Apple Hits Lowest Level Since June; New iPhone Worries 13 comments
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Apple (AAPL) shares are down sharply to their lowest level since June, as several analyst reports have triggered fresh concerns about the state of demand for iPhones and iPods.
Toni Sacconaghi, an analyst at Bernstein Research, has published the transcript of a recent conference call he held with
investors on the subject of unlocked iPhones, what they mean to Apple,
and what options the company has to deal with them. In a summary of the
call, he contends that, while the iPhone has the potential to drive
material earnings growth for Apple, the company faces two “significant
challenges”: demand appears to be falling short of expectations, and
the incidence of unlocking is much higher than expected.
Sacconaghi estimates that the iPhone will be 6% of Apple’s revenues in FY ‘08, but could be nearly a quarter of the total by FY 2012, driving half of the company’s revenue growth over the next four years; and he notes that since the iPhone has a higher gross margin than other Apple products, it could drive 70%-80% of the company’s profit growth.
Sacconaghi says that weekly run-rate sales in the December quarter were about 180,000 units, or less than 10 million on an annualized basis in the busiest quarter of the year for consumer electronics sales. That leads him to conclude that the goal of selling 10 million units in 2008 is optimistic, “particularly if Apple insists on carrier revenue-sharing, without significant price cuts or new model introductions.” He says European sales of the iPhone have been “particularly disappointing,” falling short of carriers’ initial expectations. Sacconaghi is projecting 1.45 million units in the December quarter, 6.9 million for the September 2008 fiscal year and 7.9 million for calendar 2008.
Sacconaghi, who kicked off the “missing iPhones” debate in January, pointing out the wide gap between the number of iPhones Apple has sold and the number of iPhone customers AT&T (T) as the exclusive U.S. carrier has signed up, repeats his previous estimate that 25%-30% of iPhones sold to date have been unlocked for use with carriers other than the one authorized by Apple. He notes that, if Apple sold 10 million iPhones this year but 30% were unlicked, the company would be losing out on $1.1 billion-$1.3 billion of revenue and 80-85 cents a share in EPS over the following two years. He also notes, not for the first time, that the unlocked phones pose a strategic issue, limiting the company’s ability to provide a truly exclusive relationship to carriers, and so reducing their willingness to kick back some subscriber revenue to Apple in return for an exclusive deal.
A few more tidbits.
J.P. Morgan’s Bill Shope on Friday wrote that “with relatively slow unit growth in the holiday season” and the recent price cut for the iPod Shuffle, “signs point to iPod saturation and some macro sensitivity.” He says the Shuffle price cut “is likely intended to boost Shuffle momentum and iPod units overall.” In a separate note, Shope also says that Apple “still seems comfortable with Mac momentum, which remains the critical component of the story at these levels.” He says that Apple execs in a recent meeting would not comment on iPod and iPhone demand concerns, but did say that Mac product family is better positioned than in the last economic downturn.
Morgan Stanley noted Friday that MacBook distributor inventories are “near all-time lows” for the third straight week, but that iMac units are above historical average levels. The iPod Touch, they say, is selling well, with low channel inventory, while Shuffle inventory, which had accumulated in recent months, is down sharply ahead of the arrival of recently unveiled 2GB model.
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Your article has a glaring error with one of the figures. Where you say that Toni project 1.45 million units in the December quarter, it is then accompanied by more sales figures that are of a different type. The 1.45 million units in the December quarter are Toni's projections of the number of UNLOCKED iPhones sold in that quarter...not the total sales of iPhones (which we know were well over 2 million). The 6.9 million and 7.9 million units referred to in the same sentence are for Toni's projected sales of ALL iPhones for their respective periods, including both locked and unlocked iPhones. Your sentence here thus must be read incorrectly in either one of two ways. Either all three sales figures are for unlocked iPhones alone (which would not make sense as that would mean sales of over 26million iPhones in 2008), or all three figures are for total iPhone sales (which would be incorrect as the first figure is a known figure, not a projection which was about 1 million more than 1.45 million).
It's rather interesting and unfortunate that while we have no idea given to us here exactly how much Toni S. expects Apple revs to be during this time frame, we are given some projected and specific amount that he expects Apple will lose due to unlocked iPhones. So...what's his bottom line for revs then given his figures? Is this lower than some figure he's given before? What figures? Published where and when? I haven't seen any...has he been forthright in giving them? I don't know. Please clarify this. He uses a generous carrier deal rev of $18.05 per month per iPhone. Where's the enthusiasm for billions of dollars in carrier revs for these 70% locked phones...let alone the sales of these phones which represent billions more?
I can't help but notice that Toni Sacconaghi works for a rather large investment group with about $800 billion dollars in investment assets. Interesting that this same group lost $6 billion in December 2007 and over $49 billion in January 2008. I don't suppose he has any communication with those investment brokers and hedge funds that are owned by his employer concerning AAPL? Just a curious thing. No disclosure given in your article so I don't see why we need to make any particular assumptions or conclusions here, although I've made mine.
So, how does Toni go from an avg of 1.55M per quarter through September 2008 but also with an avg of 1.975M for those three quarters plus the following quarter (Dec. 2008; fy 09 q1) combined? The final quarter would have to see sales of 3.25M units in order to reach his projection (1.55+1.55+1.55+3.25=7... Obviously, that last quarter is always a good quarter for Apple products, iPhone included. But this would mean that Apple would sell double the iPhone units in that one quarter over all other quarters in the calendar year. Is that realistic?
His assertions/projections make no sense. Apple projects 10M iPhones sold in cy 2008 and they've affirmed in the last cc that reaching this goal is not outside of their expectations. Toni S. says that not only is Apple wrong or lying about it (it has to be one or the other), the rate of iPhone sales will be absolutely horrible for 3/4 of cy 2008 and then make an incredible rebound in the final cy quarter, more than doubling it's sales rate from any of the other 3 quarters and smash through their previous best quarter by over 1 million units.
It appears that the iPhone will be a huge seller from what Toni S. projects. Yet, the premise of this article is that Toni S. claims that the carrier deals will lead to slow sales and an inability by Apple to meet their 10M cy2008 sales goal. He claims that "demand is falling" for the iPhone. 3.3M units sold in one quarter is to be described as "falling demand." Who are you kidding?!?
If you wanted to make this stuff up, you could do a better job than this. If that's not the point, I suggest that someone needs to find a job they're better at. This is horrible reporting and horrible work by a covering analyst.
if we assume Toni's figures are correct (debatable), there are a number of interesting conclusions. his fiscal year 6.9M projection by $400 (conservative since the iPhone is now $399 and $499) comes to revs of $2.76 Billion...if that' 6% of Apple fy2008 revs...we're looking at $46Billion in revs for 2008 which is $10B higher than analyst average and this doesn't include his 70% locked into carrier revs at his own figure of $18.05 mo...which if you avg this down at a median month per quarter declining through the fy...add another $605M in revs (which should be included) and add that to the iPhone revs from unit sales and the iPhone revs then become $3.365B for fy2008 which if is 6% of Apple revs for fy2008...we get $56B in revs...a full $20B over analyst average. Wow! Thanks Toni for figuring this out! These are incredible projections!