalled owing to an exploding battery fault. However, replaced Galaxy Note 7 smartphones were still catching fire or exploding and Samsung Electronics recalled and either refunded or replaced with an alternative model the handset, giving it a 2.5 million smartphone recycling headache. Although the mobile division still reported a profit, this is the lowest in almost a decade – since 2008, which is from before Samsung’s smartphone days. Away from smartphones, the consumer electronics division achieved “solid earnings growth” compared with Q3 2015 because of SUHD televisions and premium home appliances. Samsung reported that its network business enjoyed a solid quarter thanks to growth in the rollout of 4G LTE upgrades, which goes against Nokia’s recent earnings report – here Nokia reported that the Chinese carriers had slowed down their investment into LTE networking.

Samsung also reported that the recent strength of the South Korean won against major worldwide currencies hurt operating profit by 700 billion won but that most of this was from the components divisions, which are still reporting respectable business numbers. Here, Samsung reported good progress made by the display and semiconductor businesses. For the overall components divisions, the company reported a small increase over the second quarter because of SSD (solid state drives) and flexible OLED panels, but compared with this time last year reported a decline in profits because the price of DRAM declined during the first two quarters. Even given the headwind of a strong South Korean won currency, Samsung is expecting revenue and profit to improve from this division: in particular, it believes the new generation V-NAND solid state drives will improve earnings as it has managed a “supply extension” of this higher margin technology. Samsung is pushing ahead with solid state memory module technologies and is expecting to consolidate its “technological leadership” in this arena; it also has 10nm memory technology being developed and prepared for mass production. The company is also expecting a recovery in the LCD market, although notes that a reduction in flexible OLED panels (blaming a discontinued Galaxy Note 7 at least in part for this) will hurt.

However, the most important part of any earnings update is the statement and where Samsung goes from here. The company writes that for 2017, it is going to concentrate on “normalization” of the mobile business whilst developing and selling the V-NAND and OLED business. For the smartphone business, the company stated that it will “focus on expanding sales of new flagship products with differentiated design and innovative features, as well as regaining consumers’ confidence.” We have already seen some evidence that Samsung is planning something different in 2017 from its mobile business, such as a foldable smartphone display. Although Samsung reported solid sales from the Galaxy S7 family, it remarked that it is to introduce (even) more low to mid-level models: this suggests that the company is going to continue designing and manufacturing several different families and models for the emerging markets with relatively little focus. The business will also work on developing Samsung Pay, cloud computing technologies together with introducing “artificial intelligence related offerings.”