Hon Hai Profit Shows IPhone Delay Offset by One-Time Sharp Gain

(Bloomberg) -- Hon Hai Precision Industry Co. felt the squeeze from last year's delayed launch of Apple Inc.'s iPhone X, the latest results from the world's largest electronics contract manufacturer show. Were it not for a one-time gain of $2.2-billion from the sale of Sharp shares, analysts say, it would have been the company's worst holiday quarter since at least 2010.

Hon Hai reported net income of NT$71.7 billion ($2.5 billion) in the three months ended December, based on calculations using previously reported earnings. That exceeded the NT$58 billion average estimate of analysts. Fourth-quarter revenue reached an all-time high of NT$1.73 trillion. Earnings per share were NT$4.14.

Analysts point to Hon Hai's December sale of 352.5 billion yen ($3.1 billion) of Sharp shares to ES Platform LP, a partnership formed by company employees, as the main reason for the iPhone maker's better-than-expected results.

“The main profit gains came from the non-operating end. Hon Hai disposed of Sharp's special shares in the same period, recognizing up to NT$66 billion,” Arthur Liao, an analyst with Fubon Securities, wrote in a note Saturday. “Without this, EPS in the quarter would only be around NT$1.44.”

Vincent Chen, regional head of research at Yuanta Investment Consulting, said EPS would have been about NT$1.28 without the gain from the Sharp sale, according to a note after Hon Hai earnings Friday.

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Based on the analysts' calculations, Hon Hai's fourth-quarter net income would have been less than NT$25 billion without the sale of Sharp shares. That would have been the company's lowest fourth-quarter figure in seven years. Operating profit was NT$32.4 billion, according to Bloomberg's calculations. Both the gross margin and the operating profit margin missed estimates.

Hon Hai shares fell as much as 2.95 percent in Taipei as of 11 a.m. Saturday, one of two weekend trading days this year.

Full-year net income was NT$138.7 billion, falling for the first time since 2008, as profits took a hit in the second half of 2017 partly on delayed iPhone X shipments. Despite reports of lackluster demand for the device, Apple Chief Executive Officer Tim Cook said on an earnings call last month that the iPhone X was the best-selling smartphone over the holidays, citing research firm Canalys.

Hon Hai, part of billionaire Terry Gou's Foxconn Technology Group, is the sole maker of Apple's priciest gadget.

Read more: Apple's IPhone Maker Readies China's Biggest IPO Since 2015

Hon Hai gets more than half its revenue from Apple but Gou's looking for ways to expand beyond merely assembling gadgets -- especially as the smartphone market sputters. He's now taking Foxconn Industrial Internet Co., a subsidiary focused on cloud services and smart manufacturing, public in China. According to a March 13 note, Fubon's Liao estimates FII's market value could hit 269 billion yuan ($43 billion) compared with Hon Hai's $56 billion.

Hon Hai doesn't provide revenue breakdowns, forecasts or hold investor conferences. A Foxconn spokesman did not immediately provide details on the sale of Sharp shares.

To contact the reporter on this story: Debby Wu in Taipei at dwu278@bloomberg.net.

To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Edwin Chan, Samson Ellis

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