Apple's 3G iPhone: Q4 Sales Estimates Are Encouraging

Apple Inc. (AAPL) $152.65 - Apple introduced the new 3G iPhone model on July 11th, and sales thus far look to be impressive. Using the OS market share data from Net Applications and the IMEI tracking data from the Mac Observer’s Apple Finance Board, iPhone sales appear to have approached 6 million units since launch.

By the end of this quarter [Q4], I predict iPhone sales will reach 7-8 million. Most estimates on the Street are calling for unit sales to come in under 5 million units. Perhaps the most important aspect is the effect on cash earnings. Since Apple spreads iPhone revenue over 8 quarters, reported EPS will see little effect. However, cash earnings should increase more than $2.00.

SUMMARY:

I estimate Apple has sold roughly 6 million 3G iPhones with 3 weeks still left in the quarter. Q4 sales could hit 7 million, or more, with the aid of a couple factors.

1) July 11th, Apple introduced new model at 189 Apple stores and 2,000+ AT&T (T) locations in the US, and internationally in more than 20 countries.

2) August 22nd, another twenty-plus countries launched.

3) September 9th, iPhone went on sale at Nearly 1,000 BestBuy (BBY) stores.

Supply dried up at all points of sale after the first weekend. Apple stores received the bulk of new shipments as AT&T and foreign providers were strained for several weeks. About mid-August, the production ramp and demand levels showed signs of equalizing. It wasn’t until late August that AT&T stores began to have on-hand inventory since running out on the initial launch.

Apple records iPhone sales when shipped to carriers opposed to Apple retail stores, which are recorded when sold to the end-user. As demand is starting to normalize along with Apple’s retail store inventory stabilizing, focus will shift to supplying the channel. This comprises of AT&T stores, foreign carriers from both the July and August launches, and BestBuy. With 6 million likely sold thus far, sales should surpass 7 million by the end of the quarter from replenishing the channel and consumer sales.

NET APPLICATIONS OS MARKET SHARE MODEL:

Net Applications estimates OS market share from internet usage data. Since the 2G iPhone supply dried up in May and June, the installed base essentially remained static at 6.12 million units during that time. As measured by Net Applications, iPhone OS share remained steady at around 16.5 bps for those two months. That equates to roughly 370 units per basis point of market share. Using the share data since the 3G launch, unit sales of the new iPhone model can be estimated.

There appears to be some aberrations in the Net Application survey data as the huge spike in mid-August would suggest. The spike causes the sales estimates to accelerate rapidly and then flatten. If the share data were more normalized, weekly sales estimates would be smoother. Thus, the weekly estimates are volatile, and likely not accurate. Yet, the data probably does give a decent estimation of cumulative sales since the launch.

Here are a several thoughts regarding the spike in web usage seen in the week beginning August 8:

1) Certainly the weekly run rate has slowed, as with any new product launch, but definitely not to the degree that the OS share data depicts. Larger proportion of early sales (1st 30 days) versus late sales (2nd 30-days) whereby internet usage is highest right after purchase and fades. Thus, early iPhone purchases caused pronounced acceleration and when usage faded, late iPhones with heavy usage don’t offset the early decline since it’s a smaller portion.

2) There is cannibalization of 2.5G iPhones from upgrades. Original iPhones that become inactive from new 3G purchases won’t increase market share measurements. Of course, some legacy iPhones are sold or passed on.

3) Up until early August, supply was sporadic at Apple retail outlets, and virtually non-existent at AT&T and international carriers. A good number of orders were placed at AT&T outlets, but customers had to wait for their shipments to arrive. It’s possible than many customers who placed orders in July received them at the beginning of August when supply firmed, leading to higher web usage.

 

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AFB IMEI NUMBER TRACKING MODEL:

Members at the AFB board have been collecting IMEI numbers and recording those in a Google spreadsheet. The theory is that the IMEI numbers follow a consecutive sequence, and tracking them can reveal the number of units produced so far. The highest IMEI number submitted so far points to 5.604 million from an iPhone purchased on August 30. Fortune’s Elmer-DeWitt wrote about this approach on September 1st. This model corroborates the Net Application data and my calculations, suggesting unit sales have approached 6 million.

