Analyst: Skyworks Could Be The Culprit Behind Apple's iPhone Production Cuts

Apple Inc. AAPL iPhone XR woes may have to do with quality issues at one of its component suppliers, according to an analyst at Rosenblatt Securities.

The Analyst

Jun Zhang has a Neutral rating on Apple with a $200 price target. Earlier this week, the analyst downgraded Apple.

The Thesis

Weaker-than-expected sell-through rate of iPhone XR (Apple's budget phone in the X lineup) following the first two weeks of its commercial launch may have to do with quality issues from Skyworks Solutions Inc SWKS Power Amplifiers, Zhang said in a note.

The weakness may prompt Apple to begin another round of iPhone XR production cuts for the calendar year fourth quarter, Zhang said. The analyst expects the company to trim iPhone XR production by an incremental 4-5 million units for Q4, while increasing iPhone X production by 1-2 million units, as some telecoms have iPhone promos for the holiday season.

Zhang believes some printed circuit board, or PCB, supplier shipments of HDI boards were dropped this week, attributable to quality issues at Skyworks Pas.

"We will continue to track iPhone holiday season sell-through rates in order to see if the production cuts are more attributable to Skyworks' PA quality issues or if Apple is taking a more conservative approach to prepare for further softness in demand," Zhang wrote in the note.

The firm estimates production and shipments of new iPhone models at 88 million units and 76-77 million units, respectively, in the second half of 2018. The analyst sees March quarter production at 36-37 million, representing a 40-50 percent quarter-over-quarter drop, and shipments of 35-36 million.

That said, the firm sees downside risk if the sell-through rates don't pick up during the holiday season or the Skyworks issue persists through Q1.