Source: Apple.
September very well could be the most important month of the year for technology giant Apple (AAPL -2.41%). In the coming weeks -- I'm betting September 8 -- Apple will almost assuredly unveil its next-generation smartphone – the iPhone 6s.
As the successor to the new, larger-screened design of the iPhone 6 and 6 Plus, the iPhone 6s will likely utilize the same form factor. However, as has been the case in past even fiscal-year iPhones, Apple will likely include at least one flagship new feature to hopefully differentiate this year's iPhone from the last. And if reports prove correct, Apple's business could create meaningful benefits and challenges for the company behind this year's marquee feature.
Apple to boost Analog Devices
During the past few months, rumors abounded that Apple plans to make its Force Touch technology the flagship feature in this year's lineup of iPhones and iPads, and one company stands to benefit more than any other from Apple's product decision -- Analog Devices (ADI -3.66%). For those unfamiliar with it, Analog Devices supplies the touchscreen controller that powers Apple's Force Touch in the Apple Watch.
Early Watch shipments have proven impressive, but given their limited volumes on an absolute scale, the Watch alone lacks the punch to drive substantial growth at Analog Devices. However, the possibility of placing potentially hundreds of millions of its touchscreen controllers into this year's iPhones, iPads, and even Macs possibly could provide a meaningful lift to Analog Device's relatively minute sales base.
Source: Analog Devices
In its recent earnings report, Analog Device's guidance came in well above what analysts expected, helping further solidify analysts' confidence that the company's status as Apple component supplier du jour will help lift its business. In fact, one sell-side analyst believes Force Touch component shipments will add as much as half a billion dollars in fresh sales to Analog Devices' coming fiscal year.
This prediction assumes Force Touch only appears in the iPhone 6s and the iPad Pro, so the actual financial impact could swing in either direction depending on the actual number of Apple products that receive Force Touch functionality this year. And as exciting as that sounds for a company with a sales base of $3.2 billion during the last 12 months, the history of Apple's component suppliers is littered with cautionary tales, as well.
A dangerous dance
With its vast financial resources and truly massive shipment volumes, winning Apple's business presents a mouth-watering growth opportunity for executives at component specialists like Analog Devices. However, as the company with much of the leverage, Apple has a well-documented history of leveraging its advantages in order to secure the best pricing possible and, when possible, to thwart its competitors from pushing copycat features into their devices, as well.
Such is the genius of Apple's supply chain, where much of its cost and inventory excellence often goes attributed to now-CEO Tim Cook. However, while such arrangements typically benefit Apple in a number of ways, Apple's stringent supplier deals also tend to create supplier arrangements that can border on one-sided and damage a company's long-term business model.
Placement wins in Apple devices drove significant top-line growth for companies like OmniVision Technology and Cirrus Logic. However, with Apple demanding steep pricing concessions, both names saw their margin structure implode as that top-line growth failed to manifest itself in terms of meaningful new profits for either company. Worse yet, the onerous terms Apple placed on its would-be sapphire supplier, the now defunct GT Advanced Technologies, at least contributed to its decision to file for bankruptcy late last year.
Apple offers tremendous growth potential to Analog Devices and its shareholders, but investors in the touchscreen controller supplier must also understand that doing business with Apple can often prove less than its cracked up to be.
