Hon Hai's Profit Falls Most Since 2008 as iPhone Delays Hurt

(Bloomberg) -- Hon Hai Precision Industry Co. posted its biggest earnings decline in almost nine years as technical hiccups disrupted production of Apple Inc.’s 10th-anniversary iPhone.

Apple’s main device-assembler reported a 39 percent decline in net income to NT$21 billion ($696 million) in the three months ended September, lagging the NT$37.2 billion projected. That was the largest fall in profit since the final quarter of 2008 for the Taiwanese company, which gets more than half its business from Apple.

Apple’s decision to adopt technically demanding facial-scanning sensors for the iPhone X initially stymied some suppliers and held back Hon Hai’s business in turn. The U.S. company was said to have struggled to crank out enough of its priciest and most in-demand model for the crucial holiday period. And it continues to grapple with a dearth of suppliers capable of making organic light-emitting diode or OLED displays. Hon Hai’s operating expenses climbed more than 16 percent in the quarter, squeezing the company’s net margins to under 2 percent.

The growing market share of Chinese smartphone vendors from Huawei to Vivo also weighed on Hon Hai’s performance, given many assemble their own devices. And while worldwide smartphone shipments grew 5 percent in the September quarter, that was driven by demand for cheaper handsets in emerging markets, according to researcher Counterpoint.

Hon Hai had previously reported disappointing quarterly revenue as the iPhone 8 failed to take off. While Hon Hai is the exclusive assembler of the iPhone X, Apple didn’t start selling its marquee device until November, almost two months after the iPhone 8 hit shelves. Foxconn shared work on the cheaper device with other assemblers. The company, part of Taiwan’s Foxconn Technology Group, doesn’t provide revenue breakdowns, forecasts or hold investor conferences.

Apple shares slid 1.5 percent in U.S. trading. Hon Hai’s stock finished down 0.9 percent Tuesday in Taipei, paring gains this year. The third-quarter numbers included large non-operating losses taken on the valuation of financial assets and other items linked to its affiliates. Subsidiary FIH Mobile Ltd., which caters mainly to makers of cheaper devices, reported earlier on Tuesday it had swung to a loss in the September quarter.

The linked trends of growing competition and vendors’ search for assembly alternatives jeopardize the company’s near-term outlook, Taiwan Ratings analysts Raymond Hsu and David Hsu wrote in a report ahead of the earnings. Against that backdrop, its acquisitiveness, seen most recently in an attempt to get in on the bidding for Toshiba Corp.’s memory chip division, posed another concern.

“Growing signs that Hon Hai is attempting large-scale acquisitions may also hurt the balance sheet,” the two analysts wrote.

Still, the iPhone X should become a key earnings driver for Hon Hai as Apple untangles snags in its supply chain. The U.S. company predicts the iPhone X will help push sales to a record of as much as $87 billion in the holiday quarter.

Hon Hai is now shifting its attention from pure electronics assembly, a business plagued by growing expenses and thinning margins. Billionaire founder Terry Gou is installing robots to automate and offset rising labor costs in China, its main base of production. He travels frequently to the U.S., signing a deal to build a $10 billion display plant in Wisconsin. And his company’s eyeing manufacturing for the healthcare, automobile and artificial intelligence sectors.

©2017 Bloomberg L.P.