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Weak Apple iPhone Sales Hit Analog Devices’ Fiscal 3Q16 Guidance

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iPhone sales impact semiconductor suppliers’ earnings

Apple (AAPL) has been in focus for its iPhone production, and its decisions have been affecting its semiconductor suppliers such as Skyworks Solutions (SWKS), Cirrus Logic (CRUS), and Analog Devices (ADI).

Apple scaled back production of its iPhone 6s and 6s Plus by 30% from January to June 2016. This saw most suppliers, including ADI, report revenue falls.

In fiscal 2Q16, ADI’s revenue fell by 5% YoY (year-over-year) to $778.8 million, primarily due to a 27% YoY fall in the consumer segment. The company’s consumer segment mainly supplies 3D Touch for Apple’s products.

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ADI’s fiscal 3Q16 guidance

For fiscal 3Q16, ADI expects its revenue to fall another 5% YoY to $820 million, missing analysts’ consensus estimate of $846.6 million. Weakness in the consumer segment is expected to largely affect revenue. The company expects falls from smartphones to be partially offset by mid to high single-digit growth in the industrial, automotive, and communications segments, which together accounted for 90% of the company’s revenue in fiscal 2Q16.

Slow demand from Apple could also reduce the factory utilization ratio to ~60% in fiscal 3Q16 compared to ~70% in fiscal 3Q15 in order to reduce inventory levels.

ADI’s fiscal 4Q16 guidance

ADI expects growth to pick up at the end of fiscal 3Q16 and in fiscal 4Q16 as production of the iPhone 7 begins. The company also expects strong seasonal demand from the automotive segment in fiscal 4Q16. Higher demand would improve factory utilization and reduce production costs, thus improving margins.

The above guidance came in before rumors around iPhone 7 production began to circulate. There are rumors that Apple has ordered components for up to 78 million iPhone 7 units, which is 15% higher than analysts’ estimate of 65 million. Rumors have also stated that production of the iPhone 7 began earlier than usual.

This rumor was backed by strong guidance from Broadcom (AVGO), which stated that it would be ramping up production over the anticipation of demand from a key smartphone supplier.

Next, we’ll look at the impact of the above rumor on ADI’s fiscal 3Q16 earnings. You can gain exposure to Apple suppliers by investing in the VanEck Vectors Semiconductor ETF (SMH). It has holdings in 26 semiconductor stocks, including 5.4% in AVGO, 3.6% in ADI, and 3.5% in SWKS.

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