When It Comes To iPhone 6 Think About The Ecosystem

Aug.11.14 | About: Apple Inc. (AAPL)


Apple iPhone 6 launch event anticipated to be on September 9th.

The iPhone 6 won't offer revolutionary features, but it will still be best in class.

The iPhone 6 will convert more users to the Apple ecosystem and through incremental sales in other product categories Apple's growth trajectory will be maintained.

I guess I'll chip in a bit of my opinion with regard to the iPhone 6 launch event that's unconfirmed, but is rumored to be on September 9th.

Apple (NASDAQ:AAPL) is known to release its "new product" a week or so after, and like usual, we're kind of hoping for a wow factor to keep the hipster crowd on board, and hopefully an even simpler user interface to appeal to the older demographic.

The iPhone 6 preview (that we can all agree on):

  • The iPhone 6 will come with a bigger screen.
  • The iPhone 6 will have sapphire on some SKUs.
  • The iPhone 6 will come with a higher resolution display, maybe 4K.
  • The iPhone 6 will have improved internal components (CPU, RAM, graphics), but to what extent is up for debate.
  • The iPhone 6 will have iOS 8.
  • The iPhone 6 will be thinner and lighter.
  • The iPhone 6 will have a longer battery life.
  • The iPhone 6 will have two different versions, but the release date for the bigger iPhone may be different.
  • The iPhone 6 may have additional sensors (hopefully the functionality of that new sensor isn't as clunky as the Galaxy S5's heart beat sensor).

Ecosystem impact of the iPhone 6

So I'm not going to blow a trumpet, and say, yeah Apple's next iteration of the iPhone is revolutionary. Because chances are, it won't be. However, it will be better than what competitors are able to offer, due to the ecosystem effect Apple has, paired with the iconic branding, plus superior back-end customer support.

On the surface these things may not matter much. But the incremental pricing that Apple demands when compared to other competitors isn't that bad, especially if you're buying the iPhone on contract.

If a customer had to make a choice at $200, assuming all things equal, they'd go with the higher tier brand that's also known to have phenomenal customer service along with superior software functionality.

So if we lower our expectations on iPhone sales, and focus more on how the iPhone could become a stepping stone into Apple's ecosystem, the real incremental impact from each additional iPhone may translate into future iMac, iPad and iWatch sales. On a consolidated basis, the iPhone is the bulk of Apple's revenue, but if Apple is able to boost demand from pre-existing product categories, growth may not be limited to an iPhone refresh, as we can include the uptick in demand for the MacBook, iMac, iPad, iWatch, iTunes and app store.

In a recent Apple presentation at WWDC, Tim Cook mentioned that the Mac installed base grew by 100% in the past five years, totaling 72 million. In comparison the broader PC market only grew by 18%.

In the most recent quarter Mac sales grew by 16% year-over-year, whereas iPhone unit sales have grown by 13% year-over-year. The PC market from purely a unit context is smaller than the smartphone market, but it still carries hefty profit margins, and assuming this product category can continue to grow at mid-teen rates, Apple may be able to accelerate top-line growth from its fiscal year 2014 results.

However, ignoring the impact from Mac, I still believe that the iPhone will add incrementally to Apple's top-line performance. However, there have been some issues with sourcing sapphire, and it's not clear how long it will take for Apple to release the larger variation of the iPhone 6 (I will have a more in-depth article released on this topic this week).

In a previous estimate, working with Gartner shipment figures between iOS/Mac, I multiplied projected ASP with projected shipment figures, and estimated that revenue would reach $223.11 billion for Calendar Year 2015. However, in light of recent developments, I think there's the distinct possibility that both Mac and iPhone/iPad demand will exceed the 324.5 million forecasted for calendar year 2015.

However, there are factors working against/in favor of my forecast.

On one hand, the phablet may not come until the very end of 2014, or even Q1 2015 as GT Advanced Technologies (GTAT) may need to ramp up its production facilities even further, and the lack of flexibility in the supply chain could ultimately lead to a situation of shortages in the mid-stages of the iPhone 6 sales ramp. However, even if that were the case, Apple is releasing a new product category that will add incrementally to top line results, and PC refresh is still impacting Mac performance. Apple is gaining market share among PC vendors, which is why it seems that a combination of organic growth paired with market share gains will translate into Macintosh/Macbook outperformance in the coming quarter, which may be offset by supply chain difficulties with the iPhone 6 phablet variation. However the impact from new product categories and the obvious up-tick in demand from an iPad refresh may result in the 324.5 million shipment figure across Apple's ecosystem.

So in light of this, until I see guidance figures from Apple I'm not completely convinced that FY Q1 2015 results will blow it out of the park. However, assuming Apple is able to clear a pathway in which it can sell the iPhone 6 in ample quantities without any disruptions to the supply chain, there's no doubt in my mind that year-over-year revenue growth between FY 2014 and 2015 could reach 20-25%.

Bottom line

The iPhone will be a sneak peek into everything else Apple offers, and assuming consumers like the idea of accessing all their apps via the cloud, from all their devices, they'll continue to migrate their hardware purchases to other Apple products.

I think that Apple will grow revenue significantly assuming concerns over sapphire can be addressed in a reasonable period of time (I will offer a more in-depth discussion on sapphire in a future article). I also believe that new product categories paired with an up-tick in demand for the Mac will result in a stellar 2015 fiscal year.

At this point I definitely think the risk to reward favors Apple investors, and so as long as expectations are reasonable going into this event, none will be left disappointed.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.