November 9, 2017 10:12 pm JST

Pegatron sees slow start to 2018 on slack iPhone 8 demand

iPhone assembler's Q3 profit hit by supply shortage, labor costs

CHENG TING-FANG, Nikkei staff writer

© Reuters

TAIPEI -- Key iPhone assembler Pegatron on Thursday said demand for iPhone 8 could significantly weaken in the first quarter of 2018, with one analyst saying that Apple will slash orders by 50%.

"We often experience significant seasonality correction in the first quarter, a traditional low period, of the year, and 2018 is no exception. I don't see any good sign to change that at the moment," said Chief Financial Officer Charles Lin of Pegatron in an earnings briefing, without explicitly naming Apple or iPhone.

Pegatron mainly assembles the iPhone 8 model and counts Apple as its No.1 customer that contributes more than 60% to its total revenue. Its bigger peer Hon Hai Precision Industry, better known as Foxconn, makes the premium iPhone X and iPhone 8 Plus ranges.

Market observers are pessimistic about the sale of iPhone 8 but expect stronger demand for iPhone X.

"We expect a lackluster first half of 2018 for Pegatron as we've seen signs from the supply chain that Apple has started to pull back orders for the iPhone 8 range and shift the total focus to iPhone X," said Arthur Liao, an analyst at Fubon Securities.

Another analyst, Jeff Pu at Yuanta Investment Consulting, said Apple would slash orders for iPhone 8 to only 16 million the next quarter, down 50% from the current quarter. But Pu said Apple hoped to produce 40 million iPhone X in the next quarter to meet robust demand.

Pegatron said net income dropped 32.4% year-over-year to $3.63 billion New Taiwan dollars ($120.8 million) for the three months ended September. Lin attributed the fall to rising labor costs in China and the company's inability to deploy staff it had to pay because of supply shortages in some components such as memory chips and display panels.

"We recruited workers earlier this year to meet the demand in high season. However, given the shortages of components, our workers on the assembly line have to wait there with no work to do ... that really added to our expenses," said Lin. He added that the situation improved in October but the impact could still be reflected in the current quarter.

The company's gross margin fell to a record low of 3.4%, compared with 4.8% a year ago in the July-September period. This was despite a 6.5% revenue rise to NT$336.86 billion.

Pegatron shares closed 1.14% lower at NT$78 ahead of earning numbers. They have shed more than 17% in the past three months.

Asia300

Pegatron Corp.

Taiwan

Market(Ticker): TAI(4938)
Sector:
Industry:
Electronic Technology
Computer Processing Hardware
Market cap(USD): 5,970.35M
Shares: 2,614.53M
Asia300

Hon Hai Precision Industry Co., Ltd.

Taiwan

Market(Ticker): TAI(2317)
Sector:
Industry:
Electronic Technology
Computer Peripherals
Market cap(USD): 59,903.23M
Shares: 17,328.73M

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