Dialog Semi Crashes Most In 16 Years As Apple "Black Swan Moment" Strikes Again

One week ago, when shares of the UK-based Imagination Technology crashed 70% overnight after Apple announced it would cease using the tech company's graphics technology for new products, including phones, tablets, and watches, in a push to insource key R&D as well as preserve capital, Neil Campling, head of technology research at Northern Trust Securities, said that "this is what we would describe as a black swan moment for the company and investors in Imagination."

Alternatively, we wondered if instead of an isolated rare bird, this wasn't a black swan event for the entire Apple supplier industry, when we said that "it remains to be seen if Imagination's dramatic "Black swan" case study will be a warning for investors in other suppliers overly reliant on Apple for revenue."

One week later we have the answer, courtesy of key Apple supplier Dialog Semiconductor, whose shares crashing as much as 35%, (now down over 18%), the most in more than 16 years, tumbling after an analyst warned that Apple Inc. probably will cut back on the use of the company’s power-management chips.

“There is strong evidence that Apple is developing its own power-management integrated circuits and intends to replace the chip made by Dialog at least in part,” Karsten Iltgen, analyst at Bankhaus Lampe, said in a research note published Tuesday in which he downgraded Dialog to a sell rating from hold.

A shift to Apple developing its own chips in-house is unlikely in the short term, he said. In immediate result, Dialog’s stock plunged 18.5% to 38.82 euros, giving the company a market value of 2.98 billion euros. Earlier it plunged as much as 36% the biggest intraday decline since Dec. 18, 2000, as it now appears that Apple's supplier black swan becomes systemic.

Just like the recently crushed Imagination, Apple also dominates Dialog’s supply chain. Reading, England-based Dialog gets about 74% of its sales from Apple.

“We believe that Apple is setting up power-management design centers in Munich and California,” said Iltgen. “We hear from the industry that about 80 engineers at Apple are already working on a PMIC with specific plans to employ it in the iPhone by as early as 2019.”

According to Bloomberg, Dialog, which supplies chips to Apple’s iPhones and iPads, employs about 1,300 engineers, predominately in the U.K. Apple has been busy taking in-house development work for its graphic processing units. The Cupertino, California-based company is designing a new chip for future Mac laptops that would take on more of the functionality now handled by Intel Corp. processors. Apple already designs its own smartphone processors, obviating the need to turn to Qualcomm Inc. or another supplier for chipsets.

There has been a steady flow of engineers from Dialog to Apple over the past year, according to a person familiar with the situation who wasn’t authorized to speak on the topic. Due to the close nature of Dialog’s relationship with Apple, it isn’t unusual to see a steady flow of employees to and from the two companies, the person said.

 

However, over the past year Apple also hired several people from fellow supplier Imagination, including former Chief Operating Officer John Metcalfe as a senior director based in London. Imagination said in its statement last week that Apple "has asserted that it has been working on a separate, independent graphics design in order to control its products."

If one were so inclined, one would almost say that Apple is engaged in "soft" industrial espionage with its key vendors, poaching key employees, then cutting off the relationship when it knows all there is to know about the alternative technology.

It appears to be seen if Dialog will sue Apple in retaliation. For now, however, our warning from a week ago that other Apple suppliers are on the chopping block is being embraced by investors as other Apple suppliers were also dragged down by signals of the technology giant’s increasing self-reliance, with sensor makers AMS AG and STMicroelectronics declining as much as 10% and 4.3%, respectively. They will fall far more if Apple similarly cuts them off from its ecosystem in the coming months.