Hon Hai: June Revenues May Not Bode Well For Apple

Jul.11.12 | About: Hon Hai (HNHPF)

Hon Hai (OTC:HNHPF), which receives over 40% of its revenues from Apple (NASDAQ:AAPL), and accounts for a similarly high percentage of AAPL's COGS, reported June unconsolidated revenues of NT$236.83B (US$7.91B). This represents a M/M decline of -1.77%, far below a fairly consistent 10-year average of +15.69% (σ=10.19%). In fact, the decline represents the only monthly decline in June at Hon Hai over the past 10 years. June's results imply Q2 revenues for Hon Hai of NT$729.65B (US$24.37B). The Q/Q decline of -7.63% that this represents is similarly well below a 10-year average of +12.15% (σ=10.27%), and like June's monthly report, Hon Hai's quarterly sequential decline represents the first time that has happened there in a Q2 reporting period in at least 10 years.

So while the June and Q2 revenue numbers for Hon Hai are below long-term seasonal averages from a growth perspective, the silver lining to this cloud's darkness is the fact that Hon Hai's results are still at very high absolute levels. While June's results represented Y/Y growth of just +3.69%, each of the past three months showed Y/Y growth of greater than 20%, with January and February each posting Y/Y gains of around 50%. Thus for the quarter, Q2 represents the third-highest result in Hon Hai's history, (following Q1:2012 at #2, and Q4:2011 at #1).

But in terms of the expected seasonal growth, Hon Hai's results are definitely below normal seasonality. Hon Hai is the world's largest contract manufacturer, and since they manufacture product for many leading OEMs - not just AAPL, but also Hewlett Packard (NYSE:HPQ), Dell (NASDAQ:DELL), Cisco (NASDAQ:CSCO), EMC (EMC), Nokia (NYSE:NOK), Sony (NYSE:SNE), and others - the results are a negative data point for tech, broadly speaking. The question is - how much of it is due to AAPL, and how much from everyone else?

One possibility is that AAPL may be doing well, with Hon Hai's PC business doing poorly, as evidenced by recent warnings from Advanced Micro Devices (NYSE:AMD) and Seagate (NASDAQ:STX), as well as a weak outlook from Micron (NASDAQ:MU). Additionally, as we wrote following AMD's warning (see AMD Warns: Taiwan Semi Lens Sees Upside at Qualcomm, Broadcom, Apple, And Others), TSMC (NYSE:TSM) has seen a huge uptick in Q2 to all-time high levels, and again given other data points and TSMC's customer breakdown, it would appear that this strength is driven by Qualcomm (NASDAQ:QCOM) and possibly Broadcom (BRCM), two of TSMC's largest customers, both of which have as their large customers Apple and Samsung.

Another possibility is that the results are more indicative of a pause as AAPL prepares for the launch of the iPhone 5 (and possibly the iPad "mini" and other products) which haven't fully ramped. And perhaps AMD, due to its small market share relative to INTC, is more of an outlier and not really indicative of the state of the PC market - one could argue this view given the very strong June results for Taiwan's notebook ODMs Quanta (2382.TW), Compal and Wistron. Quanta reported June revenues up +22.27% M/M (vs a 10-year seasonal average of +13.88% M/M; σ=10.19%); Compal was up 30.99% M/M (vs avg +10.25%; σ=16.11%); and Wistron was up +22.2% M/M (vs avg +16.66% M/M; σ=7.03%). Perhaps a different scenario is that ultrabooks are being built, which aren't benefitting AMD. This may also explain STX's miss (ultrabooks having SSDs rather than more traditional HDDs).

Absent a pre-announcement from a supplier with high exposure to AAPL, we may not know for sure until AAPL itself reports on July 24. We will continue to monitor AAPL's supply chain for additional data.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.