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Dialog Semi, smaller after Apple deal, targets new growth areas

Stock MarketsMar 06, 2019 09:45AM ET
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© Reuters. Dialog semiconductor logo is pictured at company building in Germering

By Douglas Busvine

FRANKFURT (Reuters) - Dialog Semiconductor is targeting new growth opportunities from home healthcare to gaming consoles following a $600 million deal to cut its exposure to Apple (NASDAQ:AAPL), CEO Jalal Bagherli told Reuters on Wednesday.

The Anglo-German chip designer struck the deal in October with Apple, which accounts for three-quarters of its revenue, helping it to weather an iPhone sales downturn better than other suppliers to the smartphone maker.

Dialog said the business that will remain after it transfers a team of programmers and patents to Apple should show strong growth in 2019, weighted towards the second half.

This upbeat outlook helped to lift Dialog's shares, which were up more than 5 percent by 1400 GMT, providing a rare boost for the semiconductor industry, which has been through a rough patch.

Dialog joins a small but growing number of chipmakers forecasting stronger demand later in the year, in a sector hit by the U.S.-China trade dispute and weakness in the car and smartphone industries. Nvidia and AMD have both given optimistic 2019 outlooks in the past few weeks.

CONNECTED HEALTH

Dialog is working with four pharmaceuticals firms to develop connected health applications, as well as with two gaming companies to provide power chips for their next gaming consoles, Bagherli said.

The connected health devices would monitor blood pressure, check glucose levels or administer insulin doses for diabetic patients without them having to visit a hospital, he said in an interview.

These are part of the so-called Internet of Things - or smart devices and sensors that can be managed remotely and are expected to proliferate as fifth-generation mobile networks are launched in the years ahead.

The Apple deal, expected to close in the first half of the year, will hand Dialog a cash windfall to back its transition to a smaller, more diversified business.

"We find this transformation of Dialog's business compelling, and think its current valuation overly discounts the risk associated with the company's evolving business model," Barclays (LON:BARC) analyst Andrew Gardiner said in a note.

Gardiner holds an "overweight/neutral" rating on the stock.

Dialog earlier forecast a single-digit percentage decline in revenue this year, reflecting weaker iPhone sales. This forecast topped a consensus view among analysts for a 9 percent fall.

Apple had shocked the sector in November by warning of slow year-end sales and did so again on Jan. 3 when it issued its first sales warning in 12 years, blaming weaker iPhone sales in China.

Those warnings hit shares in other European suppliers, like Austria's AMS, while weak automotive markets have also weighed on larger players like Infineon and STMicroelectronics.

Some industry players have forecast a quick, V-shaped rebound in demand although persistent weakness in measures of industrial activity such as purchasing managers indexes and inventory builds suggest a recovery may be slow.

Dialog expects first-quarter revenue of $270-$310 million, representing a more pronounced than usual seasonal slowdown, with gross margins broadly in line with the 2018 figure.

NEW PRODUCTS

Dialog is also looking to boost sales of mixed-signal integrated circuits, which can be configured by users. This business, which Dialog entered with the takeover of U.S. company Silego, is growing well, Bagherli said.

The company is seeking opportunities for its power-management chips from folding smartphones unveiled at last week's Mobile World Congress in Barcelona. These will carry two or three battery cells that need managing, he said.

Asked about how Dialog would use the cash windfall from the Apple deal, Bagherli said he would spend some on acquisitions.

He is looking at targets in Internet of Things connectivity - in narrowband radio and WiFi - to back up Dialog's existing strengths in Bluetooth. A follow-on deal to bolster Silego's franchise would also make sense, he added.

Dialog reported a 2 percent rise in fourth-quarter operating profits. Revenues were down 7 percent.

Based on its divisional performance, mobile sales fell 13 percent in the fourth quarter, mainly due to a decline in sales of main PMICs to Apple.

Taken together, other divisions showed a 20 percent rise in sales, although this was buoyed by the contribution from the Silego takeover in late 2017.

Dialog Semi, smaller after Apple deal, targets new growth areas
 

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