It is well-known that Analog Devices (NASDAQ:ADI) was instrumental to enabling the 3D Touch functionality present in Apple's (NASDAQ:AAPL) current iPhone 6s/6s Plus flagship devices. In particular, according to Chipworks, Analog Devices supplies the controller chip for 3D Touch.
Ahead of its Feb. 17 earnings release, Analog Devices issued an updated outlook for its first fiscal quarter, warning investors that revenue would be lower than expected due to weaker-than-expected iPhone 6s/6s Plus sales.
What was particularly interesting is that Analog Devices, in conjunction with the lowered revenue outlook, also reported that its gross profit margins would take a hit as a result of an "inventory reserve associated with the updated revenue outlook."
I believe that this tells us something very interesting about Apple's next generation iPhones. In particular, I think there's a good chance that iPhone 7/7 Plus will feature a next generation 3D Touch functionality requiring a more advanced controller from Analog Devices.
How can we tell this?
According to BusinessDictionary.com, an "inventory reserve" is a "term that refers to a reserve used to account for inventory that is not sold at its cost."
Indeed, ahead of the iPhone 6s/6s Plus launch, Apple apparently ordered more components to support the build of more iPhone 6s/6s Plus phones than it was ultimately able to sell.
This is why many Apple suppliers have been talking about an "inventory correction" that's impacting their businesses in the March quarter; if Apple needs to take down its iPhone inventories, it's going to be ordering a lot fewer components than originally expected.
Analog Devices, in anticipation of a certain level of demand, appears to have "overbuilt" 3D Touch controllers for the iPhone 6s/6s Plus. This, according to Analog Devices CFO led them to reserve some of that inventory "for a possible disposal."
Although it's a bummer for Analog Devices that it overbuilt 3D Touch controllers for the iPhone 6s/6s Plus, the good news -- at least for Apple and its customers -- is that this strongly suggests that the current generation 3D Touch controllers won't be used in the iPhone 7-series phones.
After all, if Apple were planning to keep the same 3D Touch controllers, this "inventory reserve for a possible disposal" on Analog Devices' part wouldn't be necessary, would it? These parts could just be used in the iPhone 7-series phones.
Since comments from Analog Devices' management indicates that it will be in the next iPhone, it stands to reason that the iPhone 7/7 Plus will use meaningfully enhanced 3D Touch controllers from the chipmaker.
My bet? Multi-3D Touch
Updated 3D Touch controllers strongly suggest an improvement in functionality. By far the most obvious avenue of improvement -- and one that has been rumored in the press previously -- is the addition of multi-3D Touch functionality.
Although multi-3D Touch probably isn't a feature that, alone, could carry the iPhone 7/7 Plus to record sales, the inclusion of this feature coupled with a bunch of other enhancements across the phone could make for one heck of an upgrade.
Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. 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.