Samsung Electronics vows mobile rebound, dangles buyback after Note 7 shock

October 27, 2016 1:41 AM EDT

Shoppers walk near a Galaxy Note 7 advertisement at a Samsung store in Jakarta, Indonesia, October 14, 2016. REUTERS/Iqro Rinaldi


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By Se Young Lee and Joyce Lee

SEOUL (Reuters) - Samsung Electronics Co Ltd on Thursday said it aims to recover quickly from the disastrous withdrawal of the fire-prone Galaxy Note 7 that dragged third-quarter mobile earnings to their lowest level in nearly eight years.

The South Korean giant said it was expanding its probe into the Note 7 fires beyond batteries, as it tried to reassure investors that it would get to the bottom of one of the worst product failures in tech history.

It also held out the prospect of greater returns by disclosing considerations of a share buyback, talked up its semiconductor business and promised to consider proposals for a corporate makeover from U.S. hedge fund Elliott Management.

"We know we must work hard to earn back your trust and we are committed to doing just that," said Co-Chief Executive J.K. Shin as he apologized for the debacle at a general meeting in Seoul following the release of the company's results.

Investors now expect sweeping management changes in response to the Note 7 failure, especially after voting on Thursday to make parent conglomerate Samsung Group's [SAGR.UL] de facto chief, Jay Y. Lee, a Samsung Electronics director.

Lee, 48, the son of patriarch Lee Kun-hee who has been hospitalized following a heart attack, will now have greater accountability at the group's flagship company and a clearer mandate to play a public role in setting strategy.

But shareholders may have to wait for the Note 7 investigation to conclude before seeing any heads roll at the family-run conglomerate. Chief Executive Kwon Oh-hyun said the company would assign responsibility only after the crisis was resolved.

The world's top smartphone maker posted a 96 percent plunge in third-quarter mobile earnings to 100 billion won ($87.63 million) from a year earlier, their lowest level since the fourth quarter of 2008.

The result, the first since the mass recall and subsequent cancellation of the premium Note 7 earlier this month, spared Samsung from its first-ever mobile loss even though overall profit hit a two-year low.

Operating profit was 5.2 trillion won ($4.57 billion), matching Samsung's revised guidance. The firm initially estimated a 7.8 trillion won profit but cut its guidance to reflect losses incurred in the Note 7 withdrawal.

The scrapping of Samsung's flagship phone erased 0.1 to 0.2 percentage points from South Korea's third-quarter GDP growth in quarterly terms, a finance ministry official told Reuters on Tuesday.

WHAT WENT WRONG?

The Apple Inc rival said it now aimed to achieve fourth-quarter profit close to that of October-December of 2015, on the back of sales of Galaxy S7 phones and lower-tier models. Galaxy S7s were on track to set a new record for launch-year sales, it said.

"Looking ahead to the fourth quarter, the company expects earnings to improve (from a year earlier) driven by strong performance in the components business," Samsung said in a statement.

"The mobile business expects a recovery in its earnings to a similar level with that of the fourth quarter of 2015."

Samsung has already warned of another $3.1 billion hit to profit from the Note 7 withdrawal through the first quarter of 2017, all but guaranteeing a third straight year of earnings decline for the smartphone business.

As for what went wrong, Samsung still does not know what caused the fires in devices sent to customers as replacements for the initial 2.5 million Note 7s it recalled due to fire-prone batteries.

Co-CEO Shin said the battery might not be the only problem, suggesting the root cause may be more difficult to determine than had been hoped.

Investors now want a clear plan for how Samsung will revive earnings growth, repair its tattered brand image and boost shareholder returns, hence the company's promise to consider a share buyback.

"The key is whether Samsung will be able to remove uncertainty surrounding Note 7 and maintain its leading position in the smartphone market," LS Asset Management fund manager Kim Sung-soo said.

Samsung also said it was reviewing proposals by Elliott, which include a special 30 trillion won dividend. The company will respond to Elliott and announce its shareholder returns policy by end-November.

(Reporting by Se Young Lee; Additional reporting by Hyunjoo Jin and Joyce Lee; Editing by Stephen Coates)



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