Samsung: From Massive Recall to Major Profit in One Quarter

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A Samsung Galaxy S7 smartphone displayed at a store in Seoul, South Korea. Samsung halted sales of its Galaxy Note 7 smartphones last year, but it expects fourth-quarter operating profit to rise 49.8% from a year earlier. Photo: SeongJoon Cho/Bloomberg News

SEOUL—For a quarter in which Samsung Electronics Co. suffered its most embarrassing product recall in its history, the world’s biggest smartphone maker has also forecast its strongest profit in more than three years.

The South Korean technology giant said on Friday that it expects its fourth-quarter operating profit last year to rise 49.8% from a year earlier to 9.2 trillion Korean won ($7.76 billion), which would be its biggest operating profit in more than three years. Revenue likely will remain little changed at 53 trillion won.

Final earnings results will be released later this month.

The rosy earnings projection underscores just how much Samsung has moved from being a company predominantly reliant on sales of finished smartphones to one driven by the components that go into them.

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For Samsung, the shift to components as its mainstay comes at a critical time for the company as it continues to weather the damage from a recall of 2.5 million Galaxy Note 7 phones last year. Samsung pulled the premium smartphone from store shelves just two months after the product’s launch amid reports of some devices catching fire.

Samsung officials have previously said that write-offs related to the Note 7 recall will amount to at least $5 billion. Speaking at the Consumer Electronics Show in Las Vegas earlier this week, Tim Baxter, a top U.S. Samsung executive, said that the company will release its “root cause” for the overheating phones later this month. The company formally pulled the plug on the Note 7 in early October after weeks of complaints.

Samsung once derived about three-quarters of its profits from its mobile unit, as consumers around the globe snapped up new smartphones. Now, as smartphone sales growth has slackened in many markets, Samsung has offset that slowdown by selling more of the lucrative memory chips and display panels that go into devices made by its competitors such as Apple Inc.

When Samsung last recorded a quarterly operating profit as large as that of its latest quarter—in the third quarter of 2013—its mobile division accounted for about 65% of overall earnings. But the picture is quite different now. Mobile phones accounted for just 1.9% of its operating profit in the third quarter of last year when the company was first hit by the recall. Profit margins from mobile phones fell to as low as 7% in 2014 before rebounding last year to 16%. But that recovery was interrupted by the Note 7 recall.

In contrast, the semiconductor business has largely held steady, and analysts estimate that chip profits accounted for more than half of overall operating profit in the fourth quarter.

Samsung is the world’s largest chip maker with a technological lead over its rivals in dynamic random access memory, or DRAM, and NAND flash-memory chips. The company was one of the first to sell next-generation 3-D NAND chips. In the three months ended Sept. 30, 2016, Samsung had a 49.1% share of global DRAM sales and a 35.5% share of NAND sales, according to research firm IHS Markit.

Despite upbeat forecasts for the company’s semiconductor and display divisions, analysts have warned about limits to technological enhancements in chip technology and the cyclical nature of chip sales.

Even as Samsung’s display division is expected to more than double its earnings this year, the company’s overall momentum won’t be sustained if smartphones—once the company’s profit-generator—continue to struggle, says Lee Seung-woo, an analyst with IBK Securities in Seoul.

In line with its transition from a smartphone-driven company to a dominant player in electronic components, Samsung has also been intensifying its efforts to expand its capacity as a chip and display-panel manufacturer.

Last November, Samsung announced that it would invest more than $1 billion in its Austin, Texas, semiconductor factory to beef up its production of processor chips for smartphones and other devices.

Samsung is also investing close to $10 billion to expand its production of organic light-emitting diode, or OLED, displays that are thinner than traditional liquid-crystal displays.

Despite the company’s woes with the Galaxy Note 7, investors have pushed Samsung shares to record highs. On Friday, the company’s shares opened 2.3% higher after hitting an all-time high on Tuesday of 1,824,000 won ($1,538) a share, giving it a market capitalization of 286.2 trillion won ($241.4 billion)—about one-third of the market value of rival Apple. Shares had slipped on Wednesday and Thursday.

Corrections & Amplifications: Samsung’s operating profit in the fourth quarter of 2016 is on track to be the highest since the third quarter of 2013, its biggest quarter of profits in more than three years. An earlier version of this article incorrectly stated that the operating profit is on track to be the highest since the first quarter of 2014, its biggest quarter of profits in almost three years. Also, Samsung officials have previously said that write-offs related to the Note 7 recall will amount to at least $5 billion. An earlier version of this article incorrectly stated that the write-offs will amount to around $8 billion. (Jan. 5)

Write to Eun-Young Jeong at Eun-Young.Jeong@wsj.com

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