Samsung Estimates Financial Fallout From Note7 Through Q1

By Todd R. Weiss  |  Posted 2016-10-14 Print this article Print
Samsung, Note7, Note7 fires, Note7 recall, smartphones, smartphone fires, quarterly losses, Galaxy S7

Samsung expects the Note7 recall nightmare to have an additional $3.1 billion financial impact in 4Q 2016 and 1Q 2017, on top of a $2.6B charge in Q3.

Releasing new information about the financial fallout of the ill-fated Note7 smartphone, Samsung announced that it expects to see a "negative impact" on its operating profits of approximately $3.1 billion (about 3.5 trillion Korean Won, or KRW), combined, for the fourth quarter of 2016 and the first quarter of 2017.

Those losses are on top of the $2.6 billion charge the company said earlier this week that it would take against  its third-quarter 2016 earnings.

In its latest announcement on Oct. 14, Samsung said it "estimates a negative impact of approximately mid-3 trillion won in operating profit from the fourth quarter of 2016 through the first quarter of 2017, due to the discontinuation of Galaxy Note7 sales."

The lower profits in the next two quarters are expected to be about 2.5 trillion KRW in the fourth quarter of 2016 and about 1 trillion KRW in the first quarter of 2017, due to the Note7 recall, the company stated.

The reduced profit estimates come after Samsung weathered a continuing firestorm of negative news reports about battery fires and explosions affecting at least 100 Note7 smartphones since the devices went on sale in late August. The handsets were recalled in September and were finally discontinued entirely on Oct. 11 after reports appeared about apparent fire problems with the replacement phones issued following the global recall of the original devices.

With the demise of the Note7, Samsung said it will now focus on its other phones.

"Moving forward, Samsung Electronics plans to normalize its mobile business by expanding sales of flagship models, such as the Galaxy S7 and Galaxy S7 Edge," the company said in its statement. "Additionally, the company will focus on enhancing product safety for consumers by making significant changes in its quality assurance processes."

Following its announcement about the scrapping of the Note7 earlier this week, Samsung revealed its plans to take the $2.6 billion charge against its estimated third-quarter consolidated operating profits to pay for the product recall nightmare that resulted. The company will report its third-quarter earnings later this month.

Samsung said it lowered its third-quarter estimates for consolidated operating profit to about $4.7 billion (5.2 trillion KRW), a 32 percent drop from an estimate of $6.9 billion (7.8 trillion KRW) that it had announced Oct. 7. In addition, Samsung lowered its revenue estimate for the third quarter to 47 trillion KRW from its Oct. 7 estimate of 49 trillion KRW.

Samsung's downward revision of its third-quarter earnings estimates follows what had been promising second-quarter results. In July, the company posted a $7.19 billion second-quarter operating profit (8.14 trillion KRW), up 18 percent from the 6.9 trillion KRW posted a year prior. The second-quarter figure was Samsung's highest operating profit in two years since it brought in 8.49 trillion KRW in the first quarter of 2014.

The second-quarter uptick appeared to be a bright spot for the world's largest smartphone maker, which had been struggling with some tough earnings reports in recent years as it battled successful global sales challenges from competitors, including Apple and Chinese upstarts such as Huawei.

It's been a busy week for Samsung. On Oct. 13, Samsung announced procedures for how Note7 owners can return their recalled devices and get refunds or bill credits on new phones from the company or other brands.

Under a recall plan approved by the U.S. Consumer Product Safety Commission (CPSC), all Note7 owners can now register for refunds or credits toward replacement handsets from Samsung or other manufacturers under an official U.S. Note7 Refund and Exchange Program, according to a company announcement. Customers will receive free shipping materials, once they register for the return program, as well as free shipping to send the defective phones back.


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