SEOUL—Samsung Electronics Co. wants to move on from the Galaxy
Note 7. Doing so may not be easy.
Two weeks after scrapping its fire-prone smartphone, the company
on Thursday revealed a big hit to its bottom line, pledged a
"thorough" and "open" investigation into the phone's problems and
elevated third-generation heir apparent Lee Jae-yong to his first
board seat.
But problems remain for Samsung: It won't have a new flagship
smartphone to sell until its Galaxy S8 launches in four months'
time; executives appear to be no closer to identifying the source
of the overheating problem plaguing its ill-fated Note 7; and the
company doesn't know how much the recall has undermined faith in
its products.
Samsung, which on Thursday reported a 96% plunge in quarterly
operating profit in its mobile division after discontinuing the
Note 7, finds itself without a buzzworthy product at a time when
profit margins and mobile sales are under pressure.
With its Note 7 out of commission after a two-month-long debacle
that has cost it more than $5 billion in recall expenses and lost
sales, Samsung will have to get through the holiday shopping season
with the Galaxy S7, a device that has been on shelves since March
this year.
Samsung executives acknowledged their predicament in a
conference call with analysts on Thursday. "We are expecting some
difficulties until the first quarter of 2017, but we will achieve a
business turnaround with the release of our new flagship
smartphone," said Lee Kyeong-tae, Samsung's vice president for
mobile communications.
Samsung will be seeking to squeeze some extra life out of the S7
at a time when sales growth for high-end players like Samsung and
its rival Apple Inc. is anemic. In the third quarter, Samsung
shipped about 75.3 million smartphones, according to research firm
Strategy Analytics, a 10% decline from a year earlier, thanks
largely to the recall.
Lee Seung-woo, an analyst at IBK Securities in Seoul, said that
smartphone sales generally taper off sharply after the first three
to four months on the market—for Samsung, often by about 50%.
Apple's iPhones, in contrast, tend to enjoy longer lifespans.
But even Apple is struggling. On Tuesday, the Cupertino,
Calif.-based company reported its first year-over-year revenue
decline in 15 years as it struggled to maintain demand for its
iPhones, and offered an outlook for the holiday quarter that
disappointed investors.
Meantime, Alphabet Inc.'s Google unit released its first Pixel
smartphone earlier this month to positive reviews. Next week,
fast-rising Chinese rival Huawei Technologies Co., is set to
release a new flagship device of its own.
Samsung's Mr. Lee said that the next version of its best-selling
Galaxy S series smartphone, the S8, would feature slick design and
an improved camera, as well as an enhanced artificial-intelligence
service. Earlier this month, Samsung acquired U.S. startup Viv
Labs, whose co-founders had previously created Apple's Siri virtual
assistant service. Mr. Lee declined to comment on whether Samsung
was planning to include Viv technology in the Galaxy S8.
The company is still grappling with the question of what tripped
up the Note 7 in the first place -- a key unknown as Samsung seeks
to prevent the same problems from cropping up in the S8.
At a shareholder meeting on Thursday, J.K. Shin, a Samsung
co-chief executive, told shareholders that the company was working
with regulators and independent experts to study "every aspect of
the device, such as its hardware, software and manufacturing
processes."
The company had identified Note 7 smartphones whose overheating
problems likely go beyond battery issues, he said. The remarks were
the first time Samsung has mentioned potentially broader causes,
and suggested it was widening, not narrowing, its
investigation.
Mr. Shin said that the probe would take time, without commenting
further. He pledged to share the findings "in an open manner."
Despite the challenges, Samsung executives say that the Galaxy
S7 is on track to be its best-selling device ever, and has
continued to sell strongly even amid the Note 7's well-publicized
issues.
Executives told investors that they expect mobile earnings for
the last three months of the year to top those of the same period
last year, due to the strength of the S7.
Samsung's net profit fell 16.8% to 4.54 trillion Korean won
($4.0 billion) for the three months ended Sept. 30. Overall
operating profit fell 30% from a year earlier to 5.2 trillion won,
while revenue fell 7.5% to 47.82 trillion won.
The company expects to take an additional hit of about 3.5
trillion won from the Note 7 situation in the last three months of
2016 and the first three months of next year.
Separately on Thursday, Samsung promoted Mr. Lee, the company's
third-generation scion, to its board of directors, elevating him to
his most public role yet at the technology giant. Mr. Lee wasn't
present at the extraordinary general meeting—Samsung's first since
1988—to the disappointment of small shareholders who attended the
meeting to catch a glimpse of him.
Other investors showed up to express disappointment at Samsung
over the Note 7.
"The Note 7 issue isn't just about costs," said Park In-gyo, one
shareholder who stood up to speak. "It's about the impact it has on
Samsung's brand that took years to build."
Write to Jonathan Cheng at jonathan.cheng@wsj.com and Eun-Young
Jeong at Eun-Young.Jeong@wsj.com
(END) Dow Jones Newswires
October 27, 2016 08:05 ET (12:05 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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