By QuestFactory
Samsung Electronics (SEC) announced financial results for Q3 2016 today. Revenue for Q3 2016 was 47.82 Trillion Won (approximately US$42.1B) down 6% from Q2, and down 7% from Q3 2015. Operating profit also declined, at 5.2 Trillion Won (approximately US$4.6B) in Q3 2016, down 36% as compared to in Q2 2016 and down 30% from last year’s Q3 2015. The declines in revenue and profits were primarily related to the Galaxy Note7 issues, which recently led to the company’s decision to recall and cease selling the smartphone.
HAS SAMSUNG SET ASIDE ENOUGH? DOES THIS FULLY ACCOUNT FOR THE NOTE 7 EPISODE?
Samsung hasn’t released specific information on the hit taken for the Note7 recall, and estimates vary, but it was large. We can get an idea of the scale as it wiped out the profit from the IM (IT & Mobile Communications) division which had made a 4.3 Trillion Won profit the previous quarter, Q2 2016, and had been on an upward trajectory. Also, early October, a preliminary forecast of a total SEC profit of 7.7-7.9 Trillion Won had been issued, 2.6 Trillion Won more than was actually earned.
The cost of the recalls has, one assumes, been accounted for, but there are still caveats. Samsung hasn’t formally announced the cause of the Note7 problems, which implies it is not certain yet. And there have been a few concerning reports about problems with the S7 edge; Samsung’s view is that the two issues are not related. There is also the potential cost of lawsuits.
There is another problem: some Note7 clients are holding out and not returning their device. QuestFactory research shows they are looking for more compensation, and a roadmap for replacing the Note7. Samsung has now moved fast though, announcing it will replace the Note7 next year. It has announced, in Korea for now, that Note7 customers who turn in their device by the end of November, and take the Samsung S7 or S7 edge replacement, can benefit from a big discount on a future Samsung high end smartphone purchase next year.
HOW MUCH HAS SAMSUNG’S BRAND BEEN DAMAGED?
The Galaxy smartphones account for about half of Samsung Electronics’ business, so the impact is potentially very significant. There were large fluctuations in the stock price when the Note7 problems surfaced, with a 10+% drop over 2 days on a couple of occasions – of the order of a $20+B market value decline each time. On a year-to-date basis, however, the stock has done well.
Philippe de Marcillac, principal analyst, QuestFactory commented, “QuestFactory research of social and digital media shows that Samsung customers are loyal, and mainly see the Note7 problems as affecting that single device”.
He added, “Comments about Samsung Galaxy smartphones in social media are usually 80% positive. Sentiment about the flagship S7 line dipped a bit during the Note7 crisis, but has recovered. Today it’s almost back to the highly positive level we saw before the crisis.”
WILL CUSTOMERS STILL BUY SAMSUNG IN THE SAME NUMBERS?
This is the Trillion Won, or Billion Dollar, crunch question. We’ve already noted the positive view of the Galaxy brand from the customers’ perspective. But, simply put, in any case, is there enough alternative capacity to replace much of the Samsung volume?
This is an important market context: Samsung typically ships something like 80 million smartphones a quarter, holding over 20% of the WW market. Number 2 Apple shipped around 40 million in Q3 2016. Of course, Q3 was a low quarter owing to the transition from iPhone 6 to iPhone 7, so we can expect Apple to ship a much larger number, close to 80 million smartphones, in Q4. But that ramp up is effectively meeting demand from its own customers.
Our analysis of social and digital media comments shows some Note7 customers are interested in the high-end iPhone 7 Plus, but that model is in short supply, and Note7 customers probably will not want to wait. And when we look at other brands, there are not many other high-end offerings, and supply is also constrained. So, there are limited options when picking a replacement for the Note7, with Samsung’s own Galaxy S7 edge being the most obvious choice.
OUTLOOK
Samsung faces lost revenue streams from the large volume of Note7s it had planned to ship in Q4 2016. On a positive note though, it is managing to migrate a very decent amount of that demand to the S7 edge, and is ramping up production, but there will still be an impact. Looking further ahead, Samsung’s goal is to explain what happened, successfully replace the Note7s around the world quickly, and introduce a new stable Galaxy Note smartphone. If it also offers affected customers around the world attractive discounts towards new phone purchases in 2017, as is has started doing in Korea, it could well put the Note7 troubles behind it.