STREET Q4 ESTIMATES:

These are the latest estimates that I have been able to find, however they may have been revised since.

Piper Jaffray- 4.5M

Credit Suisse- 4.2M

Pacific Crest- 3.5M

Financial Alchemist- 7-8M

CONCLUSION:

Apple’s 3G iPhone appears to be selling ahead of Street estimates which may provide an opportunity for upside surprise when Apple reports Q4 results in October. Even though demand has cooled from launch day, Apple has to supply the channel which suffered an inventory drought for over a month after the 3G model was released. Domestically, iPhone shipments will go to over 2000 AT&T outlets and nearly 1000 BestBuy locations. Abroad, some 50 countries will have their inventories replenished. This should give a boost to iPhone sales as the quarter comes to a close.

Looking at the OS market share data, the focus should be on cumulative units, as opposed to weekly change. I believe that some aberrations in the measurement may have led to that abnormal spike seen at the beginning of August. This causes the subsequent weekly changes to show a pronounced slowdown which is likely exaggerated. We also must remember that some 3G models replace legacy iPhones which will not increase market share numbers, thus won’t account for new 3G unit sales.

The number to watch when Apple reports will be cash flow. The iPhone has the potential to significantly boost cash earnings. I discussed this implication back at the end of July- Apple’s Cash Earnings. On a cash earnings basis, Apple is very cheap at current levels.

Disclosure: None

Comments

[Macbeutling:]

"There is cannibalization of 2.5G iPhones from upgrades. Original iPhones that become inactive from new 3G purchases won’t increase market share measurements. Of course, some legacy iPhones are sold or passed on".

There won't be any cannibalisation-effect... tough everyone who made an upgrade will be able to sell the 2G iPhone for a good price.
I made an upgrade 4 days ago i was able to sell my old one for 330 € altough i purchased it for 399€ 10 months ago.Not bad,uhhh?

2008 Sep 12 04:26 AM

[jhazel:]

The folks over at the MacObserver / Apple Financial Discussion boards have compiled an interesting spreadsheet that is tracking (loosely) iPhone 3G sales based on IMEI and Serial Number data. Estimates have sales coming in around 6 million units as of 8/17 and a quarterly projection that pushes 10 million units.

The spreadsheet: spreadsheets.google.co...

The discussion forum: www.macobserver.com/fo...

2008 Sep 12 04:34 AM

[jmmx:]

It would be nice if we could get a handle on apps/unit.

The 100 M apps sold in 60 days is mind boggling! Of course some are sold to Touch owners, and some to existing owners. But I bet that we could quantify some kind of average apps bought in first 10 days or 30 days after purchase.

2008 Sep 12 04:51 AM

[sleepy:]

The market share figures are just that: share of total browsing, not absolute iPhone browsing level. The spike/volatility in share during August is likely due to a fall in general browsing from PC's during Olympics, vacation time & labor day in favour of watching TV or having fun. Level iPhone browsing and falling general browsing creates a peak in share.

It's almost as though Apple has deliberately issued BBY with demo units from early production runs to conceal the run rate data that IMEI numbers initially revealed. In fact I wouldn't be surprised if Apple obfuscated this IMEI covert information channel in future.

2008 Sep 12 04:53 AM

[michiganjake:]

Nice to see a writer use some data for a change. Great article!

2008 Sep 12 07:07 AM

[mollytjm:]

i agree! intelligent article! the king of prussia apple store is still the busiest retail space in the enormous mall and the at & t store is also busy. apple opens 3 new U.S. stores tomorrow and they remain the most profitable retail space in the country.

so i think with this $ pouring in they will be more aggressive in pricing as time goes on. students now think either a Mac or a Dell...but Dell usually only wins because of pricing. (because people don't realize they need to buy virus protection and they also haven't experienced the pain of poor tech support)

Apple already gives students price breaks, a free printer and often an ipod nano, so even a $100 price reduction might make a huge difference in how many students then buy a Mac. this year will show a huge increase in % of the market.

