Analysis: Dialog finds a better way out from under Apple
That exposure could be as much as 75 percent in 2018 and with Apple known to be generally following an in-sourcing strategy the situation needed managing.
There are strong parallels with the evolution of the relationship between Apple and Imagination but Bagherli appears to have done a better job. The markets appear to think so and Dialog’s share price opened up about 25 percent on the news (see Apple to acquire PMIC capabilities, staff from Dialog).
The deal is set to cost Dialog 16 percent of its work force but should produce a nice pay off of $600 million over the next three years. In the longer term it may cost Dialog a massive chunk of revenue if Apple becomes self-sufficient in PMICs but Dialog hopes to retain some business outside the iPhone. Apple is expected to be responsible for 75 percent of Dialog revenue in 2018 but the deal does give Dialog three years to build revenues in other more exciting areas; IoT, automotive, computing and storage.
After all, the smartphone market is now not only thin on margin for suppliers but also lacking in growth. Higher compound annual growth rates (CAGRs) are forecast for automotive, industrial and 5G markets.
Dialog Semiconductor revenue profile. Source DIalog Semiconductor plc.
Dialog estimates that in 2022 Apple will be down to 30 to 35 percent of an increased annual revenue total.
Next: Compare and contrast with Imagination
For many people being a component supplier of ICs to Apple would seem like a dream come true. But Apple, in return for the high volumes of components it buys, squeezes its suppliers hard on price for each subsequent generation of product and, where it can, keeps them dangling with design-ins and design outs.
And when a company is overexposed to a single customer the sudden removal of that customer can cause mayhem for the supplier – as graphics intellectual property licensor Imagination Technologies found to its cost (see Imagination, MIPS to be sold to China-, California-connected VCs).
Dialog itself suffered a couple of share price collapses in 2017 on reports that Apple was working on its own power management ICs (PMICs) that could replace Dialog PMICs in 2019 (see Dialog suffers on report of Apple in-sourcing). In the end Dialog admitted that Apple could design its own PMICs but said that the relationship between the two companies remained unchanged at that time (Dialog admits Apple could make PMICs).
It would now seem that Bagherli was scrambling to find the best way to ameliorate the loss of Apple’s business as the consumer continued to pursue an in-sourcing strategy. However, to Bagherli’s credit Dialog has bent in the breeze in a way that Imagination didn’t.
In Imagination’s case the company failed to hear Apple saying it wasn’t interested in paying royalties on something it could design itself. In the end Apple went around giving Imagination GPU engineers employment offers (see Apple hires group of UK GPU engineers) and then confirmed publicly that it would eventually be deploying in-house developed GPUs and not paying royalties to Imagination. What followed was the collapse of a UK technology company.
It should be noted that while Imagination ended up getting acquired by a US equity company managing Chinese state funds it now appears to have settled with Apple and thereby avoided potentialpatent disputes (see How much did Apple pay to settle with Imagination?).
Next: Positive action
In Dialog’s case Bagherli has been positive and bundled up some of the Dialog assets that work with Apple and converted fabless chip business into some licensing business while getting prepaid for three years of products.
In its presentation on the deal Dialog states that it will retain the revenue and gross profit from all the products shipping to Apple that are in-production. But that would also appear to look forward to a time when Apple introduces new products for its own benefit and without reference to Dialog.
Dialog has retained the right to sell PMICs to other companies.
Dialog also talks about entering the next phase of its business journey with the plan to focus on fast growing segments. In IoT Dialog sees a 2017 to 2022 CAGR of 17 percent, 11 percent in mobile radio and connectivity; 17 percent in automotive; 8 percent in computing and storage.
It is notable that Dialog, which is an industrial supplier, makes no mention of industrial applications in its presentation on the deal. Closely allied to IoT industrial applications usually retain high margins but volumes are correspondingly low. It may well be that Dialog’s exposure to consumer electronics means it now feels the fast-paced supply chain management that goes with high volume component supply is a key part of its value add.
Meanwhile the cash injection from Apple will give Dialog the opportunity to seek out useful tuck-in and more significant acquisitions to help its grow revenue and a more diverse customer base.
Related links and articles:
News articles:
Apple to acquire PMIC capabilities, staff from Dialog
Imagination, MIPS to be sold to China-, California-connected VCs
Apple hires group of UK GPU engineers
Dialog admits Apple could make PMICs
Failed merger talks won’t stop Dialog
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