EUR 850.00 For Business Accounts Only

Morningstar | AMS’ Design Wins not Sufficient to Offset Market Uncertainties

AMS' fourth-quarter results were slightly surprising as revenue exceeded our prior estimates although gross margins contracted further than expected. The firm’s current struggles surrounding effective factory utilization and an unfavorable mix (partly as a result of Apple iPhone weakness) do not appear to be abating quickly, both of which significantly impact our near-term profitability outlook. While management commentary regarding AMS’ increased expansion into the Android market is viewed positively, helping the firm diversify away from its Apple dependency, the gains are taking longer to materialize than previously expected. We may reduce our fair value estimate by a few CHF as we incorporate the recent results and guidance but at current prices, we still view shares as undervalued. That said, we would remind potential investors of the turbulence surrounding AMS and its warranted very high uncertainty rating.

Revenue in the fourth quarter was EUR 430.6 million which represented 4.5% sequential growth, thanks to a seasonal uptick in demand from Apple. However, as discussed broadly, iPhone units did not reach the previously expected heights which resulted in year-over-year AMS revenue declining by more than 8% during the December quarter. The low amount of high-margin structured light units and underutilization as a result combined to drive gross margins down 140 basis points sequentially to 28.2%. This was also significantly lower than AMS’ 40% margins during the roll out of the original iPhone X in December 2017. Despite the near-term weakness, management provided encouraging details on several design wins within the Android space and between the various 3D sensing products (structured light, time-of-flight, and stereo vision).

AMS also detailed its previously announced behind-OLED product (combining proximity and light sensing capabilities) as well as a consumer spectral sensing solution which is expected to begin shipments in the second half of the year.

Revenue in the first quarter of 2019 is expected to be down by more than 12% year over year to roughly CHF 320 at the midpoint. Guidance for the upcoming quarter assumes further margin weakness with management expecting adjusted operating margins in the low-single digits due to the continuing weakness in the consumer business as well as ongoing investments in research and development. That said, management expect to be cash flow-positive in the quarter as capital expenditures are expected to decline in the quarter due to planned decline throughout the year.