iPhone: Remain Comfortable With Mar-18 Street Estimates

As you know, earlier this week a report surfaced from Taiwan’s Economic Daily News that Apple would be cutting their Mar-18 quarter iPhone shipments (all models). We disagree, and believe iPhone estimates for Mar-18 will remain intact. Our perspective is largely, but not entirely, based on what we believe is the current strength of the iPhone X. The thinking is if the more expensive iPhone X is selling well, then the other models will likely be stable.

Taiwan’s Economic Daily News reported that Apple would be cutting their Mar-18 quarter iPhone shipments from 50m units to 30m. Subtracting 20m units from Apple’s Mar-18 Street estimate of 62m implies analysts will lower Mar-18 iPhone estimates to 42m, which we see as highly unlikely. That being said, if Apple were to give revenue guidance for Mar-18 suggesting iPhone units of around 50m (down 2% y/y), the iPhone X cycle would be a bust. This note outlines why we believe the current iPhone cycle is intact and Street iPhone estimates for Mar-18 will be unchanged following Apple’s Dec-17 earnings report (our guess is Apple reports on Tuesday, January 30th).

Recap of supply chain news this week. Taiwan’s Economic Daily News cited unidentified Apple supply chain officials as their source for the 40% cut in iPhone production in the Mar-18 quarter. Additionally, our count is two firms (Sinolink Securities and JL Warren Capital) have written about similar cuts in iPhone demand. JL Warren believes only 25m iPhone units will ship next quarter, due to a high price and lack of compelling features, and Sinolink is at 35m.

These rumblings sound familiar. Every year in the fall we hear reports of iPhone production hikes and every year around this time there are rumors of production cuts. In the fall of 2015 reports of production cuts were accurate around weak demand for iPhone 6S and 6S Plus, triggering a firestorm of analysts lowering estimates by 30%. In the end, Apple guided for weak iPhone demand in Mar-16, and eventually iPhone units were down 16% y/y in that quarter.

The public supply chain remains quiet. The difference between today and two years ago is in Dec-15 and Jan-16 iPhone suppliers were publicly reporting a bearish outlook for iPhone demand. To date, the outlook from the public iPhone supply chain remains upbeat. We think the best read is coming from Lumentum.

If you believe Lumentum, Apple’s March numbers will be unchanged. We estimate Lumentum supplies about 90% of Apple’s vertical-cavity surface-emitting lasers (VCSEL), a key iPhone component that allows for 3D sensing, augmented reality applications, and facial recognition in the iPhone X. On the company’s Sep-17 earnings call, which took place on November 1st, Lumentum suggested the strength in the iPhone X should carry through the Mar-18 quarter. Specifically, the company announced 3D sensing revenues of $40M for the Sep-17 quarter, adding they generated more revenue in the single month of October than they did in all of the Sep-17 quarter. They also expect monthly shipments to increase in Nov-17 and Dec-17. Most importantly management indicated their 3D sensing monthly run rate could remain at similar levels in the Mar-18 quarter, a conclusion drawn from customer feedback and order rates.

Things can change, but we view that as unlikely. Assuming Lumentum demand trends hold, we believe the company will record at least $127M in 3D sensing revenue during the Mar-18 quarter, all of which will go to Apple. If the total bill of materials of these VCSELs is ~$7 per phone it would implies ~18m iPhone X units for the quarter. We believe Lumentum is currently supplying 90% of all VCSELs to Apple and, factoring in the additional VCSELs from other suppliers such as Finisar and II-VI, we expect Apple to sell ~20M iPhone X units in the Mar-17 quarter. We believe ~30% of all iPhones sold are going to be iPhone Xs, which implies Apple is on track to sell about 65M total iPhone units in the Mar-18 quarter. See below.

Finisar a less helpful read on near-term iPhone demand. Finisar is also a VCSEL supplier for Apple. Finisar’s recent $390M Apple order is a bullish sign for iPhone demand in 2018, but the endorsement from Apple is a less helpful read on near-term iPhone demand. We believe the $390M order Apple placed with Finisar was primarily for components to be used in iPhones and iPads built in the fall of 2018, during the next device cycle.

A final thought on iPhone X supply. Another reason we believe the reports of a 40% production cut are misplaced is because supply of the iPhone X has been tight for most of the quarter, and it’s unlikely Apple will swing from being supply constrained to cutting production by 40%. Apple could be maintaining its iPhone X production and cutting production of its other models.  To reiterate, we believe 30% of iPhones are the iPhone X.

Details on iPhone X supply. Supply of the iPhone X was tight for most of the Dec-18 quarter, which makes production cuts less likely. We track availability of the iPhone X at 139 of the 271 U.S. on a daily basis. As of this week, U.S. Apple stores showed a 98% availability of iPhone Xs, up from 25% the week of December 6th. Additionally, online lead times in 8 countries are showing 5 days compared to 7 days the week of December 6th.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

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