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Will Apple Inc.'s Earnings Sink These 3 Suppliers?

By Leo Sun – Feb 1, 2016 at 7:00PM

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Here's how Apple’s iPhone sales growth slowdown is likely to impact Skyworks, Qorvo, and Cirrus Logic.

Apple (AAPL -4.91%) hit investors with a triple whammy of bad news in its first quarter earnings report. First, iPhone shipments rose just 0.4% annually to 74.8 million units, narrowly missing the consensus estimate of 75 million. CEO Tim Cook then admitted that Apple saw "signs of economic softness in Greater China," and the company warned that its sales could decline up to 13.7% year-over-year in the second quarter.

Those issues helped push Apple down, as it briefly hit a 52-week low of $92, but they also weighed on its top suppliers. Let's take a look at three closely watched suppliers -- Skyworks Solutions (SWKS -3.98%), Qorvo (QRVO -1.06%), and Cirrus Logic (CRUS -4.23%) -- to see how closely their fates are tied to Apple's.

The iPhone 6s. Source: Apple.

Skyworks Solutions
Skyworks Solutions produces the RF power amplifier modules in the iPhone 6s. It doesn't disclose how much of its revenue comes from Apple, but Oppenheimer & Co. analyst Richard Schafer estimated it at between 35% and 40%.  In its 10-K filing for fiscal 2015, Skyworks admitted that "one customer accounted for greater than ten percent" of its revenue during the year.

Skyworks expects its sales for the current quarter to only rise 1.7% annually to $775 million, falling short of the consensus estimate of 7.3% growth. The company forecast its non-GAAP earnings would rise 7.8% to $1.24 per share, which comes in nine cents below analysts' expectations. Skyworks' adjusted guidance wasn't surprising, since several other Apple suppliers already slashed their forecasts before Apple reported its first quarter earnings.

Another headwind for Skyworks is Qualcomm's (QCOM -3.44%) new joint venture with TDK to produce RF chips, sensors, and wireless charging technologies. If Qualcomm merges those technologies with its mobile SoCs in cheap reference designs, Skyworks' RF modules might lose their edge among low- to mid-range smartphone OEMs. Due to those concerns, Skyworks shares have declined 17% over the past 12 months.

Qorvo is Skyworks' main rival in RF front-end modules. Its antenna switch and power amplifier modules are installed alongside Skyworks' components in iPhone 6s. It's unclear how much of Qorvo's revenue comes from Apple, but the company recently warned that its fiscal third-quarter sales, which will be fully reported on Feb. 4, will miss expectations.

Qorvo expects third quarter sales of just $620 million, compared to its prior guidance for sales between $720 million to $730 million. The chipmaker blamed that miss on "weaker than forecasted customer demand" in mobile products.

Analysts now expect Qorvo's annual sales growth to slow from 53% in its fiscal 2016 (which ends in March) to just 11% in fiscal 2017, mainly due to concerns about Apple and an economic  slowdown in China. Qualcomm and TDK's entry into the RF could also hurt Qorvo, which is a smaller player than Skyworks. Those headwinds have cut Qorvo stock in half over the past 12 months.

Cirrus Logic
Cirrus Logic manufactures audio chips for Apple's devices, and disclosed that Apple accounted for 76% of its sales last quarter, while Samsung accounted for 11%. Last quarter, Cirrus' revenue rose 16.5% annually to $348 million and narrowly beat expectations by $1 million.

Source: Cirrus Logic.

Prior to that earnings release, Cirrus warned that it wouldn't achieve its prior sales target of $370 million to $400 million, due to "weaker than anticipated demand for certain portable audio products." It also warned that weakness "escalated over the last few weeks of December and is expected to continue to significantly impact our revenue in the March quarter."

Nonetheless, Cirrus stock surged 17% after the company forecast sales growth above 15% for fiscal 2017 (which starts in March), which was higher than analysts' consensus estimate of 14% growth. Pacific Crest analysts also suggested that Cirrus could supply a smart codec IC for noise-cancelling earbuds in the iPhone 7. Apple is seen as likely to phase out the 3.5mm headphone jack in that model, replacing it with a Lightning port. If that happens, Cirrus will gain a new stream of revenue beyond iPhones and iPads. Investors seem to have more faith in Cirrus than Skyworks or Qorvo -- its stock has rallied more than 30% over the past 12 months.

The road ahead...
Looking ahead, investors should be aware of these companies' exposure to Apple, but they shouldn't overlook their potential to expand beyond iPhones. Skyworks has been diversifying with new smartphone design wins and modules for Internet of Things devices, which connect cars, drones, and other devices to each other and the cloud. It's also been mulling acquisitions, which could diversify its product line and boost its production capabilities to remain competitive against bigger challengers.

If Skyworks gets bigger, Qorvo could have trouble remaining competitive. Qorvo launched a $1 billion stock buyback last November, but that money might be better spent on more acquisitions to further expand its business, which launched last year when RF Micro Devices and Triquint Semiconductor merged. Meanwhile, Cirrus' list of blue-chip customers is also getting longer, and a noise-cancelling design win for iPhone 7 earbuds could allay concerns about iPhone sales.

Leo Sun owns shares of Qualcomm. The Motley Fool owns shares of and recommends Apple, Qualcomm, and Skyworks Solutions. The Motley Fool recommends Cirrus Logic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Skyworks Solutions, Inc. Stock Quote
Skyworks Solutions, Inc.
$89.26 (-3.98%) $-3.70
Cirrus Logic, Inc. Stock Quote
Cirrus Logic, Inc.
$69.55 (-4.23%) $-3.07
Qorvo, Inc. Stock Quote
Qorvo, Inc.
$81.79 (-1.06%) $0.88
Apple Inc. Stock Quote
Apple Inc.
$142.48 (-4.91%) $-7.36
QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
$114.84 (-3.44%) $-4.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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