Samsung Now Expects a Massive Earnings Hit From the Note 7 Crisis

By Markets Fool.com

In the wake of a second recall of the Galaxy Note 7, Samsung has downwardly revised its earnings guidance for the third quarter.

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In this clip from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and contributor Evan Niu discuss how this all happened to one of the largest consumer electronics companies on Earth.

A full transcript follows the video.

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This podcast was recorded on Oct. 14, 2016.

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Dylan Lewis: Evan, you want to get us up to speed, give us a little timeline on what's been going on?

Evan Niu:Sure. Galaxy Note 7 launched in mid-August. I think that was part of the deal -- Samsung was really wanting to beat Apple to market on timing, because, as everyone knows, iPhones come out in September. So, I think the company was really pushing toward the timeline of getting this thing out to market as quick as possible to try to beat Apple to the punch. Which is kind of silly, because it's only a month difference. How much of a difference could that make? But, apparently, that was important to Samsung. I think that's partially what's led up to these problems, they cut corners or tried to do things too fast. Things obviously just weren't ready. Then, as we know, in early and mid-September, we started to see reports of Samsung Note 7 either exploding or catching on fire, a lot of the time while they were charging. In general, sometimes you hear stories about this happening. When you're using a third-party charger that's not up to spec, that can sometimes be the culprit. But these were the official chargers, the regular Samsung chargers you were supposed to be using.

So, Samsung does this huge recall, 2.5 million units. They think they figured out that it's the batteries that they sourced in-house from the Samsung SDI internal battery division. So, they do this recall. They leave all the other phones out there that have different batteries from third-party suppliers. They start replacing phones. And now, all of the sudden, in the past week or two, the replacement phones are now catching on fire.(laughs) So, everything is a huge mess, and now they've made the call to officially kill the project altogether. That's a tough call to make, but you have to do it when it's this bad.

It's crazy, because in modern smartphone times, people take this stuff for granted. Before this one, you hadn't heard about an exploding phone, or a phone catching on fire, meaningfully, in years. At least, not at this scale, outside of isolated incidences, like the third-party charger thing I was talking about. But, you don't see this wide-scale type of thing happening. It's been years. I think most consumers have probably thought that companies have figured this out, but apparently they haven't. It's kind of crazy.

Lewis:Yeah, still running into some issues on the tech side. This is, I think, brutally bad timing, given that the company is basically coming off its best earnings report in a couple years. It seemed like they had a ton of momentum, decent amount of growth in the smartphone space. Earlier this week, when the company decided to go with the full recall, they also issued an update to guidance. So, we don't even really have to speculate as to what the financial hit might look like, we can look at exactly at what the company said here. They are now expecting third-quarter operating profit to come in at5.2 trillion South Korean won, which is roughly $4.6 billion, down from the original forecast of 7.8 trillion won. So, a decent amount of rollback there. Third-quarter revenue has also been revised down. It's now expected to be about47 trillion won from the previous guidance of49 trillion won.

Dylan LewisandEvan Niu, CFA own shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.