Samsung Electronics has today forecast that it believes its fourth quarter 2016 profit will be 50% higher than the fourth quarter, 2015, at $7.8 billion. Samsung’s estimate is considerably higher than all industry analysts for the period. If correct, this will represent the highest profits that the business as recorded in the fourth quarter for more than three years and the reason is because of a combination of strong chip sales and an uptick in smartphone sales. This increase in profit is also despite an anticipated $2.1 billion hit on profits associated with the Samsung Galaxy Note 7, the late-2016 flagship model that had to be recalled and removed for sale because of exploding battery problems. However, the impact of the Galaxy Note 7 failure has been more than overcome by a combination of “solid earnings” from the sale of Samsung’s older smartphones plus an increase in the price of memory chips, which remain in strong demand across the mobile industry. For investors, 2016 was a good year: Samsung’s stock price rose by over 40% because of hopes that Samsung’s component sales businesses (semiconductor chips and AMOLED panels) would more than compensate for the failure of the Galaxy Note 7: the stock price increased by more than 2% following Samsung’s announcement.
This increased profit is in contrast to fourth quarter revenue, which fell by 0.6% compared with the same time in 2015. Samsung has managed to dramatically increase profit from slower sales, which could represent the company achieving a higher return on its investment of manufacturing plants. Some of the improvement is associated with the South Korean won depreciating in value compared with the dollar, as most components are sold in dollar terms and this has increased the won raised by the business - but this in isolation would only amount to under 9% of the increase in profits.
In the detail, Samsung’s chip sales division is reckoned to have earned a little under half of the quarterly profit figure. Samsung manufacture a range of own-branded Exynos System-on-Chips and have worked with Apple to manufacture the iPhone and iPad’s chips. More importantly are the world’s largest NAND manufacturer and produce memory chips for many consumer electronics businesses, such as smartphones, tablets, Chromebook and laptops. We have also seen Samsung introduce leading edge 2015 technology into more mainstream areas in 2016, such as the introduction of mid-range chipsets built on a 14nm process size, bringing several advantages to mid-range smartphones such as reduced power consumption and heat production. Much of the rest of Samsung’s profits has been recorded from the sales of its own smartphones, in particular the Samsung Galaxy S7 family. Samsung had to switch back to promoting and encouraging customers to buy the Galaxy S7 device during and after it recalled the Galaxy Note 7 smartphone, and it now seems that by consolidating its device range and concentrating on a smaller number of devices has helped Samsung more than losing a single smartphone line.