P&L

Foxconn’s new mantra: more software, less Apple. If only it were that easy

November 13, 2013
November 13, 2013
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The numbers: Fine, which is a big improvement on the last two quarters. Q3 net income for Taiwan’s Hon Hai Precision Industry—or Foxconn, as it’s better known—crept up 1.6% on a year earlier, to NT$30.8 billion (US$1 billion). That was slightly less than the year-on-year rise in Q2. Sales, however, rose 5% on a year before, and that’s a healthy jump compared with the wan 0.4% year-over-year increase in Q2, or the 19% drop in Q1. (Foxconn announces earnings tomorrow; its Q3 net income is based on a filing to the Taiwan Stock Exchange made today. It announced unaudited Q3 sales on Oct. 9.)

The takeaway: With around 40% of its revenue coming from Apple, Foxconn’s stronger sales are largely due to the release of new iPhones in September and the run-up to the latest iPad launch. But its Apple relationship is complicated, says Alberto Moel, analyst at Sanford C. Bernstein. “Lower Apple sales means lower revenue but probably higher margins,” Moel tells Quartz. This, he says, means how much Apple business Foxconn does will make little difference to its profit growth. So where will that growth come from instead? The twin rise of Chinese wages and Samsung means Foxconn’s been shifting away from hardware, trying to parlay this expertise into developing a suite of software and digital services—things like apps, cloud computing and tablets optimized for Mozilla’s Firefox, for instance.

What’s interesting: It’s too early to tell how that shift is going. Some analysts expect the company’s margins to start benefiting by the end of this year—and that bold moves like its purchase of a fourth-generation (4G) mobile license are good longer-term bets. “[W]orking closer with the carriers will help Hon Hai to understand the needs of consumers when introducing TVs, tablets, game consoles and smartphones,” Kylie Huang, an analyst at Daiwa Securities, told Reuters. Others are less sanguine. Asked whether he thought Foxconn could pull off the shift to software and services, Bernstein’s Moel says, “Nah. I wouldn’t trust them with such a shift as far as I can throw them.”

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