2008 Sep 12 10:35 AM

[brewer:]

Apple gave iPod touch (or nano--but that is a dumb choice over the touch) to all education buyers this fall. This I believe will make for a jaw dropping number of Macs sold this quarter to go along with all the cash from iPhones. Apple already has about 60% share of all computers costing over $1000, which is a pretty incredible statistic in and of itself.

2008 Sep 12 11:50 AM

[KenC:]

I would think having 1 M iPhones in the channel should help as well. If you think about it, the runrate is about 1M a month, and Apple usually keeps about 4 to 6 weeks of inventory on hand, so that means 1M in the channel, and that's counted as sold.

2008 Sep 12 01:14 PM

[DanDan:]

One note on reported earnings - Apple previously stated that "GAP accounting" used on original iPhone is NOT being used on the iPhone 3G due to the carrier subsidies that Apple has adopted for this model. That means no more rolling 8 quarter reporting on current and future iPhones; all revenue will be reported at the end of the quarter sold. They will, however, continue to report quarterly earnings for 1st gen iPphones for the next 7 quarters (through Jun 2010). This change in revenue reporting should have a material impact on Apple's earnings and seems to have been largely ignored by many on Wall St. and in the press.

2008 Sep 12 01:31 PM

[Turley Muller:]

@ DanDan,

iPhone revenues will continue to be reported over 8 quarters. Apple is not abandoning its subscription accounting. That doesn't have anything to do with carriers, it's the iPhone updates they offer for free over the expected 2 year life which is why revenue is spread over 8 quarters.

The first generation iPhones will still receive revenue sharing from the monthly payments- granted those aren't upgraded.

Look again at the conference calls and 10-Q. Nowhere has Apple said it will start recognizing iPhone revenue at time sold.

2008 Sep 12 01:48 PM

[Ryan Barnes:]

I appreciate the dedication put into this data gathering, but one must pause and realize that there are many other parameters that will determine both 1) AAPL's EPS figure and 2) the market's reaction to those numbers. Even though the current analyst estimates are for lower units than you suggest have been sold, by the time we get close to earnings release most folks will be expecting a beat, and the discussion will turn to "how much to they have to beat by for the stock to pop on earnings, blah, blah..." It's the nature of the beast with these fan-friendly stocks.

Shares currently trade for 29x '08 consensus estimates and over 25x run-rate operating cash flow....This is not a cheap stock. Yes, it's a fantastic company - innovative, rebellious, and the fan base is very loyal (including myself). But investors also need to realize that the U.S. consumer is in big trouble, and I for one wouldn't want to overload on a stock with such a premium valuation, and a discretionary name at that.

2008 Sep 13 01:54 AM

[Billy Staples:]

Anyone have a clue outside the technical arena for a sec...hoe long to hang on. I'm cannibalizing myself trying to hold on the as much of my apple shares as possible and remain somewhat diversified. the calls are killing me

question is...how much longer do you think there is to keep treading water. I mean this daily huge drops have to stop soon, I am already down as others I'm sure, but I hope it doesn't test $122 again

When exactly do they report? Can we stuff some big Macs down Steve Jobs throat. A ccompany loaded with cash, no debt and analysts are worried how skinny he is. Yeah I know the past.

when gang when!!!


Staples aka mr ouch

2008 Sep 14 05:34 AM

[Turley Muller:]

Ryan,

I disagree that this stock trades at a premium. trailing free cash flow is $6.84. For each 1 million iPhone units Apple sell going forward, $0.28 will be added to FCF/Shr. If Apple sells 25 million in FY09 that is $7.00 in incremental cash flow. I believe FCF/shr might top $13 in FY09. The subscription accounting of the iPhone revenue results in little impact to EPS, yet FCF will explode. Apple trades at less than 12x FY09 FCF/shr which, in my mind, is very attractive.

I know that investors expect a beat, and that is needed for a pop in the stock price, but I am taking a long-term perspective.

2008 Sep 14 06:35 AM