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Samsung's chips make up for Galaxy Note 7 financial woes

The company may be losing billions of dollars from its flawed phone, but it's making a lot of cash from its components business.

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D.J. Koh, head of Samsung's mobile business, explains Sunday during a press conference in Korea what caused the Note 7 to overheat.

Samsung

For Samsung, it's not all about the Galaxy Note 7 -- at least not when it comes to financial results.

Even as it faces a hit of more than $5 billion (spread across several quarters) from the death of its flawed phone, Samsung managed to post its best operating profit in three years. What it's benefiting from is strong demand for components that go inside mobile phones, TVs and other devices.

Still, Samsung warned its overall earnings should slide in the first quarter as its mobile business faces higher marketing costs and as it sells fewer TVs. Its components businesses should continue to grow, though.

Samsung may be best known as the world's biggest maker of phones and TVs, but it's also a major player in the semiconductor industry. It's the world's largest vendor of memory chips and the second biggest processor maker overall after Intel. Along with designing processors for some of its own devices, Samsung manufactures processors created by other companies, like wireless chip giant Qualcomm.

"For 2016, Samsung achieved solid results despite the Note 7 discontinuation in the second half as a result of continuous efforts during past two to three years to strengthen its component business competitiveness by focusing on value-added products" and advancing its DRAM and V-NAND memory businesses, as well as its OLED display operations, the company said.

The operating income for Samsung's semiconductor business soared 77 percent in the fourth quarter. Samsung said that in the mid- to long-term it expects the shift in the tech industry to focus on the internet of things, artificial intelligence and automotive to boost its components business.

The company on Monday reported its overall fourth-quarter profit jumped 50 percent to 9.22 trillion won ($7.9 billion) as customers scooped up its memory chips and display panels. Sales were essentially flat at 53.3 trillion won ($45.8 billion).

The profit in Samsung's mobile business also increased as customers sought out its nearly year-old Galaxy S7 and S7 Edge, as well as its mid- to low-end phones.

The Note 7 effect

The Galaxy Note 7, one of Samsung's most high-profile phones, blew up in its face last fall, suffering multiple recalls and bans by airlines before flickering out with a final "death update" that essentially bricks the remaining units in the wild. Thousands of diehard Note 7 fans continue to hold onto their devices, but the vast majority -- 96 percent globally -- have been exchanged.

The company on Sunday finally revealed what caused the Note 7 to overheat. The culprit proved to be two separate flaws with two separate batteries. One was a design flaw that led to the first recall. The second was a manufacturing error introduced after Samsung's second supplier ramped up production to meet demand as the sole Note 7 battery supplier.

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Fourth-quarter operating profit in Samsung's IT & mobile business rose 12 percent to 2.5 trillion won ($2.1 billion). Sales for the business slid 5.6 percent to 23.6 trillion won ($20.3 billion).

By comparison, Samsung reported its worst operating profit in two years in the third quarter, the period when it recalled and then killed off its Note 7. Samsung's mobile division, the division responsible for the Note 7, reported an operating profit of 100 billion won ($87.8 million) in that quarter, a decline of about 96 percent and its lowest in nearly eight years.

For its mobile business in 2017, Samsung expects slow growth in smartphone demand but said it will "continue to innovate both in software and hardware across its entire line-up and prioritize consumer safety.

"Although the growth of the global smartphone market is expected to slow this year, new services such as artificial intelligence (AI) will be a differentiating factor," the company said in a press release. "The mobile business will seek to strengthen its leadership in the premium market and boost competitiveness of mid-to-low end smartphones by adding innovative features available in high-end models."

That includes adding water resistance and fingerprint recognition to its cheaper phones. It also plans to expand Samsung Pay, Samsung Cloud and bring AI-based services to its premium smartphones.

Overall, Samsung's net income more than doubled to 7.09 trillion won ($6.1 billion) in the fourth quarter.