Apple (AAPL -0.35%) shares fell following iPhone supplier Jabil Circuit's (JBL -0.18%) earnings release on Wednesday. The company that supplies parts for the iPhone 5c reported that it was affected by a "shift in demand" at one of its major customers, thought to be Apple.
Why is this bad for Apple?
I'm not going to answer that question. I don't have an answer.
The "shift in demand" that Jabil is likely referring to is something we've been hearing for a couple months now -- Apple is selling fewer iPhone 5c devices and more of the iPhone 5s. In the UK, Kantar reports the 5s is outselling the 5c by a ratio fo three-to-one. Reports in the U.S. indicate a similar ratio.
This is great for Apple!
One of the biggest reasons for its shift to the iPhone 5c from the iPhone 5 was because Apple saw significantly higher sales of its previous generation device in 2013. The 5c sells for a higher margin than the iPhone 5 would (at $100 off it original price), mostly due to savings from plastic casings.
More importantly, Apple sees increased revenue and margins from the 5s compared to the 5c. Apple spends approximately $25 more to manufacture the 16 GB 5s model, and charges $100 more. If Apple's selling millions more 5s phones than expected, it could have a meaningful impact on its net income.
What about Jabil?
Jabil CEO Mark Mondello noted on the company's conference call that he expects the shift to be temporary. If history is any indication, it's likely that 5c sales share will increase in 2014, but that doesn't mean demand will go up.
In October 2012, the iPhone 5 accounted for 68% of total iPhone sales. Interestingly, the iPhone 5 sold at a three-to-one ratio with the 4s -- the same reported ratio of 5s sales to 5c sales -- that month. That share later normalized around 50% after the initial release. Meanwhile, the previous generation iPhone climbed to about one-third of all iPhone sales.
Of course, Apple sells more phones in the holiday quarter than other quarters. Last year, iPhone sales were about 40% higher in the holiday quarter compared to the average of Apple's other three quarters. So, while the iPhone 4s increased its share of total iPhones sold, actual demand remained relatively flat throughout the year, fluctuating around 11 million.
The 5c isn't exactly a previous generation model, but it's replacing the previous generation model in Apple's product line. I don't think it's much of a stretch to expect sales to behave similarly to those of the previous generation models that came before. If that's the case, Jabil will not see an increase in demand from Apple in the coming quarters.
Luckily for Jabil, demand for the iPhone has never been higher, and Apple is expected to set a record this quarter for the most iPhones sold. It's possible 5c demand will reach the demand of the iPhone 5 (for which Jabil manufactured aluminum casings) from last year going forward.
Still, investors should expect total revenue from Apple to decrease year-over-year. It's selling cheaper plastic casings and likely selling fewer casings compared to last year.
Good for Apple, not-so-good for Jabil
Jabil was counting on Apple's iPhone 5c to take significantly more sales share from the 5s. That didn't materialize, and if history repeats itself, it will likely see its revenue from Apple drop. Investors punished the stock Wednesday, sending shares down more than 20%.
For Apple, a "shift in demand" is rather beneficial. It increases its revenue, its margins, and indicates that it may have reached an equilibrium in demand for its product line, which previously saw increasing sales of older-generation iPhones.
