Apple: Seven Reasons iPhones and iPods Boost December Quarter – Quantified

15 january 2013

Pent-up demand for iPhone 5 is evident in pre-orders. Each successive iPhone launch gets frothier (still) than the previous one.  Sales of the iPhone 4S were 1M in the first day, compared to Apple’s then most successful launch of the iPhone 4 which sold 1.7M in the first weekend.  Pre-orders for the iPhone 4 were ten times greater than those for the iPhone 3GS, and pre-orders for the iPhone 4S exceeded 1M in the first 24 hours. Within an hour, pre-order inventory for the iPhone 5 on Apple’s website was sold out and by early Friday, delays for shipments of the new iPhone 5 were 1-2 weeks.  Currently on the Apple website, iPhone 5s pre-ordered today will be available for shipment in 2-3 weeks, and this is before the product is even available in the stores.

Pent-up demand effect on sales is becoming more pronounced.  The pattern for pent-up demand on iPhone releases has intensified over time.  As I have written previously, for the past three product upgrades, iPhone unit sales have increased 41%, 66% and 117% over the quarter previous to the product release.  What is even more interesting is that each successive product introduction is more popular that the previous one.  The unit iPhone sales increased 91% in the quarter that the iPhone 4 was released over the quarter when the iPhone 3GS was released.    That was pretty impressive yet it paled compared to the iPhone 4S release. Unit iPhone sales increased 163% in the first full quarter of the iPhone 4S release over the quarter when the iPhone 4 released.

Potential sales in the US alone are significant.  On top of this typical pattern, it is estimated that 30M AT&T and Verizon customers’ contracts will expire in the fourth quarter qualifying them for subsidies on the iPhone 5 purchase.  Given the shipment delays due to pre-order demand, most of these upgrades will take place in the CYQ4, or Apple’s Q1FY13.  To date, the largest quarter for iPhones sales was the December 2011 quarter, encompassing the iPhone 4S upgrade, and Apple sold 37M iPhones in that quarter.

Multi-country rollout is more aggressive than expected.  The iPhone 5 will be available in US, Canada, UK, France, Germany, Australia, Japan, Hong Kong and Singapore on September 21, with 22 more countries in the following week and to 100 countries by December.  The rollout is more aggressive than many had previously considered given announcements earlier in the year of component shortages from Qualcomm and others.  It is likely that the supply constraints affected other manufacturers rather than Apple and Apple had its supply agreements in place prior to product announcements.

China to launch in December.  Both China Telecom and China Unicom have told Chinese press that they expect to see the iPhone 5 in China in December, and the earlier in December these products can be released, the stronger effect it will have on earnings.   Demand for Apple products is exuberant in China.  It is Apple’s fastest growing and second largest market.  To highlight the impact of China on Apple:  In this past quarter, sales in China were $7.9B, up three-fold over the period a year prior.   And the demand for the iPhones is almost ravenous.  Lines formed overnight outside of stores before the iPhone 4S.  The largest e-commerce retailers in China have been taking pre-orders for the not-yet-released iPhone 5 since July.

iPod Touch is significant upgrade.   This new generation iPod Touch offers a dramatic upgrade to the previous model.  It looks like the new, highly-coveted iPhone 5 on the outside with the functionality of the iPhone 4S on the inside.  The camera MP increased from 0.7 to 5.  The screen size increased form 3.5” to 4” and sports the Retina display.  It’s faster, thinner, lighter, runs on iOS6, and it is available in six colors.  Apple hit the nail on the head to make this iPod Touch generation significantly different than previous generations to create an upgrade cycle.

iPod Nano now resembles a mini iPod Touch.  The upgrade on the Nano is significant: multi-touch screen, home button, FM tuner, and widescreen video in seven colors.  Pricing starts at $149 for 16GB iPod Nanos.  These features could encourage current Shuffle users to upgrade to this “mini Touch”, and help boost iPod ASPs.  The last iPod upgrades raised ASPs $12 to $176 and the combination of the iPod Nano starting at $149 and the iPod Touch starting at $299 could raise iPod ASPs in the holiday quarter.

Bottom line.   Apple’s December quarter is lining up to be enormous, and should close in on the amount Apple earned for all of FY 11 ($27.68).  Apple should see earnings close to $25 in Q1FY13, based upon strong iPhone and iPod demand, not to mention strong uptake of Macs.  Apple sold 37M iPhones in December quarter 2011 with the introduction of the iPhone 4s.  While the iPhone 4S was very popular, it left many waiting for a new and improved form factor and faster network speeds, both highlighted in the iPhone 5.  Given the pent-up demand for the iPhone 5 and the historical pattern of successive successful product introductions, it is conceivable that Apple could sell close to 55-60M iPhones in the December quarter and lift iPods 10-20% above the 19K sold and $176 ASPs n the previous upgrade cycle.  These estimates are not including an iPad Mini or Apple TV (of sorts) that may still be a possibility for the holiday season.  If they are introduced, the iPad Mini in particular, these estimates will be conservative.

One last note for investors:  It is becoming increasingly clear that investments in Apple, like many companies in this sector, should be considered on an annual, not quarterly basis.  The ebb and flow of product introductions by these companies and their competitors can dramatically affect quarter-to-quarter swings, while annual comparisons show trends.  As we have seen with Apple, consumers are becoming much more savvy about product upgrades and the associated timing, and purchasing behavior is affected.  In Apple’s case so far, product introductions have served to dramatically lift sales in the quarter they are readily available (and Apple is timing them for the holiday quarter) but have also served to dampen demand in the quarter preceding.  The more successful Apple is to generate excitement around a pending new product announcement, the more that previous quarter is affected.  Yes, annual earnings continue to trend up from $9.08 in FY 09 to $15.15 in FY10 to $27.68 in FY 11 to $35.49 so far in FY12.  Investors should take this into account and take advantage of those quarter “misses” (and stock declines) when these misses may foreshadow a monster quarter.