On Apple’s earnings call Luca Maestri, the company’s CFO, should provide how many iPhones are at channel partners. These count as sales for Apple but need to be taken into account when determining what the sell-though is for iPhones in that quarter. To determine the iPhone’s true demand an increase in channel inventory needs to be subtracted from how many were sold and a decrease in channel inventory should be added. (Note that I own Apple shares).
Apple had about 21.6 million iPhones in channel inventory or slightly more than 5 weeks (compared to its goal of 5 to 7 weeks) at the end of December. This was an increase of 3.3 million from the September quarter and 5.2 million from June. The 5.2 million unit increase is the largest two quarter increase Apple has had, but that isn’t too surprising since iPhone sales have grown since it was introduced.
Source: Apple
iPhone SE channel fill could boost March quarter sales
From Apple’s 10-K “The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is probable. Product is considered delivered to the customer once it has been shipped and title, risk of loss and rewards of ownership have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped.”
What this should mean is that the iPhone SE’s that Apple has shipped to wireless carriers such as AT&T, China Mobile and Verizon will be counted as sales. This channel fill could be 2 to 3 million units and increase Apple’s March quarter iPhone sales above the expected 50 to 52 million which would give a false read on demand. With the iPhone SE having an average selling price of about $450 a 2 million unit increase in its channel inventory would add $900 million in revenue.
Additionally demand for the SE seems to be strong since it is still experiencing longer lead-times than I think anyone anticipated since it is reusing the iPhone 5 form factor and most of the iPhone 6s’ technology. There are also reports out of China that the SE is doing well and impacting Android smartphones due to the SE’s $399 entry price.
One way to analyze the channel inventory impact will be to combine March quarter sales and estimate how many iPhones will be sold in the June quarter based on Apple’s guidance. This will give a better indication on how the current iPhone line-up is doing. It will also be worthwhile to combine the September, December and March quarters iPhone sales and compare them to the prior year to help mitigate the catch up in iPhone 6 demand the company experienced a year ago and adjust for channel inventory changes.
But there may have been too many iPhone 6s’ in the channel
However I believe the 5.2 million channel inventory increase in non-iPhone SE units the past two quarters is destined to decrease in the March quarter. While channel inventory has increased every year from the December to March quarter typically Apple has had less inventory than its targeted levels at the end of December due to having more demand than supply. I don’t believe this was the case in December. While Apple won’t disclose the model breakdown of its channel inventory it would not surprise me if the non-SE units were to decline by 1 to 3 million. This would decrease the number of total iPhone units that Apple will report being sold in the March quarter and could offset the SE’s channel fill.
The question that never gets asked
A question that I don’t think ever gets asked on the earnings call is how much channel inventory should change in the next quarter. If Apple management is willing to answer that would give a better indication of iPhone demand since projected iPhone sales can be estimated from the company’s revenue guidance.
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