Samsung's Profits Continue to Grow Despite Note 7 Recall

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Samsung may face a second recall of its Galaxy Note 7.
Samsung may face a second recall of its Galaxy Note 7. Credit: Samsung
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Samsung might be grappling with the fallout from its exploding Note 7 smartphones, but as a key supplier of displays and memory chips, the South Korean company showed it can rely on other phone makers and PC manufacturers to drive sales and profit.

The recall of the defective devices has dominated headlines since it was announced last month, and Samsung has worked to contain the fallout and insulate its component businesses. That helped maintain growth as new devices from rivals stoke demand for components. While Samsung appears to be remain on a firm footing amid the crises, a new challenge emerged this week when billionaire activist Paul Elliott Singer started a campaign to get the family-controlled company to restructure.

That, in addition to Friday's estimate-topping preliminary earnings report, fueled a rise in Samsung's shares to a record. By midday, the stock was up 0.5 percent at 1.7 million won. Operating income rose 5.5 percent to 7.8 trillion won ($7 billion) on a preliminary basis in the three months ended September, exceeding the 7.58 trillion-won average of analysts' estimates compiled by Bloomberg.

"Without the one-off recall costs, Samsung was originally expected to perform better and better this year," said Chung Chang Won, an analyst at Nomura Holdings in Seoul. "If its mobile unit doesn't get into further trouble from here and given the strong performance of its components businesses, Samsung shares will continue its upward march."

Still, there are signs that the exploding phone issue won't be going away anytime soon. Samsung may face an unusual second recall of its Note 7 smartphones if one that caught fire aboard an airliner this week is a replacement device as its owner says, according to two former U.S. safety officials. While the company didn't specify the impact of the recall of 2.5 million phones, analysts have estimated the cost at $1 billion to $2 billion.

Sales were 49 trillion won, the company said, compared with the 51 trillion won analysts expected. Net income and divisional performance will be released when Samsung discloses audited results later this month. Analysts have cut their estimates of Note 7 sales by 38% to 8 million units this year, according to the average of six projections compiled by Bloomberg.

"The recall-related costs have surely taken its toll on its mobile business in the quarter but its other businesses, particularly semiconductors, have fared extraordinarily well," Lee Seung-woo, an analyst at IBK Securities in Seoul, said before the earnings release.

Samsung's business is at a point where it needs a major overhaul, according to the activist investor. Mr. Singer is betting that Samsung Electronics' heir apparent, Jay Y. Lee, is so keen to modernize his family's empire without losing control that he'll embrace a complex plan to break up the company, people familiar with the matter said.

Mr. Singer is proposing that Samsung split into an operating company and a holding entity, dual-list the former on a U.S. exchange, pay shareholders a special dividend of 30 trillion Korean won, and take on three independent board members. Mr. Singer's demands are broadly in line with changes that Samsung's Mr. Lee himself had been contemplating, the Wall Street Journal reported.

Audited earnings are usually announced three weeks after the preliminary numbers. Operating income from the phone division probably was 2.7 trillion won in the quarter, according to the analyst survey. Operating income at the semiconductor business probably was 3.3 trillion won in the third quarter on sales of 12.9 trillion won, largely helped by price rebound, according to the analyst survey. Signs of a demand recovery in semiconductors are also witnessed by Samsung's bigger chip competitor Intel.

The world's biggest maker of semiconductors said last month that it has raised its forecast for third-quarter sales, largely bolstered by growing optimism for the PC market, which helped boost prices. DDR3 4-gigabyte dynamic random access memory chips rose for a second straight quarter, reaching $2.01 on Sept. 30, according to data from inSpectrum Tech. That compares with a March 31 price of $1.68.

The company's display division, which also makes screens using organic light-emitting diodes, probably posted a profit of 760 billion won while the consumer electronics unit, which encompasses TVs and appliances, was estimated to be 76% higher at 635 billion won, according to analyst surveys.