Apple Slowdown Threatens $30 Billion Global Supplier Web

Apple Slowdown Threatens $30 Billion Global Supplier Web: Tech

Apple Inc. (AAPL)’s slowing sales are rippling through a supplier network that has long benefited from the company’s ability to churn out iPhones and iPads.

Cirrus Logic Inc. (CRUS), a maker of audio chips that gets 91 percent of its sales from Apple, this week reported an inventory glut that suggested slowing iPhone sales, and forecast fiscal first-quarter revenue below analysts’ estimates. Hon Hai Precision Industry Co. (2317), Apple’s top supplier, this month posted its biggest revenue decline in at least 13 years, indicating slower sales of smartphones, tablets and computers.

Apple’s breakneck growth to $156.5 billion in revenue last year, from $24.6 billion in 2007 when the iPhone debuted, supports an ecosystem of at least 247 suppliers across the globe. They relied on Apple to deliver $30.1 billion in orders in the latest reported quarter, according to supply-chain data compiled by Bloomberg. As a result, many are now vulnerable after building up inventory in anticipation of continued growth, according to Michael Hasler, a lecturer at the University of Texas in Austin.

“This is the downside of that really positive story of being an Apple supplier,” said Hasler, a former supply-chain executive at Applied Materials Inc. “Your fortune is directly linked to Apple. Until recently, that hasn’t been a bad thing.”Following the Cirrus report, Apple’s stock fell 5.5 percent to $402.80, the lowest level since December 2011. The decline underscores concern among investors about Chief Executive Officer Tim Cook’s plans for future products in an industry crowded with rivals such as Samsung Electronics Co. (005930), Google Inc. (GOOG) and Inc. (AMZN)

Saturated Market

The iPhone, Apple’s biggest source of revenue and profit, is in a smartphone market that’s becoming saturated, while new devices such as the iPad mini have a narrower profit margin than other products by the Cupertino, California-based company.

Apple stock is down 34 percent from September record high, erasing half of a rally that began in 2009 as iPhone sales took off, following a slump in 2008 when the global financial crisis put the brakes on economic growth.

Among the 86 CEOs in the S&P 100 who have been in their jobs at least a year, Cook has led the 10th-worst performance relative to the index over the course of his tenure, with Apple lagging behind by 13 percentage points, according to data compiled by Bloomberg Rankings as of yesterday’s close. Hewlett- Packard Co. CEO Meg Whitman topped the list, underperforming by 29 points.

Supply Chain

Apple may not introduce a new product until its developers conference, usually held in June, and the stock may slump further unless the company meets the high end of analysts’ profit and revenue projections when it reports earnings next week, according to Andy Hargreaves, an analyst at Pacific Crest Securities LLC.

Bill Schnell, a spokesman for Cirrus, declined to comment. Steve Dowling, a spokesman for Apple, didn’t respond to requests for comment.

Shares of Jabil Circuit Inc., Broadcom Corp. and Flextronics International Ltd. dropped yesterday after Cirrus said it will record a net inventory reserve of $23.3 million for the fiscal fourth quarter, which ended in March. Most of that is from a high-volume product from one buyer, Cirrus said, without naming the customer.

Cook has cautioned investors before not to use isolated reports about a supplier to make broader assessments about Apple’s financial health.

Dedicated Supplier

“Even if a particular data point were factual, it would be impossible to accurately interpret the data point as to what it meant for our overall business, because the supply chain is very complex,” Cook said on a conference call in January.

Apple’s slowdown is leaving suppliers like Cirrus in a bind. Sales at the Austin-based company have more than doubled in tandem with Apple’s accelerating revenue, to $426.8 million in the latest fiscal year from $174.6 million in 2009.

Cirrus, which makes sound components for the iPhone and iPad, is an indicator of demand for Apple’s top-selling products, according to Peter Misek, an analyst at Jefferies & Co. Because Cirrus relies on Apple for most of its revenue, this suggests the iPhone maker told the chipmaker to anticipate fewer orders, Misek said.

Crystal Ball

“All we can really do is take the forecast that our customers give us, which do go out a good long ways,” Jason Rhode, Cirrus’s chief executive officer, said on a conference call in January, when asked by an analyst about the company’s ability to forecast sales.

“We try to apply some conservative judgment to that so that we don’t set ourselves up for being a big disappointment,” Rhode said. “As far as what the market uptake of our customers products are going to be, we really don’t have a good crystal ball for that.”

Apart from weaker Apple sales, Cirrus’s inventory woes may be due to the iPhone maker switching to another chip supplier or opting for a newer chip from Cirrus without giving it enough advance notice of the change, Hargreaves said.

While Apple accounts for a large chunk of Cirrus’s revenue, Jabil Circuit gets 13 percent, Broadcom 15 percent and Flextronics 8 percent of their sales from Apple, according to supply-chain data compiled by Bloomberg.

“When you’ve hitched your wagon to something that is really racing, then basically you end up almost being a dedicated supplier to that firm,” Hasler said.

After Apple on Jan. 23 reported its slowest profit growth since 2003, more than 20 analysts lowered their price targets, according to data compiled by Bloomberg. Yesterday’s stock slump is the biggest since Jan. 24, when Apple tumbled 12 percent following the earnings report.

Earnings Outlook

For the fiscal second quarter, which ended in March, analysts are predicting an 18 percent decline in Apple’s net income to $9.5 billion — the first decrease since 2003.

The results may be even worse than those projections, according to Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co. He lowered his iPhone estimate for the quarter, which ended in March, to 34.2 million units, from 35.2 million. Sacconaghi also reduced his iPad projection by 1 million to 18.5 million units.

Apple is set to report earnings on April 23, when the company is also expected to provide an outlook for the current period.

In the months since Apple’s record close on Sept. 19, the Standard & Poor’s 500 Index has gained 6.2 percent. After commanding a premium for most of the past decade, Apple is trading at about a 40 percent discount to the index on a price- earnings basis, according to data compiled by Bloomberg.

“Multiples don’t matter if people think your margins and sales are declining,” said Pacific Crest’s Hargreaves, who is based in Portland, Oregon, and has a sector perform rating on Apple. “Investors in tech companies have seen that story before, and it doesn’t end well.”

To contact the reporter on this story: Adam Satariano in San Francisco at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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