LG Innotek, the representative parts company of LG Group, was caught up in chronic Apple risks, recording an earnings shock that fell significantly short of market expectations in the second quarter of this year. Reports indicate that the camera module business, which is LG Innotek's core, is facing a triple whammy of weak demand from its largest client, Apple, intensified competition, and the strong won.
LG Innotek announced on the 23rd that it recorded sales of 3.9346 trillion won and an operating profit of 11.4 billion won in the second quarter. Compared to the same period last year, sales fell by approximately 13.6%, while operating profit plummeted by about 92.5%. This performance significantly missed the already lowered market consensus of 3.8183 trillion won in sales and 42.1 billion won in operating profit. A representative from LG Innotek noted, "External factors, such as unfavorable exchange rates and tariff risks related to the U.S., along with first-quarter pull-in demand, impacted the results."
The significant deterioration in profitability is attributed to the sluggishness of the camera module business, which accounts for more than 80% of LG Innotek's total revenue. The recent slowdown in demand for iPhones from its main customer, Apple, coupled with intensified competition from other parts manufacturers in China, has greatly impacted the situation. The sales of the optical solutions division, responsible for camera modules, were only 3.0527 trillion won, down 17.1% from the same period last year. LG Innotek did not disclose the operating profit of the optical solutions division, but it is reported in the securities industry that this division recorded a quarterly loss for the first time in two years.
The substrate materials division recorded sales of 416.2 billion won, a 10% increase compared to the same period last year. Increased demand for semiconductor substrates centered on RF-SiP (Radio Frequency System in Package) drove the sales. The automotive components division, which is seen as a future growth area, had sales of 465.7 billion won, down 6.2% compared to the same period last year. While revenue growth is limited due to the slowdown in growth of upstream industries such as electric vehicles, profitability improved as sales and proportions of high-value products such as vehicle communication and lighting modules increased.
Given that LG Innotek relies largely on exports, exchange rates have also become a key variable in its business structure. In the second quarter, as the won-dollar exchange rate continuously decreased, the structure of purchasing raw materials in dollars and supplying finished goods later inevitably resulted in foreign exchange losses. Analysts in the securities industry suggest that LG Innotek's quarterly operating profit fluctuates by around 10 billion to 12 billion won, depending on won-dollar exchange rate changes.
In the second half of the year, the performance is expected to improve somewhat due to the launch of new iPhone models, but forecasts suggest that a full-fledged rebound may be difficult. The forecast for iPhone shipments this year has been adjusted downward from the initial estimate of 240 million units to around 220 million units due to unstable macroeconomic conditions and uncertainties related to tariffs. It is also noted that the expectation of limited changes in camera specifications for upcoming new products in the second half diminishes the optimism for performance improvement.
However, a representative from LG Innotek stated, "In the second half, the mass production of key customer new models will be fully underway, and demand for communication semiconductors such as RF-SiP, along with camera modules, is expected to increase. Additionally, sales realization of high-value automotive components that were previously ordered, such as vehicle communication and lighting, is anticipated."
Industry analysts predict that LG Innotek's performance will hit a low this year and improve from next year. With Apple planning to launch its first foldable smartphone next year and significant upgrades to camera performance expected, industry experts believe that LG Innotek's profitability will rise as well. Kim Jong-bae, a researcher at Hyundai Motor Securities, said, "The average selling price of camera modules expected to be released next year is projected to increase," adding that developments in humanoid technologies and autonomous driving are also seen as long-term momentum to improve LG Innotek's profitability.
LG Innotek reported that it is accelerating the enhancement of its portfolio to secure improved profitability and long-term growth momentum. The company continues to invest in semiconductor parts such as FC-BGA (flip chip ball grid array) and automotive application processor modules, as well as mobility components for sensing, communication, and lighting. A representative from LG Innotek stated, "From the second half of the year, with the completion of new plant expansions in Vietnam and Mexico, we will accelerate strategic global production operations while enhancing cost competitiveness through the expanded introduction of AX (AI transformation)."