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IHS Predicts Strong iPhone Growth for 2015. What's the Downside?

By Jamal Carnette, CFA - Sep 29, 2015 at 8:05AM

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On a full-year basis, IHS's report shows strong growth, but the numbers indicate a slowing of growth.

For all the talk of new products and services -- iPad Pro, Apple Music, and Apple Watch -- Apple's (AAPL 4.01%) primarily an iPhone-driven company, and will continue to be so for the immediate future. When it comes to the company's revenue makeup, the iPhone has grown from roughly half of Apple's haul to nearly two-thirds in less than two years. For a graphical representation of revenue, see the chart below:

Source: Apple's 10Qs. Revenue figures in millions.

As a result of both incredible iPhone growth, and struggles in non-iPhone device sales -- most notably the iPad -- Apple has become essentially a single-product company -- so much so that the company added a disclosure to the risks section in its quarterly earnings report to address its reliance on iPhone revenue.

That's not necessarily a negative, of course. As long as the company can continue to grow iPhone sales at a strong clip, investors will continue to be rewarded. And according to global information company IHS Technology, it seems Apple will continue its iPhone growth, but if the company is correct, the next two quarters may be disappointments.

IHS's data points to a slowing second half
According to the company, Apple is expected to ship 236 million iPhones this calendar year. And while that's a strong jump -- 22% over 2014's total shipments -- the data seems to point to a considerable growth slowdown from its previous torrid pace. Here's a data representation of Apple's units shipped during calendar year 2014 -- not on Apple's fiscal-quarter basis -- in order to match IHS's presentation of data:

QuarterCQ 1 '14CQ 2 '14First HalfCQ 3 '14CQ 4 '14Second Half UnitsFull Year 2014
iPhone Units (m) 43.7 35.2 78.9 39.3 74.5 113.8 192.7
Percentage of Full Year 23% 18% 41% 20% 39% 59% 100%
Percentage of Half Sales 55% 45% 100% 35% 65% 100%  

Unit figures in millions, other figures are in percentage form. Data source: Apple's quarterly reports

As you can see, Apple's calendar-year sales are highly dependent upon its second-half results. That's not totally unexpected, because of the new iPhone release that occurs late in the the third calendar quarter. Last year, the second half produced 59% of all iPhone unit sales with a whopping 40% in the last quarter alone.

If Apple is to maintain a similar distribution of units shipped as last year throughout the final two quarters, as the first two are have already been reported, here's what shipments would look like in the soon-to-be-reported third-calendar quarter -- Apple's fourth-fiscal quarter -- and the all-important fourth-calendar quarter. 

QuarterCQ 1 '15CQ 2 '15First HalfCQ 3 '15CQ 4 '15Second Half SalesFull Year Estimate (IHS)
iPhone Units (m) 61.2 47.5 108.7 44.0 83.3 127.3 236
Percentage of Full Year Sales 26% 20% 46% 19% 35% 54% 100%
Percentage of Half Sales 56% 44% 100% 35% 65% 100%  -
Growth: Year-on-Year 40% 35% 38% 12% 12% 12% 22%

Source: Apple's quarterly report for CQ 1 and CQ 2. Bolded data signifies estimates. Assumptions/Estimates: second half sales = IHS's full-year estimate minus first half unit sales. CQ 3 and CQ 4 unit figures = second half sales estimate * 2014's percentage of half sales. 

Using IHS's estimates for full-year unit sales, simple subtraction to get estimated total second-half sales, and last year's percentage breakdown of sales by half-year for an estimate of the Q3/Q4 mix, you can see this works out to year-on-year growth slowing in the third and fourth calendar quarters. Unlike the torrid year-on-year growth pace of 40% in the first calendar quarter and 35% in the second, IHS's data suggests upcoming growth to average 12% in both quarters.

Again, this is still solid growth, but not what Apple investors are accustomed to, and certainly would be decelerating growth. Long story short, although IHS's data shows strong year-on-year growth of 22.5% with its 236-million-units figure, Apple's already achieved much of that growth in the already-reported calendar first and second quarters. 

Of course, it's important to reiterate that this is only an estimate. It's entirely possible that Apple beats IHS's figure on the back of strong China performance of the newly released iPhone 6s and iPhone 6s Plus units, with the company recently reporting13 million units sold in the first weekend alone. If the market adopts IHS's data as sufficient, I personally think Apple could surprise to the upside.

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