This Chipmaker Bet too Much, too Soon on the iPhone

(Bloomberg Opinion) -- For a company that specializes in 3-D sensing components, it can be surprisingly hard to get much visibility how earnings at AMS AG are going to develop.

A lot of that is due to the chipmaker’s exposure to Apple Inc. Five years ago, AMS decided to accelerate its push into 3-D sensing technology, a gamble that has broadly paid off. Sales almost doubled in 2017, with most of that increase attributable to Apple using the Austrian firm’s components in the iPhone X.

But that relationship has been stop-start at best. Expected orders haven’t always materialized as sales of the flagship iPhone stuttered.

This Chipmaker Bet too Much, too Soon on the iPhone

The chipmaker has also struggled to lift profitability. On Tuesday, it said expects Ebit to be a “low teens” percentage of sales in the third quarter, less than analyst predictions. That could rise to 25 percent in the fourth quarter as iPhone demand peaks, according to Hauck & Aufhaeuser Privatbank analyst Robin Brass. Even then, AMS’s goal to lift the measure to 30 percent has been pushed back a year to 2020.

That’s partly because AMS had staffed up its manufacturing facilities in anticipation of demand for the iPhone X. When that fell short, it was probably wary of the risk of firing qualified workers only to have to rehire them when Android smartphone-makers also started to buy 3-D sensors.

It may also reflect increased pricing pressure from Apple. Slowing unit sales mean the Cupertino, California-based company is trying to wring more profit out of every iPhone. It can do that by increasing the price to consumers and cutting the amount paid to suppliers for components.

Nevertheless, AMS predicted third-quarter revenue will be in the range of $450 million and $490 million, exceeding the $434 million average estimate of analysts surveyed by Bloomberg.

That reinvigorated confidence among investors that Apple will use its 3-D sensors in further iPhone models to be unveiled later this year. AMS also promised a strategic review, hinting at efforts to reduce its dependence on its tricky customer — something that will be of greater long-term importance.

AMS would do well to improve its offering for both Android phone makers and other more stable industries. Demand for 3-D sensors is likely to steadily rise from carmakers as autonomous vehicles head into production from 2020. Self-driving vehicles often use Lidar, a form of radar which uses lasers rather than radio waves. AMS needs to position itself appropriately for that market, where it already has some supply agreements.

This Chipmaker Bet too Much, too Soon on the iPhone

The relationship with Apple has been double-edged. That this quarter wasn’t as bad as investors feared helped send the stock up by as much as 13 percent on Tuesday. But the shares are still almost 40 percent below the peak they hit in March. Clawing back that lost ground will require AMS to cut its dependence on smartphone sales and give investors a better picture of its long-term health.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

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