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Why 10 Million iPhones Means A Lot More Than 9 Million

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Apple announced on Monday that it had sold over 10 million iPhone 6’s in the first three days of it being available. This is only 1 million more than the over 9 million iPhone 5c’s and 5s’ that it sold last year. While it looks like first weekend sales only increased by 11% year over year there was a tremendous amount of unsold iPhone 5c’s at the end of the September 2013 quarter (Apple reported in its earnings conference call that there was an increase of 3.3 million iPhones at the end of September quarter vs. the June quarter). This means that sell-through was much lower than the 9 million and was probably around 6 to 6.5 million last year. The actual sell-through growth rate this year was more likely about 60%.

Implications for September quarter results

In 2012 and 2013 the September quarter’s iPhone sales were down 1% and 4% quarter over quarter, respectively, when adjusted for channel inventory. This year the Street is expecting about 38 million iPhones to be sold in the September quarter which would be a 7% quarter over quarter increase or about 2.65 million units above the 35.2 million June quarter actual. The 38 million seems to be a reasonable number as Apple does have 1 million of it achieved in the first weekend of model 6 sales and since there is such strong demand for both the iPhone 6 and 6 Plus generating an additional 1.65 million units shouldn’t be too much of an issue (this does assume that sales for the first 12 weeks of this September quarter are similar to last years).

One indication of the strong demand is Tim Cook, Apple’s CEO, saying in the press release ‘we could have sold many more iPhones with greater supply and we are working hard to fill orders as quickly as possible’. It does appear that the 38 million estimate has a likelihood of coming in higher rather than lower when Apple reports next month.

This essentially means that for another six days from Monday, September 22, through the end of its quarter on Saturday, September 27, that Apple could come close to selling all of the iPhones that its manufacturing partners can make. One indication of this is Apple’s US website showing a 7 to 10 business day delivery lead-time for the iPhone 6 and 3-4 weeks for the 6 Plus.

Implications for the December quarter

In the press release Cook also said ‘our best launch ever, shattering all previous sell-through records by a large margin’. What this means is that there won’t be a large channel fill number similar to the 3.3 million that occurred a year ago. While there can be channel fill in the September quarter (it was 800,000 units in 2012) last years higher number needs to be taken into account when projecting this years December quarter sales.

If Apple would have only added 800,000 iPhone units to its channel inventory last year it would have sold 31.3 million iPhones in the September quarter. This means that when compared to the 50.1 million iPhones Apple sold in the December 2013 quarter, when adjusted for its under 1 million channel fill, iPhone unit sales would have increased 60% quarter over quarter vs. 64%. This compares to 114% and 77% quarter over quarter increases in 2012 and 2013, respectively. One would expect the growth rates to be lower as the actual unit numbers increase.

If you assume that Apple sells 38 million iPhones in the September quarter, channel inventory increases by 800,000 and the September to December iPhone unit growth rate is 60% (the same as last year) than the company would sell about 59.6 million units. However when I calculated the number of iPhones needed to achieve Apple’s mid-point of revenue guidance I came up with 60.7 million or a 63% quarter over quarter increase, not much higher than the 60%. It does look like Apple should break the 60 million unit mark as long as there aren’t any major manufacturing issues and adding China wouldn’t hurt but may not be needed in the short-term.