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Hon Hai's Profit Miss Reflects Growing iPhone-Supplier Woes

Debby Wu
Hon Hai's Profit Miss Reflects Growing iPhone-Supplier Woes

(Bloomberg) -- Hon Hai Precision Industry Co.’s disappointing earnings will fan fears that Apple Inc.’s legion of global hardware suppliers are in for hard times.

The main assembler of iPhones reported net income of NT$24.9 billion ($806 million) in the September quarter, about 12 percent below the average analysts’ estimate. Hon Hai joins a string of Apple suppliers that’ve warned of a worsening outlook as iPhone volumes plateau alongside a lethargic smartphone market.

Hon Hai, known also as Foxconn, is among a bevy of companies that together crank out devices for Apple and just about every other major consumer electronics label. But the once-red-hot global smartphone market has flat-lined as economic uncertainty spreads, and a persistent lack of new or innovative devices discourages buyers. Apple itself has reported disappointing iPhone sales and projected holiday-quarter revenue below expectations. Hon Hai shares were little changed as of 9:30 a.m. Wednesday.

“It is difficult to give Hon Hai a positive rating,” said Arthur Liao, an analyst at Fubon Securities, who characterized the result as neutral with most investors concerned about the outlook. “I expect iPhone shipments to decline to 200 million units next year and Hon Hai’s Android smartphone unit FIH Mobile will also continue to struggle.”

FIH, which is majority owned by Hon Hai, posted a third-quarter loss earlier on Tuesday.

Apple’s decision to stop disclosing unit sales for its main gadgets including the iPhone, iPad and Macbook -- which Hon Hai also assembles -- has further fueled concerns surrounding the outlook for component makers that depend on volume growth. Japan Display Inc., which gets more than half its revenue from the iPhone maker, slashed forecasts this week. Then Lumentum Holdings Inc., a top maker of iPhone facial-recognition sensors, lowered its second-quarter outlook and said a key customer had cut orders.

Apple is increasingly touting its base of 1.3 billion installed devices, rather than how many iPhones it sells each quarter. And the company has been making changes to keep these existing customers happy while selling more services to them.

Faced with a maturing smartphone market, its strategy has been to entice customers to pay more for phones with new features such as facial recognition and more vibrant screens. The 3-D sensing components from companies like Lumentum are found in iPhones that often cost more than $1,000. Fewer people can afford to pay that much for a new device. But when a sale does happen, suppliers get a one-time payment for their component, while Apple can generate hundreds of extra dollars per gadget by selling movies, apps and music.

JPMorgan is now “negative” on iPhone assemblers including Hon Hai, citing fears that Apple is reducing orders, margin headwinds and the potential risk of supply chain disruption amid Chinese-U.S. trade friction, analysts including Gokul Hariharan wrote in a Nov. 11 note.

“Hon Hai’s gross margin probably narrowed in 3Q as lower-margin, higher-priced products such as new iPhones constituted a greater share of its revenue mix,” Simon Chan, an analyst at Bloomberg Intelligence, wrote in a Nov.5 note. “The iPhones tend to have lower profitability due to their high component costs.”

Hon Hai’s revenue was NT$1.38 trillion, according to Bloomberg calculations based on previously reported monthly sales data. The company’s shares have slumped 36 percent this year. Analysts at HSBC and Morgan Stanley cut their price targets following Tuesday results to between NT$80 and NT$86 from above NT$100.

“The stock is too expensive given that the iPhone isn’t selling well,” Michael On, president of Beyond Asset Management Co., said before the earnings release.

(Updates with share price in third paragraph and price target cuts in 11th paragraph.)

To contact the reporter on this story: Debby Wu in Taipei at dwu278@bloomberg.net

To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Edwin Chan

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