Samsung’s profit goes up in flames

Samsung's Note 7 has experienced exploding battery problems. (Ariel Gonzalez / YouTube)
Samsung's Note 7 has experienced exploding battery problems. (Ariel Gonzalez / YouTube)

The financial burden of Samsung Electronics’ 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 company disclosed a negative effect of about $3 billion (R42 billion) on operating profit to 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, an analyst at Nomura Holding, had estimated the Note 7 termination would cost the company about $5 billion in operating profit through 2017.

Investors appear to have factored in an effect of that magnitude, and Samsung’s shares rose 1.3% to 1.577 million won (R19 745) at the close in Seoul.

“Samsung just has to bear it,” said Yoo Jong-Woo, an analyst at Korea Investment & Securities.

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 effect 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”, Yoo said.

Samsung’s shares have slumped more than 8% this week, wiping about $20 billion from its market 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 it would kill this generation of the high-end phone. – Bloomberg

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