Samsung Expects Q3 Profit Jump as Chip Surge Eases Galaxy Note 7 Recall Blues

South Korea's Samsung Electronics Co expects third-quarter profit grew 5.6 percent, beating estimates, as a pickup in chip and display earnings likely offset the impact of a global smartphone recall that has roiled the tech giant.

The world's biggest smartphone maker said in a brief filing on Friday its operating profit for July-September was likely KRW 7.8 trillion ($7 billion), compared with the KRW 7.4 trillion tipped by a Thomson Reuters StarMine SmartEstimate of analysts' forecasts. A year earlier operating profit was KRW 7.4 trillion.

The firm won't issue full results until late October and gave no details on the cost of recalling about 2.5 million Galaxy Note 7 phones after batteries caught fire. Analysts have said the Galaxy Note 7 woes - rumbling on with Wednesday reports of a smoking battery in a replacement device - could have undercut mobile earnings by at least KRW 1 trillion (roughly Rs. 5,986 crores).

(Also see: Samsung Could Face Second Recall as US Probes Burnt Galaxy Note 7)

Revenue for the quarter likely fell 5.2 percent to KRW 49 trillion (roughly Rs. 2,93,352 crores), the South Korean firm said, less than the Thomson Reuters StarMine SmartEstimate of KRW 51.1 trillion.

"Obviously the Galaxy Note 7 recall costs were reflected but (business) segments such as memory and Oled (organic light-emitting diode) displays did well and will probably continue to do so until at least next year," said IBK Asset Management fund manager Kim Hyun-su.

Samsung's semiconductor business - the world's top memory chip maker - is thriving as Apple and peers boost the global market, seeking chips for new iPhones and other products launched ahead of the peak year-end sales season. Germany's Dialog Semiconductor Plc, an iPhone chip supplier, said on Thursday its revenue beat expectations.

Galaxy Note 7 Chip Boost?
Ironically, the Galaxy Note 7 problems could also boost Samsung's chip business. Industry executives say the sudden need for chips in 2.5 million replacement phones is exacerbating already tight memory market conditions, which could push prices higher.

Paul Romano, chief operating officer at US-based electronic component distributor Fusion Worldwide, said the firm's clients, which include Samsung, are currently having a harder time procuring memory chips. Some smartphone makers are also trying to secure more of the chips as they see an opportunity capitalise on Samsung's mis-steps and boost handset sales, Romano said.

"Sometimes this creates a seize mentality - everyone tries to manage the risk," said Romano. "Often the response is to procure new product, trying to grab what's left of a shrinking pile of supply."

The US FAA and the Consumer Product Safety Commission are investigating Wednesdays incident involving a 'safe' Samsung Galaxy Note 7. "Until we are able to retrieve the device, we cannot confirm that this incident involves the new Galaxy Note 7," said.

(Also see: Samsung Galaxy Note 7 Fires Risk Hurting Demand for Other Products)

Researcher TrendForce says contract prices for DRAM chips - used in temporary data usage - will rise by more than 10 percent in October-December. Demand is outpacing supply in the market for NAND chips used for long-term data storage during the third quarter, the researcher added, tipping prices to continue rising.

Samsung shares were up 0.5 percent at KRW 1.7 million at 0220 GMT (7:50am IST), compared with 0.3 percent fall for the broader market.

The stock touched a record high of KRW 1.716 million on Thursday after Samsung said it was "carefully reviewing" the proposals by activist investor Elliott Management for a radical corporate makeover that would split Samsung Electronics into a holding vehicle for ownership purposes and a separate operating company.

Samsung didn't comment on Friday on how it plans to respond to the Elliott proposals.

© Thomson Reuters 2016