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Samsung Forecasts $5.3 Billion Profit Hit From Note 7 Crisis

Published on .

The financial burden of Samsung's Note 7 crisis is becoming clearer, as South Korea's largest company tallies the cost of recalling and terminating production of the fire-prone smartphone.

The Samsung Galaxy Note 7.
The Samsung Galaxy Note 7. Credit: Courtesy Samsung

The company disclosed on Friday a negative impact of approximately mid-3 trillion won ($3 billion) on operating profit through March 2017, on top of an already announced $2.3 billion cut for the preceding period.

The total of $5.3 billion is in line with analysts' estimates. Chung Chang-Won at Nomura Holdings had estimated that the Note 7 termination would cost the company about $5 billion in operating profit through 2017. Investors appear to have factored in an impact of that magnitude, and Samsung shares rose 1.3% to 1.577 million won at the close in Seoul.

"Samsung just has to bear it," said Yoo Jong-Woo, an analyst at Korea Investment & Securities. The top priority is to "rebuild trust," he said.

With the dent in revenue, operating profit will be lower by mid-2 trillion won in the fourth quarter and about 1 trillion won in the first three months of 2017, Samsung said. In addition to the announcements, the company had already reported lower-than-projected profit from the mobile division in the prior quarter, partly reflecting the impact of the first few weeks of the Note 7 recall. With that factored in, the "costs for the Note 7 crisis totals about 7 trillion won, and that means Samsung has lost about one quarter of income," Mr. Yoo said.

Samsung shares have slumped more than 8% this week, wiping about $20 billion from its market value. That has also attracted investors who are betting that the company is moving fast enough to deal with the debacle and that it offers long-term value.

The company said it plans to make up for lost revenue by expanding sales of flagship models such as the Galaxy S7 and Galaxy S7 Edge. Samsung has been struggling with the fallout from the troubled Note 7 phones, which were overheating and catching fire even after a recall that was supposed to fix the problem. Samsung said Tuesday it would kill this generation of the high-end phone.

Samsung and Vice Chairman Jay Y. Lee are struggling to contain fallout from the troubled Note 7 phones. 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. Jay Y., his son, is heir apparent but he hasn't been able to take his father's title because of Korean custom.

"Samsung will now try its best to do better in other divisions including semiconductors and it will also try hard to promote sales of S7s because there are no alternative Galaxy devices until the first quarter of next year," said Park Kang-Ho at Daishin Securities. "The shares will remain pegged around the current levels but may start rising if more restructuring comes out, or the next Galaxy S models succeed."

-- Bloomberg News

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