Samsung's Strong Q3 Chip Sales Expected to Ease Sting of Galaxy Note 7 Recall

Scarred by the global recall of its flagship smartphone, Samsung Electronics Co is set to report on Friday it still expects a small rise in third-quarter profit, analysts say, with healthy sales of memory chips and displays easing the pain.

Lost sales and expenses tied to the recall of at least 2.5 million Galaxy Note 7 handsets to fix battery problems could cost the firm nearly $5 billion (roughly Rs. 33,432 crores) this year, some analysts have said. That could sap momentum from a nascent recovery in Samsung's mobile business, an underperformer in recent years.

(Also see:  Samsung Galaxy Note 7 Recall May Cost Company as Much as $1 Billion: Report)

But a pickup in the memory chip market, led by demand from rival smartphone maker Apple Inc, will buttress earnings, company watchers say. A Thomson Reuters SmartEstimate, derived from a survey of 20 analysts, tips overall July-September operating profit to have edged up 0.7 percent from a year earlier to KRW 7.4 trillion ($6.65 billion).

(Also see:  Samsung Galaxy Note 7 Recall: User Says New, 'Safe' Unit Exploded)

Samsung will report its estimates for third-quarter revenue and operating profit, without further details, on Friday.

"So long as the operating profit number comes in at a low KRW 7 trillion level, the market will look at it and think some of noise surrounding the Note 7 recall issue has cleared," said HDC Asset Management fund manager Park Jung-hoon.

Analysts have lowered their expectations for Samsung's mobile division since the September 2 recall made global headlines. Some have cut their mobile division profit forecast by KRW 1 trillion or more to reflect the lost sales and costs of recalling a smartphone that had won rave reviews and made a strong sales start since its launch in August 19.

(Also see:  Samsung Galaxy Note 7 Recall: Restart of Sales Delayed by 3 Days in South Korea)

Korea Investment analyst Jay Yoo forecast Samsung's third-quarter mobile division operating profit at KRW 2.6 trillion, up from KRW 2.4 trillion a year earlier but down from KRW 4.3 trillion in April-June.

But analysts say Samsung's chips division - the firm is the world's biggest memory chip maker - will soothe the Galaxy Note 7 woes as other smartphone makers filled chip order books and drove prices higher ahead of the peak year-end shopping season. Analysts estimate the division could report quarterly operating profit of KRW 3 trillion or more - its highest in four quarters.

Analysts said the semiconductors uptrend was more pronounced for NAND memory chips - used for long-term data storage - as demand started to outpace supply during the quarter due to orders from Apple and Chinese smartphone makers. Demand for solid-state drive storage chips for mobile devices also grew.

(Also see:  Can You Trust the Lithium-Ion Battery in Your Pocket?)

Samsung stands to benefit from the upswing - especially in the NAND market, where it dominates rivals such as Japan's Toshiba Corp and US firm Micron Technology Inc in the market for high-end 3D products such as enterprise servers and storage.

Samsung's display business earnings also likely picked up some of the slack from the mobile division thanks to increasing adoption of its organic light-emitting diode displays (Oled) by rising Chinese smartphone makers such as Oppo and Vivo, analysts said.

"While the Galaxy Note 7 recall is a painful blow, the third quarter will show that components including DRAM, NAND and displays did better than expected," Dongbu Securities said in a report, tipping operating profit for the chips division to be at KRW 3 trillion.

© Thomson Reuters 2016