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Delay in iPhone X production hits Foxconn Q3 earnings

Non-Apple customers also weigh on Taiwanese manufacturer

The new iPhone X on display at the Apple Union Square store in San Francisco   © AP

TAIPEI -- A delay in the production of Apple's flagship handset this year has taken a toll on the third-quarter earnings of Hon Hai Precision Industry, also known as Foxconn Technology Group, the sole assembler of iPhone X.

On Tuesday, Foxconn reported operating profit of 18.71 billion New Taiwan dollars ($620 million), down 55.5% year-over-year, on revenue of NT$1.07 trillion, up 0.33%, in the three-month period ended September.

Net profit in the third quarter was NT$21.02 billion, down 39.2% from a year ago, propped up by contributions from Foxconn-controlled Sharp Corp.

Foxconn and its subsidiaries control about a 45% stake in Sharp, which booked a net profit of 20.2 billion yen ($177 million) in the July-September quarter. That translates into about NT$3 billion Foxconn realized in its non-operating income in the past quarter.

"Foxconn had to recognize some initial [iPhone X] production costs in the third quarter and plus labor costs are higher this year partly due to a shortage of labor. As peak season has been pushed back, Foxconn's revenue was not quite enough to cover the rising costs in the past quarter" to deliver stellar profits, said Vincent Chen, an analyst at Taipei-based Yuanta Investment Consulting. Chen believes that there is robust demand for iPhone X.

Chen estimates that Foxconn is likely to enjoy two consecutive strong quarters from October to March. He forecast revenue is likely to grow from NT$1.4 trillion to NT$1.47 trillion in the current quarter, and rise 33% year-on-year to NT$1.3 trillion in the January-March period. Meanwhile, Apple is forecasting a record holiday quarter on healthy appetite for iPhone X.

Apple accounts for more than 50% of Foxconn's total revenue. Other than iPhone X, Foxconn is also assembling iPhone 8 Plus this year.

Issues with facial identification parts created a bottleneck in the mass production of iPhone X before the handset went on sale on Nov.3. Those issues appear to have been mostly resolved now as waiting time for customers is about 3-4 weeks.

Other businesses underperform

While Foxconn will continue to rely on iPhone orders for growth this year, its businesses from other customers appear to be weighing it down.

Its Hong Kong-listed subsidiary FIH Mobile, in charge of making mobile devices for customers including Huawei, Xiaomi and Razer, issued a profit warning in early November that losses in the second half of this year will be "significantly higher" than the $200 million loss it made in the first six months of 2017.

That means FIH Mobile, in which Foxconn and its subsidiaries hold a 64% stake in, will lose at least a total of $400 million this year, or roughly NT$12 billion.

Based on Foxconn's net profit of NT$148.66 billion for all of 2016, FIH Mobile's losses could reduce Foxconn's net income by some 5%.

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