Samsung Q3 Operating Profit Slumps due to Note7 Debacle

Worse, its mobile division operating profit fell 96% to $88M in Q3 from $2.09B a year ago following the Note7 recall due to battery fires.

Samsung, Note7, Note7 recall, Note7 fires, revenue, operating profit, Q3 2016, smartphones, Android

Samsung's third-quarter earnings were hit hard by the recent recall and dropping of its once-flagship Note7 smartphone, as the company's operating profit fell 30 percent to $4.6 billion (5.2 trillion Korean won, KRW) from $6.4 billion (7.39 trillion KRW) a year ago.

The company's mobile division operating profit was particularly devastated by the Note7 debacle, declaring an $88 million (100 billion KRW) operating profit in the third quarter, down 96 percent from $2.09 billion (2.4 trillion KRW) in the third quarter of 2015. The company's mobile division revenue fell to 22.54 trillion KRW in the quarter from 26.61 trillion KRW in 2015.

Samsung reported its third-quarter financials on Oct. 27, a little more than two weeks after it announced the demise of the Note7 model on Oct. 11 due to more than 100 reports of unexplained battery fires and explosions around the world.

Overall, Samsung's revenue for the third quarter totaled 47.82 trillion KRW, down 7.47 percent from 51.68 trillion KRW in the same quarter in 2015.

Samsung did see a revenue increase in its semiconductor segment and operating profit increases in its consumer electronics and display panel segments in the third quarter, which helped offset its mobile device division declines. Semiconductor division revenue rose to 13.15 trillion KRW in the quarter from 12.82 trillion KRW a year ago, while the company's consumer electronics division had an operating profit of 770 billion KRW, up from 360 billion KRW for the same quarter in 2015. Samsung's display panel division posted an operating profit for the quarter of 1 trillion KRW, up from 930 billion KRW last year.

Despite the disappointing earnings that resulted from the failed Note7, the company said it "expects earnings to improve year-over-year driven by strong performance in the components business." At the same time, Samsung said its "mobile business expects a recovery in its earnings to a similar level with that of the fourth quarter of 2015, led by solid sales of the Galaxy S7 and S7 Edge" handsets, which were unveiled this past March.

Jan Dawson, chief analyst at Jackdaw Research, told eWEEK that while the impact of Samsung's Note7 disaster is "obviously significant, it looks like some other items this quarter helped to offset some of the profit impact, which was fortunate."

The company will likely bounce back financially fairly quickly, while "the bigger question becomes the longer-term branding impact," said Dawson. "I think they might be a bit more humble about future devices and a bit more careful about testing. It also sounds like they'll be ramping up marketing spend in the next few months to drive sales of other devices in the absence of the Note7."

Earlier in October, Samsung estimated that it would see further earnings consequences in its future fourth quarter 2016 results and in its first quarter 2017 results due to the Note7 failure. The company said at the time that it expected a "negative impact" on its operating profits of approximately $3.1 billion (about 3.5 trillion Korean Won, or KRW), combined, for the fourth quarter of 2016 and the first quarter of 2017. That is on top of the negative financial impacts reported in the third quarter. The lower profits in the next two quarters are expected to be about 2.5 trillion KRW in the fourth quarter of 2016 and about 1 trillion KRW in the first quarter of 2017, due to the Note7 recall, the company stated.

Ezra Gottheil, principal analyst at Technology Business Research, told eWEEK that the financial impact of the failure of the Note7 has to be looked at in a larger way, since Samsung has multiple product lines and business segments that can help it survive tough times in any one division.

While the company's mobile division is a large and important part of its overall business, "Samsung is in an almost unique position of being a supplier to its competitors in smartphones, so its losses in the smartphone segment drives gains in others," said Gottheil. "Still, this is a big hit. While I think customers' regard for Samsung will rebound once the cause of the problem is unearthed and the company continues its policy of transparency, the smartphone business will be damaged for at least two years" due to intense competition in the Android phone market.

"Loyal Samsung customers may find themselves happy with less expensive Samsung phones, and some high-end customers may try competitors' phones and like them," said Gottheil. "Because Android phones are all very competent now, many buyers are shifting away from performance-based purchasing decisions to decisions based on style and trends. This affects Samsung negatively because of its very large market share; it will suffer more from overall lower loyalty."

In the end, though, "Samsung is a very strong brand, and it has cost advantages because of its components businesses, so Samsung smartphones will rebound significantly over the next two years," he added. "I wouldn't have predicted long-term growth, irrespective of the recall, so the recovery won't be a full one."