According to a June 8 report from Nikkei Asian Review, a publication that often gets it right with respect to Apple (NASDAQ:AAPL) supply chain machinations, the company is telling its suppliers to "prepare around 20% fewer components for iPhones debuting in the latter half of 2018" relative to what it had asked them to build ahead of the previous iPhone product cycle.
The report goes on to say that while Apple had asked its suppliers to "prepare for production of up to 100 million units of the new iPhone 8, iPhone 8 Plus and iPhone X," it's telling them to ready components for production of just 80 million units.
Let's go over what this, if true, could mean for Apple.
Mix shift downward
Investors shouldn't necessarily interpret this as meaning that Apple intends to ship 20% fewer iPhones during the coming iPhone product cycle. I don't think even the most pessimistic analysts and investors out there would call for such a steep year-over-year decline in iPhone unit shipments during the coming product cycle.
What I think is happening here is that Apple thinks that it'll see a shift in iPhone shipments toward the company's prior-generation iPhone models. If Apple keeps with tradition, it'll likely continue selling the current iPhone 8 and iPhone 8 Plus devices, but at reduced prices. Apple's thinking may be that, in the coming iPhone cycle, it'll ship more of its older devices as a percentage of total iPhone shipments than it did in the prior cycle.
One component supplier confirmed this
Interestingly, one top Apple supplier, Broadcom (NASDAQ:AVGO), which provides wireless chips in iPhones, seemed to confirm Nikkei Asian Review's reporting around the orders being lower and even indicated that there's real uncertainty on Apple's part as to what the relative mix of older iPhone and newer iPhone shipments will be in the coming product cycle.
Here's what Broadcom CEO Hock Tan had to say on the company's most recent earnings conference call (I've bolded the parts you should pay extra attention to):
... as we move from iPhone 8 to iPhone 9 generation coming up, there is some caution in the level of build. ... But having said that, we also think orders [are] coming in what I call ... a normal seasonal pattern of strength. We do see that very clearly now and we do see bookings that extend all the way to close to the end of this calendar year from these North American customers. ... The difference is what's the mix of the new generation phones versus legacy phones. And that's what might lead to some uncertainty of how much content changes or increases there might [be]. And quite frankly, visibility is not that clear because it's hard to predict what level or what will the mix of new generation phones versus legacy generation phones ... be.
It's also important to keep in mind that while Apple seems to be taking a cautious stance, the company is likely to respond as quickly as it can to the demand signals that it sees in the marketplace shortly after the new iPhones finally go up for sale.
Apple business implications
Over the course of the current iPhone product cycle, iPhone revenue has grown largely thanks to a marked increase in average selling prices. The unit story, by contrast, hasn't been anywhere near as robust.
|Unit shipment growth||(1%)||3%|
|Average selling price growth||14.66%||11.09%|
If Apple does wind up shipping a weaker mix of iPhones (that is, a higher proportion of older-generation models) in the coming product cycle, that could potentially lead to a deceleration in average selling price growth or, at worst, a regression in average selling prices. If that average selling price headwind isn't effectively counteracted by, say, greater total iPhone shipment volumes, then the iPhone business could see stagnant or perhaps even declining revenue. The iPhone made up about 62% of Apple's revenue in the second quarter.
Now, of course, the iPhone average selling price story has many moving parts (e.g., relative mix within both older and newer iPhone shipments) so it's hard to draw any firm conclusions about what the iPhone's revenue performance will look like in the coming fiscal year.
All we can do now is watch and wait for the next iPhone cycle to begin, and then based on the first full quarter of results of that product cycle (the first quarter of Apple's fiscal year 2019), we can make more meaningful predictions as to how the iPhone business will perform for the entirety of the fiscal year.