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A day after Samsung announced it had permanently discontinued its fire-prone Note7 smartphone line, the company revealed that it expects to take a $2.6 billion hit to its estimated third-quarter 2016 consolidated operating profit to pay for the product recall nightmare that resulted.
Samsung issued a revised Q3 earnings expectations report on Oct. 12, stating that it has lowered its estimated consolidated operating profit to about $4.7 billion (5.2 trillion Korean Won, KRW), a 32 percent drop from an earlier estimate of $6.9 billion (7.8 trillion KRW), that it had announced on Oct. 7.
In addition, Samsung has lowered its revenue estimate for Q3 to 47 trillion KRW, down from its Oct. 7 estimate of 49 trillion KRW.
“After recent incidents and in consideration of our consumers’ safety, Samsung Electronics stopped sales, exchanges and production of the Galaxy Note 7,” the company said in a statement. The revised pre-earnings guidance “reflects the impact of this decision on the third quarter earnings, in accordance with accounting standards,” the company continued. “We are providing the revised guidance based on disclosure regulations of [the] securities market.”
The lowered profit and revenue estimates come after Samsung weathered a five-week 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 as the company’s flagship handsets.
Adding to Samsung’s misery, those first Note7 fire reports were followed by apparent fire problems with the replacement phones which came after a global recall of the original devices. Samsung ultimately pulled the plug on the production and sales of Note7s on Oct. 11, relegating the model as a poster child for a failure of costly proportions.
The scrapping of the Note7 came just a day after Samsung announced on Oct. 10 that it was temporarily suspending its production of the handsets after at least two reports surfaced about fires or explosions involving replacement Note7 handsets that were manufactured after the battery problems were supposedly corrected. In addition, sales and warranty exchanges of the handsets were also being stopped while investigations into the reports continued.
Samsung addressed the initial Note7 fire reports by investigating the affected devices and starting its own global recall, and then in September cooperated with U.S. regulators at the U.S. Consumer Product Safety Commission, when the agency issued a government recall of a million of the handsets.
The disappointing Q3 financial news for Samsung follows what had been very promising Q2 results back in July, when the company posted a $7.19 billion operating profit (8.14 trillion KRW), which was an 18 percent increase from the 6.9 trillion KRW posted a year prior, according to an earlier eWEEK story. The Q2 profit was Samsung’s highest operating profit in two years. The Q2 profit was the highest posted by the company since it brought in 8.49 trillion KRW in the first quarter of 2014.
The Q2 figures were good news for the world’s largest smartphone maker, which had been struggling with some tough earnings reports over the last several years as it battled successful global sales challenges from rival smartphone makers including Apple and Chinese upstarts such as Huawei.
Samsung’s Q2 revenue reached $45 billion (50.94 trillion KRW), up from the 48.54 trillion KRW posted in the same quarter a year prior. Revenue in the mobile division, which includes smartphones, rose to 26.56 trillion KRW from 26.06 trillion KRW a year prior.
Yet despite the Note7 disaster and the ensuing recall and financial losses, the company is expected to eventually regain its swagger after this embarrassing and damaging event, analysts told eWEEK.
Roger Kay, an analyst with Endpoint Technologies Associates, called the Note7 situation “a pretty big debacle” for the company but that Samsung will ultimately survive the ordeal.
“It’s a black eye from a PR point of view, but I think financially they’ll probably be OK,” he said. “It will have a financial impact, but it won’t sink the ship. When the Samsung Galaxy 8 comes out [in early 2017], they’ll be back in the game.”
Note7 customers who have original or replacement Note7 handsets are being told by the company and by the CPSC to power down their smartphones immediately and exchange them for another Samsung smartphone, including a Galaxy S7 or Galaxy S7 Edge, or seek a full refund where they bought their devices. Consumers who have questions about what to do with their phones can go to the company’s Website at samsung.com/us/note7recall, or call the company at 1-844-365-6197.