Samsung Third-Quarter Profit Drops Amid Note 7 Phone Crisis

(Bloomberg) -- Samsung Electronics Co. reported a 17 percent slump in third-quarter profit after the demise of its fire-prone Note 7 line threw the world’s largest smartphone maker into disarray.

Scores of reports about battery fires and explosions forced Samsung to kill its most profitable model this month, punctuating its worst corporate crisis to date. Net income fell to 4.41 trillion won ($3.9 billion) in the September quarter as the company dealt with a debacle that may ultimately cost more than $6 billion.

While the crisis has cast a pall over the smartphone division, the display and chip businesses -- which supply screens and memory to TV makers and rival phone brands -- have held up well. Its shares have gone on a roller-coaster ride since the Note 7 recall began in September, at one point shedding more than $20 billion of market value.

Key Points

• The company says capital expenditure this year will be 27 trillion won

• Third-quarter net income of 4.41 trillion won compares with the 3.9 trillion-won average projection of seven analysts surveyed by Bloomberg News.
  

• Final operating profit was 5.2 trillion won on sales of 47.8 trillion won.
  

• Samsung shares fell 1.9 percent to 1,567,000 won in Seoul Wednesday, before the earnings release.

• The stock remains up about 24 percent this year.

Big Picture

Samsung, rushing to get the Note 7 to market ahead of Apple Inc.’s next iPhones, introduced a device prone to overheating, as a string of graphic online photos and reports from consumers around the world showed. The device has drawn lawsuits from incensed customers and tarnished a brand Samsung spent billions burnishing. The company’s now counting on the next iteration of its Galaxy S phone, expected in the first quarter, to help it regain its footing against Apple.

The Details

• The mobile unit posted the operating profit 100 billion won, a record low and down from 2.4 trillion won a year earlier.

• Note 7 recall impact to linger at least until early next year when the new Galaxy S model is expected, says Lee Do-hoon, an analyst at CIMB Securities in Seoul.

• Operating income at the chip unit was 3.37 trillion won, compared with 3.7 trillion won a year earlier. A rise in memory chip prices as well as new products from device makers including Apple and Chinese manufacturers helped the division fare better in the quarter compared with its other businesses.

• Although the Note 7 recall hurt sales of organic light emitting diode or OLED displays, prices of older-generation liquid crystal displays are on the rise. Operating income from the display unit was 1.02 trillion won, up from 930 billion won.

• Samsung’s biggest growth drivers will be its components businesses, including NAND flash chips and OLED displays, Kim Young-woo, an analyst with SK Securities Co., wrote last week.

• Kim expects Samsung to adopt a new design for the S model early next year, while the Note series will be replaced with foldable devices.

To contact the reporter on this story: Jungah Lee in Seoul at jlee1361@bloomberg.net. To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Reed Stevenson

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