Samsung slashes profit estimates after Note 7 phone safety disaster

Samsung Electronics Co slashed its quarterly profit estimate by a third yesterday, soaking up a $2.3-billion(R32.7-billion) hit from ditching its flagship smartphone in what could be one of the costliest product safety failures in technology 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 expected its July-September operating profit to be 5.2-trillion won(R66.9-billion), down from the 7.8-trillionwon (R98.4-billion) it estimated five days ago. Samsung said the 2.6-trillion won($2.3-billion) guidance cut reflected the sales and earning impact it currently expected from the decision to permanently halt sales of the $882(R12 540) Note 7 device. Its third-quarter revenue estimate was also cut to 47-trillion won (R592-billion) from 49-trillion won (R617-billion)previously. The new earnings guidance is 30%below last year’s third-quarter operating profit, and left investors and analysts pondering the longer impact on Samsung’s brand and earnings. Rival suppliers of smartphones that also use the Android operating system stand to benefit if the Note 7damage drives consumers elsewhere. “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,” a fund manager at HDC Asset Management, which owns shares in Samsung, Park Jung-hoon, said. Samsung shares ended down 0.7% yesterday, with the Seoul market closing before the earnings guidance cut was announced. HDC’s Park said the initial guidance issued last week probably already factored in a 1-trillion won (R12.6-billion) profit impact, putting the total third-quarter earnings hit at around3.6-trillion won (R45.3-billion).While this was a major blow, he said some investors had feared the profit impact could be worse. Samsung shares have already fallen10% this week and are on track for their biggest weekly decline since May 2012. Some investors said Samsung might need to return more cash to shareholders, either through a dividend or additional buybacks, to calm market jitters. The tech giant announced the recall of 2.5 million Note 7s early last month following reports of the phones catching fire. It 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.