Sunday, September 29, 2013

Apple's iPhone Paradox

On Monday, September 23rd, Apple announced the company had sold more than nine million 5c and 5s handsets in the first weekend of sales. The surprisingly high unit sales number for Apple's newest iPhone handsets caused analysts to rewrite and reconsider their narratives on Apple's prospects for early success.  Speculation turned to talk of high channel supply of the iPhone 5c as the source of the expectedly high unit sales number. Analysts had previously cautioned Apple's apparent unwillingness to release a lower-cost handset for emerging markets would dampen the sales growth potential of the new models. 

Confusing matters even more, on September 23rd Apple filed a Form 8-K reiterating revenue and gross margin guidance for the September quarter and indicating revenue would be near the top end of the revenue guidance range of $34 billion to $37 billion and gross margin would be near the top end of the guidance range of 36% to 37%.

The Issue of iPhone Channel Supply
Apple ended the June quarter with about 11 million iPhone handsets in the global channel while also reporting an increase in component supplies. In the June quarter iPhone sell-through was greater than reported unit sales because Apple reduced channel supply in the quarter from about 11.6 million units at the end of the March quarter. In other words, more iPhones were sold to end users in the June quarter than Apple reported as unit sales. 

In the September quarter one year ago, Apple reported ending channel supply of 9.1 million units. At the time, iPhone 5 supplies were constrained and ending channel supply was below the desired range of 4 to 6 weeks of supply on a look-forward basis. 

Because Apple chose to replace the iPhone 5 after its one year in the market with two new models, the global channel could absorb as many of the new handsets as Apple could deliver. There's no issue with high iPhone 5c handsets shipments. Apple has always reported as units sold shipments to resellers when ownership of the devices change hands, not when those handsets are sold by resellers to consumers. Additionally, the iPhone 5c is sold in five different colors. This necessitates more product in the market as sales begin.

Apple's iPhone Paradox
Selling more than nine million new handsets while reiterating September quarter revenue guidance with millions of 5c handsets awaiting sales to customers might create an apparent paradox. But there's no mystery or conflict in the numbers. Apple's decision to focus its new handset efforts on the top tiers of the smartphone market and forego an aggressive effort to gain market share in emerging markets at this time is in line with Apple's approach to the company's primary product markets.

The graph below illustrates Apple's revenue mix over the first three quarters of FY2013:

iPhone revenue represented 53.8% of the company's reported revenue total over this 39-week period that ended in late June. In FY2012, iPhone revenue represented 50.3% of the company's reported revenue total. In the first three quarters of the fiscal year, iPhone revenue rose15.7% versus 10.7% revenue growth for the company as a whole. In FY2013 which ended on September 28th, revenue from iPhone sales may have reached 55% or more of Apple's revenue total. The iPhone remains Apple's principal revenue and operating income driver. Emerging markets can wait for now as Apple seeks gross margin recovery and a return to net income growth.