On or off, yes or no? Computing technology, via an underlying programming code, depends on the answers. In business, though, things are not binary. Consider Apple’s relationship with its UK-based specialist supplier Dialog Semiconductor. Talk that Apple might need much less of Dialog’s power-saving chips a couple of years ago put investors off the Frankfurt-listed producer. Then came Thursday’s announcement of a $600m supply deal between Dialog and Apple. That turned the market back on. Dialog’s share price jumped 25 per cent.
There are good reasons for that reaction. While Apple will still require fewer of Dialog’s power management integrated circuits, which the latter has provided since the first iPhone, it decided to throw its supplier a lifeline and secure the technology for the near term. Half of Apple’s money will go to licensing this PMIC technology, which helps extend battery life. This cash also buys some of Dialog’s design facilities around Europe, including in the UK, along with 300 of Dialog’s employees — almost a fifth of the total. The other $300m will pre-pay orders for the coming three years.
That will make a big difference to this smallish chip producer, whose revenues were expected by analysts to slip next year to under $1.2bn. Its very un-tech like valuation of 10 times forward earnings reflected these fears. Though Dialog has no debt, and in the past had enough cash flow to cover its investment needs, the potential loss of Apple’s orders forced the company to switch direction. If Apple, representing 75 per cent of sales, had run off then Dialog’s market value, down two-thirds since early last year, would not have recovered.
Is Dialog better off? Yes and no. The bad news is it will continue to depend heavily on Apple, which remains a major client. But the better news is that it has secure revenues while it builds a more balanced client profile, with more than 60 per cent of its orders flowing from other customers by 2022. That fact alone means the shares deserve a higher valuation.
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