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October 13, 2016

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Samsung cuts quarterly profit estimate after Note 7 disaster

SAMSUNG Electronics Co slashed its quarterly profit estimate by a third yesterday, soaking up a US$2.3 billion hit from ditching its flagship smartphone in what could be one of the costliest product safety failures in tech 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 expects its July-September operating profit was 5.2 trillion won (US$4.7 billion), down from the 7.8 trillion won it estimated five days ago.

Samsung said in a statement that the 2.6 trillion won guidance cut reflects the sales and earning impact it currently expects from the decision to permanently halt sales of the US$882 Note 7 device. Its third-quarter revenue estimate was also cut to 47 trillion won from 49 trillion won previously.

The new earnings guidance is 30 percent below 2015’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 use the Android operating system, like Samsung’s, stand to benefit if the Note 7 damage drive 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,” said Park Jung-hoon, a fund manager at HDC Asset Management, which owns shares in Samsung. “I think it’s possible for fourth-quarter profits to come in as much as the high 7 trillion won range.”

Samsung shares ended down 0.7 percent yesterday, with the Seoul market closing before the earnings guidance cut was announced.

HDC’s Park said the initial guidance issued last week likely already factored in a 1 trillion won profit impact, putting the total third-quarter earnings hit at around 3.6 trillion won. While this was a major blow, he said some investors had feared the profit impact could be as large as 5 trillion won this year.

Samsung shares have fallen 10 percent this week and are on track for their biggest weekly drop since May 2012, having hit a one-month low of 1.494 million won as investors worried the Note 7 crisis could inflict long-term damage.

Some investors said Samsung may need to return more cash to shareholders, either through a dividend or additional buybacks, to calm market jitters. HDC’s Park said the cash-rich firm may need to announce a buyback of between 2 trillion won and 3 trillion won in order to mollify shareholders whose nerves have been jangled.

Samsung would likely push ahead to get the latest version of its premium S-series smartphones to market as soon as possible, fund managers said.

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