Samsung Cuts Profit by $2.3 Billion After Killing Note 7

EghtesadOnline: Samsung Electronics Co. cut its third-quarter operating profit by $2.3 billion after ending production of its fire-prone Galaxy Note 7 smartphones, the first official indication of how much the crisis will cost South Korea’s largest company.

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13 October 2016

Profit is projected to be 5.2 trillion won ($4.63 billion) instead of 7.8 trillion won in the three months ended September, the company said in a regulatory statement Wednesday. That effectively erases all the mobile business profit that analysts had been projecting. Revenue will be 47 trillion won instead of 49 trillion won, reports Bloomberg.

Samsung and Vice Chairman Jay Y. Lee are struggling to contain fallout from the troubled Note 7 phones, which were overheating and catching fire even after a recall that was supposed to fix the problem. The Suwon-based company said Tuesday it would kill this generation of the high-end phone and then cut third-quarter guidance today, less than a week after it was first issued.

“This is a huge cutback,” said Greg Roh, an analyst at HMC Investment Securities Co. “It means Samsung has reflected not only the sales loss from the shutdown but it also means it would bear the costs of the inventories of Note 7s in the channel as well as the components they bought a few months back.”

Wednesday’s announcement is the first time the company has put a price on the debacle, even if it is preliminary. Chung Chang Won, an analyst at Nomura Holdings Inc., estimated in a research note before the company’s announcement the worst-case scenario of Samsung terminating the Note 7 would cost the company about $5 billion in operating profit through 2017.

Samsung’s shares have tanked this week as new fire reports emerged. The stock has slumped 10 percent in the past three trading days, wiping $21 billion from its market value.

"It’s the biggest crisis for Samsung Electronics,” said Huh Nam Kwon, chief investment officer at Shinyoung Asset Management, which held more than 300,000 shares in the company according to filings compiled by Bloomberg. “It’s not because of its physical losses, but because the issue has been a blow to the company’s brand. The company should have been more cautious in responding to this case in the beginning.”

The debacle is testing Samsung’s management and raising questions about whether it needs stronger leadership. Lee Kun-hee, the family patriarch, remains chairman even though he suffered a heart attack more than two years ago and hasn’t been back at the company since. His son, Jay Y., is heir apparent but he hasn’t been able to take his father’s title because of Korean custom.

“They have real management problem right now,” said Shaun Rein, managing director of Shanghai-based China Market Research Group. The lack of a clear leader “has slowed down decision making.”

Samsung hasn’t said who, if anyone, will be held responsible for the Note 7 missteps. The phone unit is run by D.J. Koh, who took over in December. The episode also raises questions about Jay Y.’s ability to manage the sprawling company.

“It’ll be hard for Jay Y. to detach himself from from his responsibility for the Galaxy Note 7 crisis,” said Chung Sun-sup, chief executive officer of Chaebul.com, a website that tracks Korean conglomerates. “The resistance against his succession may grow.”

Samsung’s mobile division was projected to report operating income of 2.7 trillion won in the quarter, according to estimates compiled by Bloomberg. HMC’s Roh said the revised outlook probably erased that number. “We expected the mobile division to see about 2.6 trillion won previously but it will only see a mere 0.3 trillion won in the third quarter,” he said.

Samsung Electronics generates more than half of its revenue from businesses other than the mobile unit. Sales of semiconductors, glass panels, appliances and other products are projected to keep the company profitable in the third quarter and it’s estimated to make more than $20 billion for the year.

Samsung hasn’t said what the Note 7 crisis may cost in future quarters, when the device was supposed to compete with Apple Inc.’s iPhone and devices from Google and Huawei Technologies Co. Samsung may have to rethink how it makes product decisions given the magnitude of the misstep.

“Every company can have a problem anytime,” said Shinyoung’s Huh. “But Samsung was in too much of a hurry to reach a conclusion and it resulted in an error in the conclusion.”