How Did Suppliers Hold Up After Apple’s iPhone Sales Decline?

Image Source: Apple.

After 13 years of incredible growth,
Apple

(NASDAQ: AAPL) finally hit a rough patch, when it reported a 13%
decline in sales last quarter. iPhone sales were the sore spot in
particular, with unit sales falling 16% year over year — the
device’s first ever sales decline. iPad sales also continued to
fall, and Mac sales fell as well, albeit not as much as the global
PC market.

Apple investors should have seen this coming after iPhone 6
sales blew the doors off analysts’ expectations, producing
impossible comparables. And Apple is certainly capable of
withstanding a down year in its product cycle. The stock has been
priced with expectations for a sales slowdown for years now.makeArticleAd();

But many of Apple’s suppliers are still priced for significant
growth, and a drop in iPhone units could have a bigger impact on
their stock prices and total revenue than Apple saw itself. Here’s
a quick checkup on how Apple’s iPhone sales decline affected some
of its biggest suppliers last quarter.

Skyworks

Skyworks Solutions

(NASDAQ: SWKS) supplies RF chips for the iPhone as well as several
other smartphone manufacturers such as
Samsung

 and Huawei. During its second quarter, Skyworks reported a
modest 1.7% increase in revenue, missing analysts’ expectations.
While the $775 million the chipmaker brought in met its outlook,
CEO David Aldrich noted that it had to deal with “a combination of
inventory adjustments and forecast reductions at one of our major
customers.”

Skyworks has been able to maintain its revenue growth thus far
by improving its presence in other high-end smartphones. As
manufacturers demands for more complex integrated chips increases,
Skyworks has room to raise its price. Aldrich told investors that
its content on Samsung’s Galaxy S7 is up 20% versus prior-year
models. It’s also secured over $9 of content on Huawei’s flagship
phone (a 40% increase from last year), diversified beyond
smartphones, and expanded its broad market products segment by 18%
year over year.

Skyworks drove profits higher, as its gross margin increased 410
basis points to 50.8%. The gross margin expansion was driven by new
products, which also saw a 6% increase in R&D expense. Skyworks
offset that with a 7% reduction in SG&A expenses. Overall,
operating margin improved 280 basis points to 36.8%.

But Skyworks expects to get hit hard by the iPhone sales decline
in the third quarter. Its outlook of $750 million in revenue fell
well below analysts’ expectations of $800 million. Again,
management cited “softness at our largest customer” as the reason
for the lower-than-expected outlook, and growth at Samsung and
Chinese manufacturers will only “partially offset” the decline in
sales to Apple.

Cirrus Logic

Cirrus Logic

(NASDAQ: CRUS) makes audio chips for the iPhone, other Apple
products, and other smartphones and tablets. During the first nine
months of the year, 67% of its revenue came from Apple, and another
15% came from Samsung. During its fiscal third quarter (ended in
December), Apple accounted for 76% of the company’s total
sales.

During its fourth quarter, Cirrus saw its revenue decline 9%
year over year. Unlike its peers, Cirrus didn’t call out any single
customer but noted that “sales were affected by short-term weakness
in portable audio.”

Cirrus managed to beat analysts’ depressed earnings
expectations, though, posting non-GAAP EPS of $0.38 per share
versus estimates of $0.21 per share. Similar to Skyworks, Cirrus
benefited from improved gross margin, which increased 320 basis
points to 49.8%. However, its increase in R&D and other
operating expenses led to a decline in operating margin by 300
basis points to 15%.

Next quarter, Cirrus also expects a significant sales decline.
The midpoint of its $220 million to $250 million revenue outlook
for the quarter represents a 17% year-over-year decline. But
reports indicate that
Cirrus will play a key role in Apple’s iPhone 7
design

, possibly providing a more complex chip for delivery through the
lightning port as well as supplying a chip in the headphones. That
could significantly boost the content Cirrus has in the iPhone
enabling it to grow revenue even if iPhone sales continue to
decline.

InvenSense

InvenSense

(NYSE: INVN) provides the motion-sensor chips inside the iPhone.
Those chips provided 39% of InvenSense’s sales during its fiscal
fourth quarter (ended March). Samsung provided another 14% in
revenue. Overall, revenue declined 20% year over year, but revenue
from Apple declined just 2.4% year over year. The bigger drop came
from a loss of content share in Samsung’s devices.

However, that strength with Apple may be short-lived. CFO Mark
Dentinger told investors that inventory levels in the channel are
at their highest levels since he took on the role in August 2014.
Total revenue for the first quarter of 2017 is expected to come in
between $58 million and $62 million, representing a 44%
year-over-year decline in revenue at its midpoint.

What’s more, there’s a potential for InvenSense to lose its
position in the iPhone to rival
STMicroelectronics

(NYSE: STM) , which has been taking back share in Samsung and won
the motion-sensor socket in the Apple Watch. With a diminished
position with Samsung compared with just a year ago, InvenSense
can’t afford to lose Apple as a customer, which makes it a very
risky investment at this time.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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