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Apple Takes Over Part of Dialog Semiconductor in $600 Million Deal

For much of the last decade, Apple has been consolidating its control over the chips embedded in its products to support graphics, machine learning and other tasks. Inside some of its latest iPhones is another custom chip, a new main power management IC (PMIC) that Apple designed to prolong battery life. Dialog Semiconductor had until recently been selling Apple that part.

The importance of this tiny component came through on Thursday. As part of a $600 million deal, Dialog said it would license the main PMIC technology it developed for the iPhone and transfer around 300 chip engineers to Apple. The company said that the deal allowed it to continue selling main PMICs to other customers and in other markets like the Internet of Things.

Apple is technically paying $300 million in the transaction, which includes patents and licenses from Dialog. The other $300 million is a prepayment for other products to be shipped to Apple within the next three years. Most of the 300 employees being transferred in the deal—which account for around 16 percent of Dialog's total workforce—were already working on chips specifically for Apple products.

On Thursday, Dialog also announced that it had signed new contracts with Apple to supply power management, audio subsystem, charging and mixed-signal integrated circuits. The company, whose shares increased 25 percent following the news, said that it would start earning revenue from the new contracts next year. Another part of the deal: Apple will take over four Dialog offices in Italy, Germany and Britain.

The deal not only removes the uncertainty around Dialog’s relationship with Apple. It could also bolster the company’s attempts to reduce its dependence on Apple. That means expanding its presence in markets like the Internet of Things, which includes smart home appliances and smart watches. The company expects its advanced mixed-signal, connectivity, automotive and industrial businesses to grow between 10 and 15 percent from 2018 to 2022.

“We believe that this transaction is in the best interests of our employees and shareholders who will benefit from a business with enhanced focus, strong growth prospects and additional financial flexibility to invest in strategic growth initiatives,” said Jalal Bagherli, the company’s chief executive officer, in a statement. “Going forward, we will have a clear strategic focus,” he added.

Supplying chips for hundreds of millions of iPhones and other Apple products every year can fundamentally change a company’s fortunes. But the sudden loss of that business can have catastrophic results. Over the last decade, Apple has been ramping up the development of custom chips for tasks like image processing and machine learning. The company introduced its first ARM-based SoC for the iPhone and iPad in 2010.

The potential dangers were underlined when Imagination Technologies announced last year that Apple would remove its graphics processing units (GPUs) from the iPhone’s core chipset for the first time in a decade. Apple developed a homegrown GPU architecture in its place to improve realism of reflected light and other graphics. The move eliminated a significant amount of Imagination’s business, which has been split up and sold off.

Apple deployed the same strategy with Dialog, which will continue selling main power management products to the Cupertino, California-based company before they are gradually scooped out of the iPhone and Apple's other hardware starting in 2019. Bagherli said that the company would continue supplying Apple with current and future generations of another power management chip, the sub-PMIC. 

Before Thursday’s announcement, Dialog's market value had been cleaved in half over the last year amid warnings that Apple would develop custom power management chips. For much of the last year, Bagherli has struggled to tamp down concerns about its business. In June, the company acknowledged that Apple was adding another source for its PMIC components. That caused Dialog to lower its projected 2018 sales by around five percent.

“Dialog has deep expertise in chip development, and we are thrilled to have this talented group of engineers who’ve long supported our products now working directly for Apple,” said Johny Srouji, Apple’s senior vice president of hardware technologies and head of its semiconductor division. “Our relationship with Dialog goes all the way back to the early iPhones, and we look forward to continuing this long-standing relationship with them.”

Dialog said that the deal would not reduce this year’s revenue. But the company will not take home any revenue from the main PMIC components inside the 2019 iPhone or the 2020 iPad and Apple Watch. Revenue from the licensing deal with Apple is estimated to be $875 million in 2018. But it will decline in the second half of next year, phasing out by 2022. The deal is expected to close in the first half of 2019.

Following the deal, the company’s headcount will decline to around 1,800. Its sub-PMIC business with Apple, on target for $150 million before the end of the year, is projected to increase to around $450 million by 2022. Dialog expects Apple to account for between 35 and 40 percent of its 2022 revenues, down from an estimated 75 percent this year, the company said.

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