Apple Inc. iPhone Sales Could Drop Substantially in Fiscal Year 2016

Apple (AAPL 0.61%) can't seem to catch a break these days. According to a pre-publication blurb from Digitimes, Apple has cut iPhone component orders by about 10% to 30% with the site citing "Taiwan-based supply chain makers."

Those same folks in the Taiwan supply chain apparently said that Apple's iPhone shipments during the first quarter of 2016 (which roughly corresponds to Apple's fiscal second quarter) will be down anywhere from 12% to 20% year over year, in a range of 50 million to 54 million units.

There's no spinning this: If these numbers are correct (and I think there is a good chance that they are), then current analyst estimates for the current fiscal year could be too high. Here's why.

Building an estimate for fiscal 2016 iPhone shipments
CEO Tim Cook said on the company's most recent earnings call that he expects iPhone sales in the first fiscal quarter of 2016 to grow from the levels seen at the same time last year. Apple sold 74.6 million iPhones at that time, so let's assume that the company was able to move around 75 million units in the first quarter of fiscal 2016.

Then, let's assume that Digitimes is correct that fiscal second-quarter shipments will come in a range of 50 million to 54 million.

Using this information, coupled with the seasonal pattern we saw in the prior fiscal year, we could see iPhone shipments by quarter that look like this:

Source: Author estimates.

By way of reference, Apple sold about 231 million iPhones during fiscal year 2015. If my estimates are correct, then Apple is set to see a unit decline of anywhere from 7.6% to 12% year over year. If average selling prices are flat, then the revenue declines should be in this range. For now, I'm willing to assume flat average selling prices to fiscal 2015 levels.

What does this mean for total Apple revenue?
During fiscal year 2015, Apple generated approximately $155 billion in revenue from iPhone. If units drop at the range mentioned above, and assuming flat average selling prices, then this could suggest iPhone revenue in the range of $136.4 billion to $143 billion.

The decline, in absolute dollar terms, could be between $12 billion and $19 billion.

No single Apple product category is really going to be able to grow rapidly enough to offset that decline. In fact, in order to really have a chance of even just coming in flat in fiscal 2016, Apple will need to see robust growth in all of its product categories.

The reality, though, is that expecting such growth is unrealistic. I'm not convinced that Apple will be able to grow iPad in fiscal 2016 (in fact, I think the best investors should reasonably hope for is a "less steep" decline than the ones seen over the last few years).

Mac may be able to grow by low- to mid- single digits, but total Mac revenue in fiscal 2015 was just $25.47 billion; 5% to 7% growth in this segment would only bring in between $1 billion and $2 billion in incremental revenue -- hardly enough.

Services and "other products" brought in about $30 billion in fiscal 2015 (roughly $20 billion for services, and $10 billion for "other"), with growth rates of 10% and 20% year over year, respectively. If we are to assume similar growth rates in fiscal 2016, then that would be good for around $4 billion in incremental revenue.

Based on this analysis, there's very little reason to be optimistic that, in light of the decline that Apple could be preparing to see in iPhone, Apple will even be able to keep its total revenues flat year over year, let alone grow.

Conclusion? Analyst estimates are too high
Current analyst consensus calls for Apple to achieve fiscal year 2016 revenue of $242 billion, good for 3.6% growth from the prior fiscal year. I think that this estimate is too high and believe that when Apple issues fiscal second-quarter guidance, analyst estimates will come down.