Galaxy Note 7 burns £1.9bn hole in Samsung profits

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Samsung has slashed its estimate for quarterly profits by £1.9 billion after scrapping the Galaxy Note 7 smartphone.

The South Korean electronics giant halted production of the smartphone yesterday. The Note 7 was the subject of a global recall last month after battery fires but it has now scrapped the device after reports of fires in replacement phones.

It said that it now expected operating profits for the three months to September to be 5.2 trillion won (£3.8 billion), down from the 7.8 trillion won it estimated five days ago. The new earnings guidance is 30 per cent below operating profit in the third quarter last year.

It said that the 2.6 trillion won (£1.9 billion) cut in its guidance reflected the hit to sales and earnings that it expects from the decision to halt sales of the Note 7. The company also reduced its third-quarter revenue estimate to 47 trillion won from 49 trillion won.

The revision to the guidance was announced after the market closed in Seoul; Samsung shares had closed down 0.7 per cent following an 8 per cent fall the previous day, which wiped about £14 billion off the company’s market value.

“Nobody could have expected the figure that Samsung just guided for,” CJ Heo, a fund manager at Alpha Asset Management, told Reuters. “We’ll have to see how the market reacts tomorrow.”

Analysts at Credit Suisse said that the scrapping of the handset would translate to lost sales of about 19 million phones, or £14 billion. Others doubted whether the company’s reputation would ever recover.

The failure could hardly have come at a worse time for Samsung, with both Apple and Google offering new high-spec smartphones.

Technology analysts suggested that the problem with the phones may have been with the handset design rather than individual lithium batteries — putting the blame squarely on Samsung rather than its battery suppliers, which were previously in the spotlight. Samsung has declined to comment on this point.

Before the crisis Samsung was the leader in global smartphone sales, with a 22 per cent market share. Analysts said that Apple would step up production of its iPhone to cope with a surge in demand.

Investors and analysts said that Samsung needed to explain the origin of the fault otherwise the damage to its brand and future earnings would get worse.