Apple (AAPL) analysts are basically all in agreement that this quarter and next warrant a downgrade when it comes to iPhone sales. The projected iPhone sales slowdown ahead of the iPhone 5 release was mentioned three more times this week, and analysts continue to cite the supply chain as evidence for their conclusions. After reading a number of pessimistic iPhone reports, I think it's time to introduce six mandatory variables for analysts to consider before they release misleading information to the public. Focusing on one sliver of the story while dismissing the rest is irresponsible. It's time to ban alleged Chinese supply chain insight from iPhone forecasts. It was misleading last quarter, the quarter before that, and the quarter before that. The following list contains six mandatory variables that analysts must consider before coming up with an iPhone forecast:
1. Enterprise transition: Since late 2009, Research in Motion (RIMM) has been selling over 10 million smartphones per quarter and, according to IDC, still claimed 10.4% global market share in 2011. In its recent earnings report, released on June 28, RIMM announced that revenue fell 42.7% on sales of 7.8 million Blackberries. Enterprise IT departments are facing critical decisions regarding their reliance on RIMM as a vendor. The exodus away from the Blackberry benefits Apple in a major way. With RIMM facing an uncertain future of job cuts, management changes and new product delays, there is no good reason for businesses to renew. We expect Apple's June quarter will show significant strength in enterprise adoption for both the iPhone and the iPad.
Need more evidence? How about this? On the last earnings call, CFO Peter Oppenheimer said:
iPhone momentum in the enterprise has evolved beyond email, calendar and contacts. IT and business line managers across industries see the opportunity to leverage both company and employee-owned devices to improve productivity and efficiencies through iOS in-house app development. In fact, the majority of the Fortune 500 companies who have approved iPhone on their networks are members of the iOS Developer Enterprise Program and are actively deploying in-house applications to their employee base.
Apple's enterprise growth at the expense of RIMM and other competitors should help to shield the company from unit weakness ahead of the iPhone 5 launch. At a time when consumers might be strapped for cash in this slow growth economy, enterprise is flush with cash to pick up the slack. Last quarter, the big surprise was China; this quarter, it's set to be enterprise.
2. Growth in China: Needham & Company's Charlie Wolf released a report on the smartphone industry and identified the emergence of China as the leading smartphone market in the world as the quarter's big news. In the June quarter, smartphone sales grew 164% to 33.1 million in China, overtaking the U.S., with 25 million units sold. Among all mobile operating systems, Apple jumped from 9.9% market share to 17.3% year over year, with the majority of the jump being attributed to the iPhone 4S that went on sale with China Unicom in January and China Telecom on March 9. The June quarter was the first full quarter of availability through Telecom.
3. Replacement cycle: The sequence of iPhone sales from the past 12 quarters is as follows: 35.1 million, 37.04 million, 17.07 million, 20.34 million, 18.65 million, 16.24 million, 14.1 million, 8.4 million, 8.75 million, 8.7 million, 7.4 million, and 5.2 million. Assuming that most iPhones sold prior to three years ago have already upgraded, that leaves approximately 52.5 million iPhones in the 18-month to 3-year-old range. Analyst Bill Choi calculates the installed user base to include 70 million subscribers with iPhones over one year; he estimates that 30% of quarterly iPhone sell through is due to upgrade purchases. The relatively short cycle of a phone as compared to a computer forever changed Apple's business model, and provides a high degree of quarter to quarter consistency. Phones crack, they suffer water damage, they get lost, and they fall victim to wear and tear. According to data from Consumer Intelligence Research Partners, we know that 94% of Verizon and AT&T iPhone users were retained. If that number is consistent throughout the world, then the iPhone replacement cycle is another variable that will help Apple stem the tide of unit weakness ahead of the iPhone 5 launch.
4. New users: As analysts banged the drum on iPhone weakness, Apple's iOS hit an all time high in June, according to analytics firm Net Applications. Apple was the biggest winner in June by a large margin. The company grew its market share to 65.27%, up from 62.65% in May. Android remained flat in June at 19% market share, and the Blackberry platform tanked to 1.87%. This data also includes tablets, which explains why Blackberry's market share is so low. Nevertheless, it showcases Apple's continued momentum in gaining new users. Canaccord Genuity analyst Michael Walkley told AppleInsider that he performed channel checks with Verizon, and found that the iPhone was still the best selling smartphone on the network. He also reported that the iPhone was the bestselling smartphone on all of the big US carriers who offered the iPhone in Q2. Figuring a sequential decline of 7-8 million iPhone units -- as most analysts are forecasting -- is difficult to grasp when the iPhone remains such a big hit.
5. Impact of staggered global launches: Q2 is not the final quarter of the iPhone 4S cycle. During the current quarter, the 4S had been available for 6-9 months. It is being compared year over year to the iPhone 4, which had been available for 9-12 months (in the U.S.). Apple has changed the game by staggering the timing of iPhone global launches. When the iPhone is in its 3rd quarter of availability in the U.S., it is only in its first or second quarter in other regions of the world.
6. Brazil: The city of Jundiai in Brazil has changed the name of one of its streets to "Avenida Steve Jobs." It is not far from the Foxconn factory believed to produce both iPhones and iPads. Analysts who have a supposed edge because they have access to Chinese manufacturing data now need to keep a finger on Brazil's pulse as well if they hope to accurately extrapolate supply chain data into actual sales projections. Secret supply chain data is protected, and I have no idea why the SEC permits Apple analysts to continue to use it. Apple has strict confidentiality agreements with manufacturers, and anyone who trades on that information should be guilty of insider trading.
In conclusion, the iPhone doesn't have a problem, but the analysts do. I have no issue with negative analysis, as long as it can be proven. Seeing the same anonymous supply chain game play itself out quarter after quarter should be beneath many of the firms who put out this kind of headline-grabbing garbage. If you have some data related to enterprise adoption, Chinese growth, the replacement cycle, new users, staggered global launches, or Brazil, then let the Apple community know about it. If all you've got is a hunch that iPhone sales are slowing down before the iPhone 5 launch, then please keep it to yourself. And please stop masking that hunch with anonymous supply chain sources. According to historical precedent and the data we have discussed with respect to these six variables, the iPhone is once again on the verge of making the professional analysts look like they're out of touch with reality.
Disclosure: I am long AAPL.