2012: The 115 Million iPhone Year

| About: Apple Inc. (AAPL)
This article is now exclusive for PRO subscribers.

In a piece I published yesterday at Seeking Alpha, I laid out two different forecasts for 2011 iPhone sales. One scenario is based on the assumption that the iPhone 5 is unveiled and launched for sale in June, and the other scenario is based on the assumption that the iPhone 5 released for sale in September.

The current overwhelming consensus suggests that the iPhone will in fact be delayed until September, but just in case Apple (NASDAQ:AAPL) decides to pull off a surprise launch at the worldwide developers conference held in June, it's wise to lay out two different forecasts until we know for sure. I should point out, however, there is some evidence that may suggest an iPhone launch is coming in june.

As I pointed out in yesterday's article, the iPhone delay could cost Apple more than $4.5 billion in revenue during in its fiscal Q4, which will be to the benefit of one or more quarters in fiscal 2012.

Fiscal Q1 2012 iPhone Estimates (assuming June iPhone Launch)
If we assume the new iPhone is announced and released for sale in June, then based on the seasonal and sequential growth trend, Apple should sell about 26.5 million iPhones in fiscal Q1. Over the past few years, there has been noticeable sharp sequential rise between the launch quarter of the iPhone -- generally fiscal Q4 -- and Apple's holiday Q1.

In Q1 2011, for example, iPhone unit sales rose to 16.24 million units or 15.2% from 14.1 million units in Q4 2010. We saw a similar noticeable sequential rise in Q1 2010. iPhone sales jumped to 8.74 million units or 18.1% in fiscal Q1 2010 over the 7.4 million units Apple sold in Q4 2009.

If we see a similar sequential rise in Q1 2012 over the 23 million iPhones I'm estimating that Apple will sell in Q4 2011, Apple would sell 26.45 million units. That would represent a 63.2% year-over-year increase in unit sales which would be on par with what is expected out of the global smart phone market in 2012. Based on an average selling price of $640 which is more or less in-line with the sequential and seasonal growth trend, Apple should report about $17 billion in iPhone revenue in Q1 2012.

Fiscal Q2 2012 iPhone Estimates (assuming June iPhone Launch)

Again, if we assume that the iPhone is launched in June, then fiscal Q2 2012 should be relatively straightforward. Apple's fiscal Q2 usually represents the peak in iPhone sales during the upgrade cycle for the past two years.

In Q2 2010, for example, iPhone unit sales increased to 8.75 million units from the 8.73 million sold in Q1. In fiscal Q2 2011, we saw a significantly larger sequential rise in unit sales. Q2 iPhone sales came in at a whopping 18.65 million units which represented a 15% rise over the 16.235 million units Apple sold in fiscal Q1.
Yet, given the fact that Apple had significant problems rectifying its supply/demand imbalance for the iPhone 4, and took almost three quarter to finally properly fill the channel, I think it's unlikely that Apple will see a similar sequential rise in 2012 as it learns how to adequately meet demand.

Instead, what we'll probably see in Apple's fiscal Q2 2012 is something more along the lines of what we saw in 2010 -- flat to slightly higher sequential growth. I'm modeling for a 500,000 unit sequential rise between Q1 and Q2 to 27 million iPhones sold. Based on a $640 average selling price, iPhone revenue should jump to a peak of $17.280 billion on the quarter.

Fiscal Q3 2012 iPhone Estimates (assuming June iPhone Launch)
Again if we assume the iPhone upgrade cycle remains on the June time-frame it would mean that the iPhone 6 will be launched in June 2012. This will likely result in the customary weakness normally seen in Apple's fiscal Q3. The sequential seasonal trend would tend to suggest sales on the order of about 25 million units for Apple's fiscal Q3 with revenue coming in at about $16 billion.

Fiscal Q4 2012 iPhone Estimates (assuming June iPhone Launch)
For the final quarter of 2012, I'm modeling for very modest growth of 32% on a sequential basis or 30.1% on a year-over-year basis. There's a very good likelihood that Apple will eclipse my Q4 2012 estimate but with having to make predictions more than a year out, I'm going to tend to be conservative. I'm currently modeling for unit sales of 33 million for Apple's fiscal Q4 with iPhone revenue coming in at $21.12 billion on the quarter.

This again, presumes that Apple will introduces an iPhone 6 in June and that we're still on the June upgrade cycle. The two charts below represent my iPhone unit sales and revenue expectation for fiscal 2012 based on an assumption that Apple introduces the iPhone 5 at next month's world wide developers conference and the iPhone 6 at the 2012 WWDC.

If, instead of introducing the next generation iPhone at June's WWDC, Apple decides to delay the release of the device until September, there will be major ramifications for the entire fiscal year 2012.

