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Hon Hai Net Income Beats Estimates Ahead of New IPhone

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Hon Hai Precision Industry Co. Chairman Terry Gou
Terry Gou, chairman of Hon Hai Precision Industry Co. said that Profit and revenue will climb at least 10 percent for the full year, with the company maintaining its internal goal of 15 percent sales growth. Photographer: Tomohiro Ohsumi/Bloomberg

Aug. 14 (Bloomberg) -- Hon Hai Precision Industry Co. posted profit that beat analyst estimates as it prepares to release new versions of Apple Inc.’s iPhone. The shares climbed to the highest level in three weeks.

Second-quarter net income climbed 19 percent to NT$20.2 billion ($673 million), the Taipei-based company said in an e-mailed statement yesterday, beating the NT$18.2 billion average of 14 analysts’ estimates compiled by Bloomberg. Shares rose.

Operating profit climbed 50 percent, pointing to improved efficiency and the receipt of one-time payments for preparing Apple’s new iPhone that helped offset a drop in sales. Suppliers were due to commence mass production of the larger-screen smartphones last month, Bloomberg News reported in June, which means revenue won’t accrue to Hon Hai until the third quarter.

“These numbers indicate they received one-off payments from Apple to cover the development of the new products,” Alberto Moel, who rates the stock hold at Sanford C. Bernstein in Hong Kong, said by telephone. “It also points to iPhone 6 being relatively easier to ramp up than earlier models.”

Hon Hai rose 2.8 percent to NT$109 at the close in Taipei trading, the highest level since July 24. The benchmark Taiex index was little changed.

Apple’s iPhone 5, released in September 2012, faced a supply shortage as complaints about scratches to its new aluminum casing prompted a quality-control crackdown and highlighted the challenges of scaling-up production of a new device, Bloomberg News reported in October 2012.

Margins Widen

Wider-than-expected profit margins indicate the iPhone 6 may not face the same issues, Moel said. Operating margin widened to 3.2 percent from 2.1 percent a year earlier, Hon Hai said.

Clients also often make payments to cover the non-recurring engineering expenses that manufacturers must bear before they can realize revenue from shipping a new model, Moel said.

Hon Hai, the largest company in Terry Gou’s Foxconn Technology Group, last month reported a 1.8 percent drop in second-quarter sales to NT$879 billion, missing the average of analyst estimates at the time for NT$900 billion.

Operating income climbed to NT$27.9 billion, beating the NT$22 billion average of analyst estimates compiled by Bloomberg. Gross margin, which measures the percentage of sales left after deducting the cost of goods sold, widened to 7.1 percent from 5.8 percent, and beat estimates for 6.3 percent.

Bond Sale

Hon Hai, founded by Gou 40 years ago, doesn’t provide earnings forecasts, hold analyst meetings or explain its financial results.

In addition to reporting earnings, Hon Hai yesterday said its board approved plans to sell up to NT$24 billion of bonds to repay short-term debt.

Revenue will rise about 10 percent this quarter, according to analyst estimates. Sales this year through the end of July have climbed 0.8 percent, highlighting the company’s struggle to increase revenue amid weak computer and smartphone markets.

Profit and revenue will climb at least 10 percent for the full year, with the company maintaining its internal goal of 15 percent sales growth, Gou said at the company’s annual shareholders’ meeting in Taipei.

Apple’s largest-ever iPhones were scheduled to go into mass production in July, people familiar with the plans told Bloomberg News in June. The iPhones will come in two new models: one with a 4.7-inch screen and another with a 5.5-inch screen, people with knowledge of the plans have said.

Two new versions of the Cupertino, California-based company’s iPads are also in production for release by the end of this year, Bloomberg News reported this week, citing people familiar with the matter.

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

To contact the editors responsible for this story: Michael Tighe at mtighe4@bloomberg.net Aaron Clark, Suresh Seshadri

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