Apple's iPhone Production Cuts: Impact on Semiconductor Industry
Impact of iPhone production cuts on big suppliers
We’ve seen that Apple’s (AAPL) move to scale back iPhone 6s and 6s Plus production until March 2016 had an adverse impact on Qorvo (QRVO) and Cirrus Logic (CRUS). They’re largely dependent on Apple for their revenues. The extension of the cut would lead to further revenue declines for the two companies.
Small companies with weaker cash positions will find it difficult to handle these headwinds. But what about the big suppliers that depend on Apple as a key customer? Are they financially strong enough to withstand the headwinds? Let’s look at two of these companies: Qualcomm (QCOM) and Taiwan Semiconductor Manufacturing (or TSMC) (TSM).
Until 2014, Apple and Samsung (SSNLF) contributed 49% to Qualcomm’s (QCOM) revenue. The semiconductor company supplies application processors, cellular modems, and connectivity solutions to smartphones.
QCOM lost the application processor demand from Samsung and Apple when these two companies shifted to custom in-house SoCs (system on chips). However, it still had Apple’s cellular baseband order. In fiscal 1Q16, which ended December 2015, the iPhone production cut affected Qualcomm’s revenue from the mobile chipset segment, which accounts for 70% of the company’s revenue. With iPhone production cuts extended to June 2016, Qualcomm’s fiscal 2Q16 and 3Q16 revenues could also suffer.
To add to the troubles, there have been rumors that Apple is likely to source baseband modems for 30%–40% of its iPhone 7 from Intel (INTC). This would limit the positive impact of the iPhone 7 for Qualcomm. However, Qualcomm has strong cash reserves of $30 billion, which enables it to withstand prolonged headwinds and invest in long-term growth opportunities.
With the slowdown in smartphone sales, Qualcomm is making efforts to increase exposure in the IoT (Internet of things) and data center space.
Taiwan’s (EWT) foundry TSMC (TSM) saw revenues fall 12.8% YoY (year-over-year) in fiscal 1Q16, which ended in March 2016. It came on the back of Apple’s iPhone production cuts and the Taiwan earthquake, which delayed shipments. According to a Credit Suisse report, TSMC earns ~20% of its revenue from Apple. The foundry’s lower-than-expected fiscal 2Q16 guidance reflects Apple’s extension of its iPhone production cuts.
However, TSMC has strong cash reserves of $20 billion, which allows it to withstand prolonged headwinds. The company is investing in advanced technology to attract more customers from various segments.
In the next part of the series, we’ll look at the impact of the iPhone production cuts on companies that serve a diversified customer base across various sectors, including the smartphone sector.
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