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Samsung Electronics warns of $3 billion hit from Galaxy Note 7 discontinued sales

Jung Yeon-Je | AFP | Getty Images

Samsung Electronics said on Friday it expected to take a hit of about 3.5 trillion won ($3.1 billion) to its operating profit over the next two quarters from the fallout of its bungled Galaxy Note 7 recall.

The South Korean tech giant said it expected the negative impact to be in the mid-2 trillion won range in the October-December quarter and about 1 trillion won for the January-March 2017 quarter as a result of discontinued sales of its Note 7 handsets.

On Wednesday, Samsung cut its operating profit guidance for the third quarter by 33 percent, from 7.8 trillion won to 5.2 trillion won. Third-quarter revenue was also revised down from 49 trillion won to 47 trillion won. This means Samsung will take an operating profit hit of over $5 billion when all its guidance figures are added up so far. Samsung has not indicated whether there could be a further financial impact beyond the first quarter of 2017.

Earlier this week, Citigroup analysts cut their operating profit estimates for Samsung by 6 percent in 2016 and 3 percent in 2017 on the back of Note 7 termination costs and perceived brand deterioration for its mobile business.

The analysts expect Samsung's operating profit to be 7.06 trillion won in the fourth quarter of 2016 and 6.72 trillion in the first quarter of 2017.

CIMB analysts expect operating profit for the final quarter of 2016 at 7.55 trillion won, rising to 7.66 trillion won in the first three months of 2017.

Investors appeared to have shrugged off the news as Samsung shares traded up 0.58 percent at 1,566,000 won in mid-morning trade.

Ratings agency Moody's said this week that the production halt and recall of the Note 7 were credit negative for Samsung, while Fitch Ratings said potential long-term brand damage posed a "greater threat to [Samsung's] credit profile."

Both agencies, however, said Samsung's strong balance sheet and substantial liquidity were expected to absorb the financial impact.

Samsung, which is currently the smartphone market leader by shipment volume, also said on Friday that it planned to expand sales of its flagship smartphone models, such as the Galaxy S7 and S7 edge.

Some analysts, however, expect a reshuffle to take place in the high-end smartphone market, at least in the short term, as Samsung missed sales of the Note 7.

Deutsche Bank analysts said in a Wednesday note that they expected the likes of Apple, LG, Huawei and Sony to benefit in various regions where they compete with Samsung.

In China, they expected local high-end Android phones, made by the likes of Huawei, OPPO and vivo, to take "the majority of high-end smartphone share from Samsung."

The problems with the Galaxy Note 7 began just days after its launch in August, with reports of some phones catching fire. In early September, Samsung issued a recall of 2.5 million Note 7 handsets in 10 markets, according to Reuters, citing possible battery issues.

But shortly after the replacement devices began rolling out, there were reports they were also catching fire, with one flaming handset leading to the evacuation of an flight in Kentucky minutes before departure.

On Tuesday morning, Samsung asked carriers and retailers globally to stop sales and exchanges of the Note 7, before announcing in the afternoon that the model was going to be permanently discontinued.

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