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Foxconn earnings miss market forecast despite Apple's strength

Analysts call trade war the biggest uncertainty amid iPhone peak season

Foxconn drew about 50% of its quarterly revenue from Apple.   © Reuters

TAIPEI -- Key iPhone assembler Foxconn Technology Group reported a surprise earnings decline for the April-June quarter as rising costs took a toll, a performance that contrasted with Apple's strong results.

The Taiwanese company, which trades as Hon Hai Precision Industry, said on Aug. 13 that while revenue climbed 17.03% year-on-year to 1.07 trillion New Taiwan dollars ($34.8 billion) last quarter, net profit dropped 2.18% on the year and 27.37% on the quarter to NT$17.49 billion. The net profit was Foxconn's lowest quarterly figure since 2013.

Gross margin fell 1.18 percentage points on the year to 5.63%, missing the market's consensus estimate of 6.4%, the filing with the stock exchange here showed. Operating margin slid 1.25 points to 1.46%, compared with the market's forecast of 3%. Foxconn's gross margin was its lowest since second-quarter 2012, while operating margin hit its weakest since the first quarter of that year, company data showed.

For the first half of 2018, the iPhone assembler's net profit dipped 9.72% to NT$41.57 billion from NT$46.04 billion in the year-ago period.

Foxconn declined to comment on its earnings performance. The company's Taiwan-listed shares dropped 2.44% to close at NT$83.80 in Taipei trading, ahead of the release of the quarterly results.

Apple, which accounted for some 50% of Foxconn's revenue, reported record April-June revenue and profit on July 31, driven mainly by growth from services, AirPods and Apple Watch accessories. Shipments of iPhones, which are closely correlated with earnings at Foxconn and smaller rivals Pegatron and Wistron, grew only 1% on the year.

"Apple's earnings performance has gradually drifted away from these Taiwanese suppliers, given its slowing hardware sales," said Vincent Chen, head of the regional research team at Yuanta Investment Consulting.

Foxconn's weaker-than-expected earnings also reflect rising costs for components, labor recruitment expenses in China and the burden from Hong Kong-listed subsidiary FIH Mobile's expanding loss, Chen said. FIH Mobile said on Aug. 10 that its first-half net loss widened to $348.06 million from $196.9 million a year ago.

Foxconn's $10 billion investment in a Wisconsin factory project that broke ground on June 28 also may be weighing on operating expenses, which rose more than 18% year-on-year to NT$44.95 billion last quarter, the analyst said.

But the company's move to invest in the U.S. offers benefits amid the escalating trade tensions between Washington and Beijing.

"It is very important for big manufacturers like Foxconn to diversify production bases from China in the long term, as we don't know how long this trade war will last," Chen said.

Trade issues represent the biggest uncertainty beyond corporate control as Apple prepares to launch new iPhones for this year. "This [trade war] could possibly hit consumer confidence and affect new iPhone sales if the situation worsens," the analyst said.

Pegatron warned that trade tensions could affect market demand, saying on Aug. 9 that it may expand capacity outside of China to ease potential impact.

Apple is taking a more conservative approach this year, asking suppliers to prepare 20% fewer components for new iPhones than a year ago, the Nikkei Asian Review reported. The U.S. tech company will monitor market reaction for the new phones before deciding whether to add more orders, sources said.

Nikkei reported that Apple intends to introduce three iPhones this year: an expensive model featuring a 6.5-inch organic light-emitting diode display, one equipped with a 5.8-inch OLED screen and a lower-priced model offering a 6.1-inch liquid crystal display screen.

Foxconn remains the largest iPhone assembler this year. It secures 100% of the orders for the 5.8-inch OLED iPhones, as well as an 80% to 90% share of the 6.5-inch OLED phones. The company also holds a 30% order allocation for the 6.1-inch LCD model, according to Yuanta Investment Consulting's supply chain checks.

Pegatron takes the majority of the remaining orders, while smaller rival Wistron will not begin production for the 6.1-inch LCD iPhones until the end of this year, the brokerage said.

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