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The Three-Minute Chat That Wiped Billions Off Stocks

(Bloomberg Opinion) -- A three minute conversation on stage at UBS AG’s Global Technology Conference in San Francisco helped wipe more than $190 billion from global stocks. 

Lumentum Holdings Inc. makes lasers for 3D facial recognition used by major smartphone makers, with Apple Inc. its key client. On Monday, the company announced a 17 percent cut in its December-quarter revenue outlook. That triggered a plunge in shares of Apple and its suppliers, and reverberated through stock markets in the U.S. and Asia.

The Three-Minute Chat That Wiped Billions Off Stocks

Taking questions from a UBS representative, this is what CEO Alan Lowe and Interim CFO Chris Coldren said later in the day.

Q: You took down numbers for the December quarter by $70 million, which implies 20 million phone units. Can you talk a little bit about what drove that.

A: We had given guidance in our earnings call a couple of weeks ago, and we were confident in [the] numbers that we gave per guidance at that point in time based on orders. And in fact at the time we had been expedited to ship more sooner, whereas a few days ago we got some notification from a lead customer that they needed less parts. And so we wanted to get that news out as soon as we possibly could, and being here at the conference was sort of the catalyst to get it out this morning.

Q: Are we sure this is not a change in competitive situation, no change in ASPs, this is really driven by end demand?


A: I don’t know what the end demand is, they don’t tell us that. But I believe we have maintained our share, and I am not concerned about share shift. This is not a relationship that we have with them that they would do something like that. I believe that our partnership we have with our lead customer, and in fact for all of our customers, is one of a lot of trust and I do trust them. So I don’t think there’s been a share shift.

Q: Is there a way to parse that 70 million downtick between there being inventory in the supply chain versus maybe a downtick in end demand?

A: I think the two are sort of related, obviously, that if there was a downtick in end demand then if we were all operating off of higher production rates, that would be creating additional inventory. So, again, and Alan highlighted, our customer doesn’t share with us their situation and their plans. But certainly it feels like either inventory in the channel, or due to overproduction in the early time frame of this product cycle or slightly softer than expected end-market demand. But, you’d better ask them.

I reproduced the full conversation so you can get a sense of the importance of this conversation, and the nuance from both the interviewer and the executives.

The follow-up questions are the key.

In its press release earlier that day, Lumentum mentioned a recent client request to cut shipments. But as the question hints, and the answer shows, this wasn’t some competitive dynamic working against the company. The client, Apple, cut its own outlook. And Coldren goes on to note that you can’t really split the issue of excess inventory and weaker demand. They’re related. This is something I warned about back in August, and something that the market is once again learning to deal with.

The Three-Minute Chat That Wiped Billions Off Stocks

As a relatively new vendor to Apple, it’s possible that Lumentum hasn’t learned to play the supplier game.

Around the middle of every year you’ll see a string of press reports claiming that Apple has expectations for how many iPhones it’ll sell that year. The source of that news is invariably suppliers. Neither the manufacturer nor Apple itself knows how many devices customers will actually buy.

What Apple is really telling its vendors is how many units they should be prepared to make. From over a decade covering the sector, I’ve learned that this client tends to ask for a lot more than may be needed. Experienced suppliers know how to adjust to Apple’s early optimism.

With sales concentrated so early on in the product cycle, any bottlenecks in supply have the potential to hurt iPhone sales. As i-Day approaches, Apple may sometimes rush suppliers in order to get more devices on the shelves so they can soak up any early demand. 

But as Lumentum just discovered, that excitement can disappear quickly. And with it go hopes that the tech bull market can resume.

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

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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