In what seems like yet another boost to Apple (AAPL), Verizon (VZ) followed AT&T (T) in touting its record holiday quarter smartphone sales, which was driven by a higher mix of iPhones. The largest wireless carrier in the U.S. announced Wednesday that it had activated 9.8 million smartphones during Q4 2012, which not only helped it record 27% growth over the year-ago quarter but also closed the gap with AT&T.
AT&T had earlier announced 10 million smartphone activations for the same quarter – a mere growth of 6% over Q4 2011. While Verizon’s superior LTE coverage may have helped it narrow the smartphone gap with AT&T last quarter by shifting the iPhone mix towards itself, the introduction of the high-speed technology in the iPhone 5 means that Apple will have had a yet another blockbuster Q4 nevertheless. This will be driven by sales not only in the U.S. but also international markets seeing as this iPhone rollout was the fastest ever in Apple’s history.
iPhone sales estimate
If we look at Verizon’s smartphone sales over the past year, we see that the iPhone accounts for an average of 50% of its total activations every quarter with the December quarter seeing a spike to 56%. Further, Verizon has accounted for 12%, 9%, 10%, and 12% of Apple’s iPhone shipments over the last four quarters. Considering that the iPhone 5 launch is a broader roll-out than the 4S, Verizon’s contribution to iPhone sales may be lower this time but this may have been offset by the fact that LTE may have caused a shift in iPhone mix toward Verizon. We therefore take the middle path and assume that Verizon’s contribution to Apple’s total iPhone sales is around 11%. In sum, assuming that Verizon accounted for 11% of total iPhone sales and that 56% of the 9.8 million smartphones sold by Verizon last quarter were iPhones, we see that Apple will have sold about 50 million iPhones in Q4 – exceeding our estimates for the quarter (by about 12%).
This still leaves a significant scope for upside if Verizon’s contribution to iPhone sales turns out to be lower than 11% due to the fast iPhone 5 rollout. For example, Apple’s holiday quarter sales in 2012 will include those in China as against the iPhone 4S rollout when China received the iPhone after December. Also, since Verizon specifically said that its smartphone sales were driven by a higher mix of iPhones, Verizon’s iPhone mix may have been higher than the 56% we have used in our assumption above.
Earlier, we had made similar estimates taking AT&T’s Q4 guidance for smartphone sales and arrived at a 47 million estimate for iPhone sales in Q4 2012. (see AT&T’s Smartphone Sales Point To A Strong Holiday Quarter For Apple.)
Apple will look to China to support growth
The 47-50 million sales estimate that we arrived at is still only about 30% ahead of iPhone sales in the holiday quarter last year. In the first four years after the iPhone was introduced in 2007, Apple had recorded close to a 90% growth rate in iPhone unit sales every year.
With the smartphone market in developed regions such as the U.S. saturating (U.S. smartphone sales grew y-o-y by just 9% in Q2), Apple will be looking to tap the fast-growing emerging markets such as China to grow at close to historical rates. China, despite being only in the early stages of smartphone adoption, has already pulled ahead of the U.S. as the world’s largest smartphone market by volume. This is an incredible statistic given that 3G penetration in China stands at only about 20% currently. Considering the huge 2G subscriber base that the Chinese carriers are looking to upgrade to 3G, the potential for Apple to ride the boom is huge.
Apple’s revenues from greater China, which includes mainland China, Hong Kong and Taiwan, grew 26% year-over-year in Q3 and accounted for 15% of Apple’s revenues for the fiscal year.
As the country grows and the average Chinese buyer sees an increase in buying power, we expect to see a growing shift in demand from 2G to 3G smartphones. The iPhone can help Apple tap this phenomenal growth in demand. Currently, the iPhone is available on only China Unicom and China Telecom, the smaller two of the only three Chinese wireless carriers. A deal with the third carrier, China Mobile, which is not only the biggest carrier in China but also globally with more than 700 million subscribers, could almost double Apple’s addressable market in China. But it seems Apple might have to foot part of the subsidy bill and take a hit on margins for such a contract to happen. (see Apple Faces China Mobile-Sized Stumbling Block Limiting China Upside Potential). Considering the huge market potential of a China Mobile deal, this might be a compromise that Apple will eventually make - an event that could be the next big trigger for its stock.
Disclosure: No positions.