First of all, there is always significant pent up demand of customers just waiting to buy Apple's next generation iPhone. In Q4 2010, for example, Apple sold 14.1 million iPhones which was 5.7 million units or a whopping 68% higher than the 8.4 million units it sold in the previous quarter. We saw a similar jump in 2009 as well.

Secondly, this pent-up demand is almost never fully met in fiscal Q4, and there tends to be significant spill-over into the next few quarters. As mentioned above, iPhone sales in Apple's fiscal Q1 tends to be almost 15% higher than sales in the launch quarter (fiscal Q4). This partly has to do with the strong seasonality of the holiday shopping season.

As Peter Oppenheimer (Apple CFO) mentioned in the conference call, Apple only just recently rectified its supply-demand imbalance for the iPhone 4 during the March quarter -- that's almost 9 months after the launch of the device.

Unless Apple miraculously discovers a way to both meet the pent up demand of buyers waiting for the iPhone 5 / iPhone 4S, and meet the seasonal demand of the fiscal Q1 holiday shopping season, there will likely be major spill-over into fiscal Q2, Q3 and Q4 2012.

To make matters worse, there's already a major supply-demand imbalance with the iPad 2. Both the iPhone and iPad use Apple's A4 processor which will likely cause significant supply issues as Apple does everything it can to meet the overwhelming demand for both devices.

Unless Apple figures out a way to significantly expand capacity, investors shouldn't be let down or surprised if sales don't meet the most optimistic expectations. A supply issue is never a bad problem to have, and Apple always eventually finds a way to meet demand.

Assuming the iPhone is in fact delayed until September, my estimates will be based on full capacity utilization for fiscal Q1 and fiscal Q2 with Apple meeting some sort of a supply-demand balance for both the iPad and iPhone 5 in fiscal Q3.

Fiscal Q1 2012 iPhone Estimates (assuming September upgrade cycle)
Apple will probably add about 2.5 million units in fiscal Q1 2012 if the iPhone is launched in September. I expect Apple to post sales of about 29 million iPhones which represents a 78.6% year-over-year rise above the 16.24 million units Apple sold in Q1 2011. I expect Apple to be completely stretched to full capacity on the quarter and there will be spill-over into fiscal Q2 and fiscal Q3.

iPhone revenues should skyrocket to $18.6 billion on the quarter resulting in Apple breaking $10.00 in earnings per share for the first time in the company's history.

Fiscal Q2 2012 iPhone Estimates (assuming September upgrade cycle)
Fiscal Q2 will be even more dramatic. As Apple begins to bring the company to supply-demand parity, millions of purchases will roll-over to fiscal Q2. I expect sales to jump by 3 million units over my original estimates. Unit sales should come somewhere around 30 million units for the March 2012 quarter resulting in iPhone revenues of approximately $19.2 billion. Apple will report well over $10 in EPS on the quarter -- don't worry I'll get to my full 2012 estimates soon enough.

Fiscal Q3 2012 iPhone Estimates (assuming September upgrade cycle)
iPhone 5 unit sales and revenue will peak in fiscal Q3 as Apple will finally meet supply-demand parity on the iPhone -- just in time for Apple to struggle with demand from the iPad 3. I expect sales to rise to over 31 million units on the quarter resulting in Apple posting nearly $20 billion in iPhone revenue. This will result in Apple reporting well over $10 in EPS on the quarter.

Fiscal Q4 2012 iPhone Estimates (assuming September upgrade cycle)
Since Apple would presumably be on a new upgrade cycle which results in a new iPhone introduced every September, Apple's fiscal Q4 will tend to be Apple's weakest quarter depending on when the iPhone is actually launched. Apple's fiscal Q4 runs from July through the end of September. Thus, if Apple were to release it's iPhone in early September rather than late September, then fiscal Q4 will tend to be on par with previous quarters.

Yet, if Apple tends to upgrade the iPhone toward the end of September, then due to seasonality, iPhone sales will tend to suffer in the quarter as customers postpone purchase ahead of a new device. Conservatism demands that we assume the less favorable outcome on the quarter.

Thus, I'm looking for iPhone sales to fall by about 3 million units in fiscal Q4 2012 as Apple prepares to introduce the iPhone 6. Revenue from the iPhone will be approximately $18 billion on the quarter. The charts below represent my iPhone estimates for Apple's fiscal Q3 & Q4 2011 along with Apple's FYE 2012.

Closing Remarks
It is always important to remember that when providing year-long estimate projections requires a lot of assumptions. Many of those assumptions will prove to be false, yet I've always tended to be more conservative when it comes to making predictions for the forward fiscal year.

Now that I've provided my iPhone estimates for Apple's fiscal 2011-2012, I'll be providing my iPad and Macintosh sales expectations for the next 6 quarters. I'll then follow up with my full revenue and earnings estimates, and then finish my Q3 Apple critique with a comparative valuation analysis based on my forward expectations.

Disclosure: I am long AAPL, SPY.