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Killing Note 7 slashes Samsung profit

Trims $2.3 billion from third-quarter earnings

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Bloomberg

Samsung Electronics cut its third-quarter operating profit by $2.3 billion after ending production of its fire-prone Galaxy Note 7 smartphones, the first official indication of how much the crisis will cost South Korea’s largest company.

Profit is projected to be $4.63 billion in the three months that ended on Sept. 30, 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 and Vice Chairman Jay Y. Lee are struggling to contain fallout from the troubled Note 7 phones, which were overheating and catching fire even after a recall that was supposed to fix the problem.

The Suwon-based company said Tuesday it would kill this generation of the high-end phone and then cut third-quarter guidance today, less than a week after it was first issued.

“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 Note 7s in the channel as well as the components they bought a few months back.”

Wednesday’s announcement is the first time the company has put a price on the debacle, even if it is preliminary. Chung Chang Won, an analyst at Nomura Holdings, estimated in a research note before the company’s announcement the worst-case scenario of Samsung terminating the Note 7 would cost the company about $5 billion in operating profit through 2017.

Samsung’s shares have tanked this week as new fire reports emerged. The stock has slumped 10 percent in the past three trading days, wiping $21 billion from its market value.

Samsung Electronics generates more than half of its revenue from businesses other than the mobile unit. Sales of semiconductors, glass panels, appliances and other products are projected to keep the company profitable in the third quarter and it’s estimated to make more than $20 billion for the year.

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