Foxconn expectedly experiences sales lull amid seasonal iPhone decline

iPhone 5 (manufacturing process 003)

Hon Hai Precision Industry, also known as Foxconn, assembles many Apple products, including iPhones and iPads.

And with an estimated 60 to 70 percent of its revenues owed to the Apple orders account, Foxconn’s earnings are scrutinized for any possible hint which could point to increasing or decreasing demand for Apple products.

Today, the contract manufacturer has posted a nineteen percent decline in sales in the first quarter compared with a year earlier. As you’d expect, Reuters immediately speculated the numbers are down because the company is “hurt by disappointing demand for the iPhone”

Here’s Reuters, quoting the reliable KGI Securities analyst Ming-chi Kuo:

A quarterly decline was expected, but not a yearly decline. This shows that Hon Hai’s revenue depends too much on Apple, and iPhone orders corrected more than expected.

He’s right about the quarterly decline: by now, most of the people who planned on buying the iPhone 5 have one. iPhone sales typically peak in the first quarter of availability and continue growing into the following quarter before starting to decline over the remaining two quarters of availability.

Unlike other manufacturers that churn out multiple handsets on a monthly, sometimes weekly basis, Apple refreshes its iPhone annually. This means customers are planning their purchases in advance and lots of them refrain from taking the plunge when we’re just a few months ahead of a next-generation model.

As for the yearly decline, I wouldn’t necessarily attribute that to “disappointing demand.” The iPhone has always been prone to seasonality, though big media insists on describing these seasonal iPhone dips as “disappointing.”

Now, Foxconn in Q3 2012 reported a sharp rise of profits on new Apple product launches and analyst told The Wall Street Journal that Apple orders accounted for about 40 percent of Foxconn’s revenue.

So with that ratio growing from 40 percent in Q3 2012 to as much as 60-70 percent in Q1 2013, it’s expected that the increased reliance on the Apple biz would have a stronger effect on Foxconn’s earnings, especially after iPhone sales nosedive ahead of a new model launch.

Also important: 30-40 percent of Foxconn’s revenue is still coming from other clients. Therefore, it’s virtually impossible to claim with any degree of certainty that a drop off in Foxconn’s first-quarter sales is in fact related to Apple.

So no, Reuters, Bloomberg, WSJ, NYT and others: iPhone demand isn’t “disappointing.”

This is a seasonal thing and it’s been going on for six years now, ever since the original iPhone went on sale in the summer of 2007.

Make sense?

By the way, can’t wait to see how The Wall Street Journal spins this.