Daily Management Review

After Pulling the Plug on Note 7, Samsung Slashes Third Quarter Profit Estimate by a Third


After Pulling the Plug on Note 7, Samsung Slashes Third Quarter Profit Estimate by a Third
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, Samsung Electronics Co slashed its quarterly profit estimate by a third.
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 after it quantified the financial pain of Tuesday's move to scrap the Galaxy Note 7 smartphone after a global recall and weeks of mounting problems.
The sales and earning impact it currently expects from the decision to permanently halt sales of the $882 Note 7 device is denoted by the 2.6 trillion won ($2.3 billion) guidance cut, Samsung said in a statement. From 49 trillion won previously, its third-quarter revenue estimate was also cut to 47 trillion won.
The new earnings guidance left investors and analysts pondering the longer impact on Samsung's brand and earnings and is 30 percent below third-quarter 2015's operating profit. If the Note 7 damage drive consumers elsewhere, rival suppliers of smartphones that use the Android operating system, like Samsung's, stand to benefit.
"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. I think it's possible for fourth-quarter profits to come in as much as the high 7 trillion won range," said Park Jung-hoon, a fund manager at HDC Asset Management, which owns shares in Samsung.
Samsung shares ended down 0.7 percent on Wednesday, with the Seoul market closing before the earnings guidance cut was announced.
Putting the total third-quarter earnings hit at around 3.6 trillion won, the initial guidance issued last week likely already factored in a 1 trillion won profit impact, HDC's Park said. Some investors had feared the profit impact could be as large as 5 trillion won this year even while this was a major blow, he said.
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, Samsung shares are on track for their biggest weekly decline since May 2012 and have already fallen 10 percent this week.
To calm market jitters, Samsung may need to return more cash to shareholders, either through a dividend or additional buybacks, some investors said. In order to mollify shareholders whose nerves have been jangled, the cash-rich firm may need to announce a buyback of between 2 trillion won and 3 trillion won, HDC's Park said.
Following reports of the phones catching fire, the tech giant announced the recall of 2.5 million Note 7s in early September. As the company issued replacement devices with different batteries, until new phones also began to smoke and combust, it appeared to have the situation under control.
The longer the market was left in the dark about the origin of the fault, the deeper would be the damage to Samsung's brand and future earnings, investors and analysts agreed. Some have already predicted lost revenue in the region of $17 billion for Samsung.
"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.