What Lies Ahead For Samsung After A Tough Q3?

SSNLF: Samsung Electronics logo
SSNLF
Samsung Electronics

Samsung Electronics (OTC:SSNLF) published a tough set of Q3 2016 results, posting year-over-year declines in revenues (down 7% to $41.9 billion) and operating profits (down 30% to $4.6 billion), as the impact of the recall and discontinuation of the flagship Galaxy Note 7 handset more than offset gains at the firm’s semiconductor business. [1] While we believe that the near-term outlook for the mobile business remains tough, Samsung expects to return to year-over-year growth in Q4, leveraging its components business. Below we take a look at some of the key factors driving earnings.

We have a $1,350 price estimate for Samsung Electronics, which is slightly ahead of the current market price.

See our complete analysis for Samsung

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Note 7 Recall Costs Hurt Mobile Profits, But True Impact Will Play Out In Q4

Samsung’s mobile revenues fell by about 15% year-over-year to 22.09 trillion won ($19.3 billion), while its operating profit declined by roughly 96% to 100 billion won ($87 million), as the firm recognized costs related to the recall and discontinuation of the Galaxy Note 7, which saw multiple instances of battery fires and overheating. While the direct costs related to the discontinuation of the device were factored into Samsung’s Q3 earnings, we expect the full impact of the crisis to play out over the next few quarters. Samsung will face revenue pressures as it goes into the holiday quarter without the Note 7, which many reviewers praised as the company’s best smartphone to date, and also due to perception issues relating to the safety and durability of its broader product lineup. While Samsung is counting on its high-end Galaxy S7 as well as new mid-range devices such as the A and J series to drive growth, we believe that things will remain challenging in the near term. Samsung previously estimated that operating profits could take a hit to the tune of 3.5 trillion Korean won ($3.1 billion) over Q4’16 and Q1’17 due to lost sales.

Components Business Remains Strong

Samsung’s semiconductor segment performed well, with revenues rising by 3% year-over-year to about 13.15 trillion won ($11.5 billion), although operating margins declined by 300 bps to 25.6%. Samsung’s memory business benefited from strong shipments of high-density products to the mobile and server space, and also from the company’s pivot towards advanced technologies such as 3-D NAND memory. The chip division saw strong demand for mid-to low-end application processors and increasing sales of image sensors to Chinese smartphone vendors. Things should remain strong on the semiconductor front over Q4, as demand for NAND memory rises with mobile OEMs increasing memory content on devices, while PC DRAM prices potentially benefit from under-supply in the market as major vendors have been reducing their production mix in favour of mobile DRAM. Samsung’s display business should also perform well in the near term, driven by a recovery in the LCD business.

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Notes:
  1. Samsung Q3 Earnings Release []