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Pegatron earnings sink 46% as industry ramps up iPhone capacity

Taiwanese assembler invests to bring casings unit into smartphone's supply chain

TAIPEI -- Pegatron's net profit fell 46.4% on the year for the quarter ended in March, the iPhone assembler reported Thursday, hurt by growing competition and the costs of the Taiwanese company's component integration efforts.

The net profit of 2.08 billion New Taiwan dollars ($69.6 million), or NT$0.80 per share, was the lowest since the second quarter of 2014. The profit also vaporized by 44% from the previous quarter's NT$3.73 billion.

Pegatron did not cite weak iPhone sales for the earnings drop, saying its communications business -- which refers to iPhones and networking devices -- actually topped the company's estimate despite the traditional slow season for the smartphone.

"We felt the industry competition heating up since the second half of last year," Chief Financial Officer Charles Lin said in a teleconference. "All of the assemblers expanded their production capacity amid the slowing smartphone industry, which led to pricing competition and eroded profit."

The expanded capacity among assemblers cut production utilization rates in the industry and idled manpower, Lin said.

Pegatron has said it devoted nearly $400 million last year to expanding capacity. Top competitor Hon Hai Precision Industry, better known as Foxconn Technology Group, did not disclose such capital spending, while compatriot and smaller rival Wistron spent almost $300 million.

Pegatron intends to reduce capital spending on design and manufacturing services to $250 million, Lin said, and the company will be more cautious in the timing of labor recruitment efforts this year.

"We hope to increase the production utilization rate while meeting the client's demand in peak season through better management this year," he said. Apple accounts for roughly 60% of the company's revenue.

The Taiwanese assembler also was slowed by metal casings subsidiary Casetek's preparation to enter the iPhone supply chain this year. Casetek is investing in a new plant in the eastern Chinese city of Jiashan, Pegatron Chairman Tung Tzu-hsien told the Nikkei Asian Review in an interview, an effort that will benefit the parent's position in the supply chain over the long term.

Casetek had announced plans for capital spending of up to NT$18 billion this year to meet new orders. But the unit posted an unexpected net loss Tuesday of NT$496.29 million for the January-March period -- its first quarterly loss since listing on the stock exchange in 2013.

Lin confirmed that Casetek's loss hurt the parent's profit. Pegatron anticipates higher operational expenses and lower efficiency for the metal casings unit in this quarter and the next one, he said, as Casetek shifts focus from current product lines to a new one.

But Casetek grabbed the opportunity to venture into a new business, which will bolster Pegatron's capability in component integration over the long term, Lin said. Despite the "pressure on our profitability in the short term, we believe it is the right thing to make the investment," he said.

Vincent Chen, an analyst at Yuanta Securities Investment Consulting, cast concerns over Pegatron's operational outlook for this year after joining the earnings call.

"Apparently, the industry competition is more intensified than in the past," Chen said. The company also carries heavy operational expenses for Casetek and needs to improve its vertical integration with the metal casings unit for iPhones, he said. "It is a big challenge for Pegatron to manage this year."

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