Samsung is much more than just a smartphone company. And its smartphone business does not rely on just a single product. Following the Galaxy Note 7 debacle, many analysts expected the company’s profits to take a huge hit, especially in the crucial holiday shopping season. The Korean electronics giant issued a forecast on Friday that its October-December quarter operating profits would be 50% higher than the same quarter a year ago. Not too many analysts were expecting that.
Samsung’s component business is thriving
In its guidance, Samsung said the fourth-quarter operating profits would be 9.2 trillion Korean won or $7.8 billion despite the recall of its flagship Galaxy Note 7, which is estimated to have cost the company upward of $3 billion. The fourth-quarter earnings would be the highest in more than three years. While the Note 7 story did not end well, Samsung’s component business is thriving.
Samsung profits even when consumers choose to buy an iPhone instead of a Galaxy device; or TVs, laptops and other devices from its competitors. That’s because Samsung’s components are used by many of the world’s leading electronics manufacturers in their products. Samsung used to rely heavily on its mobile business until a few years ago, but now it has diversified its revenue streams.
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The Korean company was pouring billions of dollars in its semiconductor and display businesses even when its smartphone business was thriving. As a result, the company has today established itself as a leading supplier of electronics components. IDC analyst Bryan Ma told BBC that processors and displays are “really, really profitable businesses.” The depreciation of Korean won against the US dollar may also have helped Samsung.
Samsung expected to book Galaxy Note 7 recall costs
Samsung first issued the Galaxy Note 7 recall in September following dozens of complaints about exploding batteries. The company offered replacement Note 7s to customers with ‘safe’ batteries from a different supplier. But the company had to kill the device after supposed safe phones were also found to be prone to explosions. Samsung has promised to share the details of its investigation into the cause of Note 7 explosions by the end of this month.
Samsung will release its detailed fourth quarter earnings in late January. The company is expected to book Note 7 recall costs that could affect its Q4 bottom line. The company plans to invest $1 billion in its Austin, Texas facility to beef up its semiconductor production. Samsung is also investing approximately $10 billion to expand the production of OLED displays. Samsung Display is rumored to be the sole supplier of OLED screens for Apple’s upcoming iPhone 8.
Mid-range phones, Galaxy S7 come to the rescue
Following the discontinuation of Galaxy Note 7, Samsung fans proved loyal to the brand. Instead of switching to the iPhone, a large number of Note 7 users purchased the Galaxy S7, which sold briskly during the fourth quarter despite being in the market for almost a year.
CLSA analyst Sanjeev Rana told the Wall Street Journal that even in the best case scenario the Galaxy Note 7 would have sold only about 15 million units. That’s just 5% of more than 300 million units the Korean company sells every year. LS Asset Management fund manager Kim Sung-soo told Reuters that mid-range smartphones helped Samsung hold its ground amid Note 7 debacle.