Foxconn's Ace Earnings Mask Something More

(Bloomberg Gadfly) -- Foxconn's Hon Hai Precision Industry Co. turned in a set of standout numbers for the fourth quarter, and the reason behind them is pretty interesting.

While the result was attributed to strong iPhone sales during the period, the truth is the top line was actually a weakness for the world's largest electronics manufacturer. Rather, incredible fiscal discipline on the part of Chairman Terry Gou and his team helped Hon Hai cast off any concerns its key customer -- Apple Inc. -- is dragging the business down.

Fourth-quarter revenue, the first full period in which the iPhone went on sale, shows a weakening trend over the past two years:

Gross margins, however, show Hon Hai has managed to squeeze more cost savings out of its suppliers while possibly securing more favorable pricing from customers.

Look even closer, and you'll see that Hon Hai's operating-expense margin has fallen steeply. This indicates costs have been cut not just at a factory level, but in administrative areas also.

While net income did get a boost from non-operating items, that figure wasn't wildly outside past quarters. One positive swing factor: shares of Sharp Corp., which almost doubled in the three months to Dec. 31. Hon Hai owns about 44 percent of Sharp, and shareholdings by Foxconn affiliates give Gou effective control. Hon Hai has so far declined to consolidate Sharp at the top line, which means any gains get inserted at the non-operating level.

These marginal wins helped Hon Hai to deliver bottom-line results well above what sell-side analysts had been expecting. Some maybe had an inkling things were looking good, but investors would do well to watch Hon Hai's shares closely as they start trading again after a four-day weekend.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

To contact the author of this story: Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.