Samsung cuts profit by US$2.3b after killing Note7 phone

People testing Samsung Galaxy Note7 smartphones at a Samsung showroom in Seoul. PHOTO: AFP

SEOUL (BLOOMBERG) - Samsung Electronics cut its third-quarter operating profit outlook by US$2.3 billion (S$3.16 billion) after ending production of its fire-prone Galaxy Note7 smartphones, the first sign of how much the crisis will cost South Korea's largest company.

Profit will be 5.2 trillion won (S$6.38 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. Samsung cut its guidance for the third quarter less than a week after it was first issued, as costs from the global recall escalated and it decided to kill off the Note7. The company has been scrambling for answers in the wake of reports that smartphones were exploding, including supposedly safe models.

"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 Note7s in the channel as well as the components they bought a few months back because they can no longer sell the Note7 at all."

Wednesday's announcement is the first time the company has put a price on the debacle; analysts had estimated it would cost at least US$1 billion. Samsung's shares have tanked this week as new fire reports emerged. The stock has slumped 10 per cent in the past three trading days, wiping US$21 billion from its market value.

Samsung's mobile division was projected to report operating income of 2.7 trillion won in the quarter, according to estimates compiled by Bloomberg. 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.

Follow ST on LinkedIn and stay updated on the latest career news, insights and more.