Reviewing Samsung's Q4 2016 Figures And What Lies Ahead

Samsung Electronics ( SSNLF ) published its Q4 2016 results on Tuesday, posting its highest operating profit in over three years, as a strong market for semiconductor products and the depreciation of the Korean Won helped the company overcome some setbacks faced by its smartphone division, following the discontinuation of its fire-prone Note 7 smartphones in Q3. While overall revenues remained almost flat at 53.33 trillion won ($45.8 billion) , operating profits expanded by about 50% to 9.22 trillion won ($7.9 billion). Samsung expects earnings to improve in 2017, as the company takes advantage of strong semiconductor pricing and stable demand, although the smartphone unit could face some challenges, amid higher marketing costs, slowing global smartphone shipment growth and mounting competition. Below we take a look at some of the key factors that drove Samsung's performance over the last quarter and what to expect in 2017.

We have a $1,340 price estimate for Samsung Electronics , which is slightly ahead of the current market price.

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Semiconductor Unit Outperforms On Tight Supply And Samsung's High-End Focus

Samsung's semiconductor business had a solid quarter, with revenues rising by 12.5% to 14.86 trillion won ($12.74 billion), and operating profits growing by about 77% to a record 4.95 trillion won ($4.24 billion), driven largely by the memory business. Supply-demand conditions in the memory market have been tight, with mobile OEMs increasing memory content on devices, effectively bolstering demand for NAND modules, while PC DRAM is seeing some under-supply, as major vendors have been reducing their production mix in favor of mobile DRAM, boosting prices. While Samsung has been benefiting from the broader market tailwinds, the company's technology edge and its focus on higher value products also appear to be paying off.

For instance, Samsung is focusing on high density/performance DRAM over commodity DRAM, while expanding process migration to the 48-layer 3D V-NAND. Samsung is looking improve its process technologies further in 2017, migrating to to 1x-nm DRAM and 64-layer V-NAND, driving down costs. The company's system LSI business, which manufactures processors, also aided Q4 earnings, driven by strong demand for mid-to-low end app processors. 2017 is expected to be an important year for the LSI division, as Samsung looks to ramp-up production of the next generation 10-nm products from its foundry operations. These chips, which could be a fixture of high-end smartphones in 2017, are touted to be more battery efficient, while offering better performance and a smaller form factor.

Smartphone Business Largely Shrugs Off Note 7 Impact

Samsung's smartphone division fared reasonably well, despite the Note 7 recall which occurred in late Q3. Although segment revenues declined by about 5.5% year-over-year to 23.61 trillion won ($20.27 billion), operating profits rose by about 12% to 2.5 trillion won ($2.15 billion). Profitability for the quarter was aided by strong sales of the company's flagship Galaxy S7 and S7 Edge, which have higher margins, as well as sales of its mid-range smartphones such as the A and J series. That said, things are likely to remain subdued over Q1 2017, as Samsung is increasing its marketing spending in order to rebuild its brand following the Note 7 crisis. Moreover, the company's upcoming Galaxy S8 flagship is likely to launch in Q2, moving away from the March launch cycle that the company adopted with the S7. The upcoming device will be crucial to Samsung, as the company looks to restore its image as a vendor of cutting-edge smartphones, while contending with increasing competition in the high-end of the smartphone market as Apple preps to launch a completely redesigned iPhone later this year, while Google ramps up sales and distribution of its critically acclaimed Pixel devices. (related: Will The Galaxy S8 Deliver For Samsung Shareholders?)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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