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Now We Know Why Apple Gave Such Strong Guidance

By Danny Vena - Sep 7, 2017 at 6:58PM

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With earlier reports of major production issues and a potentially delayed iPhone launch, investors scratched their heads last month when Apple issued solid guidance for the coming quarter. Recent revelations make things much clearer.

For many months now, the Apple Inc. (AAPL 0.03%) rumor mill has been working overtime, with reports that the newest version of the iPhone is facing production issues, resulting from a problem with a redesigned OLED screen, or issues integrating a Touch ID fingerprint sensor, depending on the day. Some went so far as to suggest that the iPhone 8, the rumored name of choice, would be delayed until just before the holidays, as the company would be unable to achieve mass production because of these difficulties. 

When Apple issued its recent financial report, the guidance it gave for the coming quarter was remarkably strong if any of these rumors were to be believed. Recent reports suggest that Apple has several tricks up its virtual sleeve, and its forecast may not be so far-fetched.

Various iPhones forming a mosaic.

Will Apple's flagship iPhone release this month? Image source: Apple.

Apple knew things investors didn't

Investors collectively scratched their heads when Apple released its guidance for the upcoming September quarter, which provided for revenue in a range of $49 billion to $52 billion, an increase of between 15.6% and 22.6% over the prior-year quarter. This was particularly strong guidance, considering Apple had just posted its third consecutive quarter of accelerating growth, and in light of the reports of trouble in scaling production for the upcoming iPhone release.

Apple quieted some of those rumors when it announced an "Apple Special Event" scheduled for Sept. 12 in the recently completed Steve Jobs Theater, at the company's new headquarters campus. The timing of the event would roughly coincide with Apple's product launches in previous years.

Three phones and a watch

The Wall Street Journal (subscription required) is reporting that Apple will unveil three iPhones at the event -- a 10th-anniversary edition of its flagship iPhone, as well as upgraded editions of last year's iPhone 7 and 7 Plus. The iPhone 8 is rumored to sport facial recognition that may replace or augment the current Touch ID, and an expanded edge-to-edge display. The phones are also expected to carry a higher price tag, widely rumored at about $999. 

Apple is also expected to announce the release of its third-generation Apple Watch, with technology that will make it a standalone device, eliminating the need for the presence of the iPhone to make and receive calls, resulting from the addition of an LTE chip.

That's how Apple gets to those numbers

Shipments of new products have historically begun on the second Friday following the product announcement. Apple is reported to have recently increased manufacturing, expanding to additional production facilities, to meet the expected demand. Recording more than a week of new product sales in the September quarter, with higher price points, would generate revenue that would probably be sufficient to meet and exceed its robust forecast.

Until the actual product launch, this is all conjecture and fun with numbers. That said, it would explain what many believed to be unusually strong guidance in light of previous reports of production difficulties. Even if those rumors were true, with more than $250 billion in cash, Apple has the ability to make things happen. It may have deployed some of its massive cash pile to ensure that the 10th-anniversary edition of its iconic phone would release without a hitch.

On Sept. 12, investors will get the answers they want -- directly from the source.

Danny Vena owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.

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