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Samsung's mobile division profits fall by 96% in wake of Note 7 disaster

It’s not a great time to be working in Samsung’s mobile division. The South Korean manufacturer reported its earnings this week, and the results illustrate just how hard a hit the company took from its double recall of the Galaxy Note 7. Company-wide net profits fell 16.8% to $4 billion, while its mobile division reported a staggering 96% net profit loss year-over-year (from $2.1 billion in 2015 to just $88 million today).

The news wasn’t all bad for Samsung — its 3D NAND / V-NAND business has done well and the Korean manufacturer expects to expand to 64-layer NAND products in 2017. The cancellation of the Note 7 has also hit the flexible OLED business, however, even after some consumers shifted their purchases to other Samsung products that also use OLED screens. Samsung’s overall OLED and LCD large display divisions both saw significant growth this past quarter (flexible OLEDs, specifically, saw a sharp reduction in panel shipments while revenue from traditional OLED and LCD displays increased).

In a separate meeting yesterday, Samsung President Shin Jong-kyun met with shareholders directly and gave some additional updates and disclosures related to the Note 7 disaster. The company has recalled all 2.5 million of the Note 7’s it manufactured, and provided replacement phones to an estimated 1.47 million customers. There were 220 reports of original devices overheating and 119 reports of replacement device failures. Samsung investigated 117 original phones and 90 replacement devices, and claims that 85 original devices and 55 replacement Note 7’s were confirmed to suffer from “overheating incidents linked to phone or battery problems.” It was unable to examine 47 devices.

Samsung may have tested its own hardware in the initial and replacement runs of the Note 7, but both Samsung and United Laboratories (UL) are investigating now. Samsung still doesn’t know what caused the failures, but has pledged to continue investigating until it has a thorough understanding of what went wrong.

One of the fears with the mammoth recall was that it could harm consumer perception of Samsung products as a whole, but the company has seen no sign that this is occurring. Galaxy S7 sales remain strong. There was some speculation that Apple might be able to capitalize on Samsung’s misfortune, but recent reports suggest this is unlikely. Apple has reported it is supply constrained, particularly with the iPhone 7 Plus. As of this writing, Jet Black iPhone 7’s have a wait time of 2-3 weeks, while the same iPhone 7 Plus has an estimated wait time of 4-6 weeks.

It’s possible the delays are linked to yield issues with 14nm silicon, but there’s not much evidence for it. The iPhone 7 is immediately available in all of its color options and capacities except for Jet Black. The iPhone 7 Plus, in contrast, is only available in 3-4 weeks (4-6 for Jet Black). The two phones use most of the same internal hardware, apart from the 7 Plus’s larger screen size. Since the iPhone 7 uses two different modems, we also compared AT&T, Verizon, and the fully unlocked variant to see if estimated shipping time was different between manufacturers using Qualcomm’s modem and those using the Intel XMM7360. It was not.

Reports have also indicated that Google’s Pixel and Pixel XL devices are similarly supply constrained, which makes it less likely that any other manufacturer in the Android universe will make much revenue off Samsung’s misfortune. It’s still possible that a manufacturer like HTC might see a sales uptick, but we’ll have to wait for quarterly market share figures to make that determination.

As of this writing, it looks as though Samsung will be able to return to business as usual after an ugly, but ultimately surmountable, crisis. Things might turn much worse if the Galaxy S8 or hypothetical Note 8 suffer from a similar flaw to the Note 7. But Samsung has every reason to put upcoming devices through a fine-grained testing sequence to make certain this doesn’t happen. Then again, the company still doesn’t know what caused the problem in the first place, and it’s a lot harder to iterate on a design when you don’t know what made the last one fail. If Samsung can’t determine what made the Note 7 fail by the time the S8 is moving into production, it’ll probably draw up a contingency plan that emphasizes known-good technology at multiple points in the design. That might make upcoming devices a little more conservative than what we saw in 2016, but conservative beats explosive every time.

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