Shares of Dialog Semiconductor (Frankfurt: DLG) are sending a chill through the semiconductor sector this morning with the stock falling 17% in Germany, to around €40.00. According to reports, an analyst at Bankhaus Lampe believes there is evidence to suggest Apple (AAPL​) is developing its own power management integrated circuits and intends to replace the chip by Dialog. This comes after last week's announcement that Apple would no longer be using Imagination Technologies Group PLC (IGNMF) graphics technology. (See also, Apple Might Buy Imagination Technologies: Analyst.)

A Few Good Customers

When reviewing Dialog's 2016 annual report, it is abundantly clear the company relies on a few key customers. The report notes sales to Apple, Samsung, Xiaomi, Panasonic, and Bosch. These top five customers represent 92% of Dialog revenue in 2016. Furthermore, in a footnote, the company notes that in 2014, 2015 and 2016 there was one customer, Apple, that accounted for more than 10% of the company's revenue. Even if the other four companies represent 9% each, that would represent 36% of revenue, and we know these five make up 92%, Apple likely represents over 50% of Dialog's total revenue. Just do the math.

Should semiconductors players be concerned? It all depends. In a February report, we highlighted the potential winners in an iPhone 8 upcycle. In that report, we explored to suppliers Broadcom (AVGO​) and Skyworks Solutions (SWKS​). We concluded that Apple represents about 40% of SWKS revenue, and that after the acquisition of some new customers, Apple's share has been shrinking. Meanwhile, AVGO likely had less than 20% of its revenue from Apple. (See: iPhone 8 Component Suppliers: Who Wins?

What Did the Teardown Say?

What about others? Tech Insights tore down the iPhone 7 and looked at the parts inside the device. Qorvo (QRVO​), Cirrus Logic (CRUS​), Intel (INTC​), Texas Instruments (TXN) and Lattice Semiconductor (LSCC​) were a few of the key component manufacturers. 

In Intel's 10-K, the company notes their largest customers accounted for 38% of net revenue, with Dell accounting for 15%, Lenovo Group accounting for 13%, and HP accounting for 10%. No mention of Apple here at all. For Texas Instruments, in its 10-K, the company notes they sell products to about 100,000 customers, with more than one-third of revenue coming from customers outside the largest 100. For QRVO, in the 10-K it notes that in 2016 the company sold products to its biggest end customer through multiple contract manufacturers, which in aggregate account for approximately 37%.

Meanwhile, Huawei accounted for 12%, and Samsung accounted for 7%. The 10-K also notes that sales outside the US accounted for about 88% of the company's revenue, with 61% located in China and 14% in Taiwan. We know from our SWKS and AVGO research that Foxconn is based in China and the assembles the iPhone for Apple. CRUS in its 10-K notes the company gets 89% from its 10 largest customers. The 10-K notes that Apple makes purchases through multiple contract manufacturers and it represents 66% of revenue in 2016, while Samsung represents about 15% of revenue in 2016. LSCC, reports in 10-K that in 2016 no one individual end customer accounted for more than 10% of total revenue

If you are looking to get some exposure to Apple without revenue concentration, it seems that INTC, LSCC, TXN, AVGO fall into the category of moving away from reliance on Apple. Finally, CRUS and QRVO are heavily tied to Apple. 

What's the final conclusion? Don't put all your eggs in one basket. 

Michael Kramer and the clients of Mott Capital Management, LLC own shares of SWKS. Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.

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