Samsung slashes third quarter profit
estimate by a third after pulling plug on Note 7
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[October 12, 2016]
By Se Young Lee
SEOUL (Reuters) - Samsung Electronics Co
slashed its quarterly profit estimate by a third on Wednesday, soaking
up a $2.3 billion hit from ditching its flagship smartphone in what
could be one of the costliest product safety failures in tech history.
Quantifying the financial pain of Tuesday's move to scrap the Galaxy
Note 7 smartphone after a global recall and weeks of mounting problems,
the world's top smartphone maker said it expects its July-September
operating profit was 5.2 trillion won ($4.7 billion), down from the 7.8
trillion won it estimated five days ago.
Samsung said in a statement the 2.6 trillion won ($2.3 billion) guidance
cut reflects the sales and earning impact it currently expects from the
decision to permanently halt sales of the $882 Note 7 device. Its
third-quarter revenue estimate was also cut to 47 trillion won from 49
trillion won previously.
The new earnings guidance is 30 percent below third-quarter 2015's
operating profit, and left investors and analysts pondering the longer
impact on Samsung's brand and earnings. Rival suppliers of smartphones
that use the Android operating system, like Samsung's, stand to benefit
if the Note 7 damage drive consumers elsewhere.
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"It's possible there could be additional profit impact in the fourth
quarter but it likely won't be as large as the third quarter," said Park
Jung-hoon, a fund manager at HDC Asset Management, which owns shares in
Samsung. "I think it's possible for fourth-quarter profits to come in as
much as the high 7 trillion won range."
Samsung shares ended down 0.7 percent on Wednesday, with the Seoul
market closing before the earnings guidance cut was announced.
HDC's Park said the initial guidance issued last week likely already
factored in a 1 trillion won profit impact, putting the total
third-quarter earnings hit at around 3.6 trillion won. While this was a
major blow, he said some investors had feared the profit impact could be
as large as 5 trillion won this year.
BILLION-DOLLAR BUYBACK?
Samsung shares have already fallen 10 percent this week and are on track
for their biggest weekly decline since May 2012, having touched a
one-month low of 1.494 million won as investors worried the Note 7
crisis could inflict long-term damage on Samsung's reputation and
earnings.
Some investors said Samsung may need to return more cash to
shareholders, either through a dividend or additional buybacks, to calm
market jitters. HDC's Park said the cash-rich firm may need to announce
a buyback of between 2 trillion won and 3 trillion won in order to
mollify shareholders whose nerves have been jangled.
The tech giant announced the recall of 2.5 million Note 7s in early
September following reports of the phones catching fire. The firm
appeared to have the situation under control as it issued replacement
devices with different batteries, until new phones also began to smoke
and combust.
Investors and analysts agreed that the damage to Samsung's brand and
future earnings would deepen the longer the market was left in the dark
about the origin of the fault. Some have already predicted lost revenue
in the region of $17 billion for Samsung.
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![](../images/101216pics/news_o25.jpg)
Signage is seen at the Samsung 837 store in the Meatpacking District
of Manhattan, New York, U.S., October 10, 2016. REUTERS/Andrew Kelly
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"There needs to be explanation from Samsung in order for consumers
to understand that problems won't occur in the next models...Samsung
needs to clearly explain and admit what went wrong," said IBK Asset
Management fund manager Kim Hyun-su. The asset manager owns shares
in Samsung.
Samsung would likely push ahead to get the latest version of its
premium S-series smartphones to market as soon as possible, fund
managers said. Typically, the South Korean company unveils a new
Galaxy S phone on the sidelines of the Mobile World Congress tech
trade show in the first quarter as it battles Apple Inc to stay at
the top of the smartphone market.
'DAMAGE CONTROL'
Experts are baffled by what could be causing the overheating in the
replacement phones, if not the batteries, and Samsung has not
commented.
An official at the Korean Agency for Technology and Standards, which
is investigating the problem alongside Samsung, said the fault in
the replacement devices might not be the same as the problem in the
original product. The official asked not to be identified as he was
not authorized to speak publicly.
Aviation authorities and airlines around the world are telling
passengers to switch off their Note 7s and keep them out of checked
baggage, amid fears they could bring down a plane.
"Damage control at Samsung will face an uphill battle to redeem the
company's tarnished image owing to the dangerous and dramatic nature
of the phone's failure," Vijay Michalik, an analyst at research firm
Frost & Sullivan, said.
While the damage to Samsung's brand, if not its earnings, remains
hard to quantify, negative publicity from the botched recall could
touch off a turf war among Android smartphone manufacturers,
analysts said.
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Consumers tend to commit to their choice between Apple's iOS
operating system and Google's Android, leaving Samsung's fellow
Android manufacturers such as LG Electronics Inc and Alphabet Inc's
Google in prime position to strike.
($1 = 1,114.7500 won)
(Reporting by Se Young Lee; Additional reporting by Joyce Lee and
Nataly Pak; Writing by Lincoln Feast; Editing by Stephen Coates and
Kenneth Maxwell)
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