Apple reports September results on November 2nd. The focus of the call will be Apple’s commentary about iPhone X preorders which start on Oct 27th (launch is Nov 3rd), and what that will mean for iPhone mix and ASP. The mix and ASP will be the biggest driver of AAPL shares in the next year, which we expect to be favorable to the story. We’re raising our estimates based on higher iPhone ASPs ($740) with our updated model (here).
Raising Estimates. For FY18, we’re raising our iPhone ASP to $740 vs. Street at $696 (up 15% y/y), revenue to $273 billion vs. Street at $265 billion, and EPS to $11.25 vs. Street at $11.05. We’re moving 7m iPhones from Dec-17 (now at 77.5m vs. Street at 82m) to Mar-18 (now at 64.5m vs. Street at 61m) to account for production constraints of the iPhone X. For FY18 we’re expecting 238m iPhones, up 9% y/y vs. Street at 242m. We dive deeper into the potential upside around iPhone X in FY18 below.
iPhone ASP Barrier A Fallacy. At first take the $1000 starting price iPhone feels like a deal breaker. We think that’s a fallacy, and consumers will take a step function jump in what they’re willing to spend on an iPhone. The average ASP (unweighted) for the iPhone X is $1074, compared to $809 for the iPhone 7, a 33% increase, and the average iPhone 8 ASP of $824, 2% above the iPhone 7. It’s been well documented an increasing number of iPhone buyers are moving to monthly installments, whether through the iPhone upgrade program, or similar programs from most global carriers. In total we estimate about 75% of new global iPhones are purchased via installment programs. Last year using the iPhone Upgrade Program, the iPhone 7 plus 128GB was $40.75 per month, compared to the iPhone X 64GB at $49.91 per month. This translates to a $9.16 monthly increase, and an ASP increase from $849 (iPhone 7 Plus 128GB) to $999 (iPhone X 64GB), up 17%. We think 22% of iPhone buyers will view the $9 monthly increase as an acceptable monthly increase to get the latest iPhone.
Now Modeling for 15% ASP Increase in FY18, versus Street at 8%. We’re raising our iPhone ASP to $740 vs. Street at $696 (up 15% y/y) due to a shift to higher ASP iPhones including the iPhone 8 and iPhone X. The release of the iPhone 8 was underwhelming compared to past iPhone launches, but this is not bad news for Apple. This year’s iPhone cycle will have its units and revenues split between the iPhone 8 and the iPhone X. We anticipate ~25% of iPhone SKUs purchased in FY18 will be an iPhone X (with about ~30% iPhone 8). Historically about half of the iPhones purchased in a given year are the most recently released model. This bodes well for iPhone revenue growth as this cycle’s ASP is materially higher than previous cycles. We have a weighted-ASP of $740 for this cycle of phones (all iPhone models for sale), indicating the higher-end phones’ robust demand is pulling up ASPs. Importantly, a look at the bill-of-materials (BOM) for these phones indicates that the gross margin on the 8/X cycle will be comparable to previous models’ at around 65%. While this means margins have not improved, it does mean that there will be more gross profit dollars for this year’s phones (65% of $1000 is more than 65% of $500). See below for our breakdown of the cycle’s mix and ASPs.
Other Ways To Get A Read On iPhone Demand. Google trends suggests a 10% decline in interest; the index went from 79 to 71 for ‘iPhone’ searches Y/Y. While this is a negative data point, we are putting more weight onto our iPhone Intent to Buy survey we have conducted twice over the past six months. The results of our survey indicate 25% of people in the US intend to upgrade to iPhone 8 or iPhone X, compared to last year’s results of 15% intending to upgrade to the iPhone 7. Our model also predicts ~18% of new iPhone sales will be the SE, which may appear high, but the SE is actually a capable phone (it was released 18 months after the iPhone 6) that will appeal to price-sensitive iPhone buyers given its average price of $399. The SE is not a threat to the iPhone X as the price points and tech interest levels of the respective buyers are vastly different.
The Upgrade Wave. The reason why our survey is suggesting 25% of the iPhone base in the U.S will upgrade this year (that’s about 12% of the U.S. population) may be attributed to the base of iPhone owners whose phone will be 3 years or older. This number will surpass 300 million this year. This 300 million pool exceeds Street estimates calling for 242 million new iPhone units to be sold in the twelve months. Owners of older phones will be more inclined to upgrade in a given cycle. In addition, this year’s models offer a favorable ASP mix, both of which are positive data points for Apple. Owners of newer models will still be inclined to upgrade due to the draw of more advanced technology and new features, so it is not hard to believe that the Street’s estimates are conservative. For our part, we are modeling 238 million units to be sold, and would not be surprised to find this estimate conservative once the sales data starts coming in.
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.