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iPhone SE Sales: Good, Bad, or Irrelevant?

By Jamal Carnette, CFA - Apr 10, 2016 at 9:03PM

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Is Apple's newest iPhone a success? Does it matter?

Apple's iPhone SE. Source: Apple.

Apple's (AAPL 1.81%) financial performance is heavily tied to the success of its core iPhone device. Last fiscal year, two-thirds of Apple's top line was due to iPhone sales. In the recently reported first fiscal quarter, investors reacted harshly when Apple reported flat year-on-year iPhone sales and CEO Tim Cook admitted the company expects iPhone unit sales to decrease next quarter. Since that report, Apple introduced its newest addition to the iPhone family, the 4-inch iPhone SE with a starting price of $399.

Whether the iPhone SE will become a success remains up for debate. On the bear side is KGI Securities analyst Ming-Chi Kuo, who questioned earlier reports that Apple received 3.4 million pre-orders for the new iPhone in the important market of China. Kuo went on to describe demand of the new unit to be "significantly lower" than other models. Additionally, Piper Jaffray found early on that 90% of 100 Apple stores in New York City, Los Angeles, Dallas, and Minneapolis had the device in stock, leading the company to predict lower-than-expected demand.

A recent report from MacRumors is decidedly more bullish, noting that Apple has lengthened its delivery date to April 22-27 in the U.S., major carriers are reporting similar shipping increases, and Apple Stores in large markets of NYC, LA, San Francisco, Philadelphia, and Washington, D.C., are selling out of their iPhone SE inventory.

3.4 million Chinese pre-orders
Many of these reports are based on anecdotes. Not having the device in stock could be indicative of a tremendous pent-up demand, but it could equally be due to supply constraints. On the other hand, Apple's having the iPhone SE in stock doesn't necessarily mean the phone isn't popular, but rather the company properly gauged demand and adjusted supply accordingly.

Perhaps the key takeaway is CNBC's report that Apple had 3.4 million iPhone SE pre-orders in China. Most likely, these iPhone SE pre-orders will show up in Apple's second-quarter earnings. Apple doesn't report iPhone sales on a geographic basis, but 3.4 million of Apple's lowest-cost iPhone SE would represent 8% of the total revenue Apple grossed in China in last year's corresponding quarter. This figure is impressive, but not exactly a thesis-altering event.

Success or not, it's unlikely to stop Apple from shipping fewer iPhone units this quarter
Chinese technology website DigiTimes looks into Apple's supply chain for insight. According to an unnamed source, the iPhone SE shipment target during the quarter is 4 million to 5 million units. Unfortunately for Apple investors, DigiTimes reports that these shipments will not offset falling sales of higher-cost iPhone 6s and iPhone 6s Plus models. If correct, look for Apple to report both lower shipment totals and lower average selling prices. Together, these are headwinds to revenue growth.

It's highly likely that CEO Tim Cook was well aware second-quarter results would include shipments of the iPhone SE. Still, Cook admitted the company would probably report a year-on-year iPhone sales decrease. Cook partly blamed the resolution of supply constraints in last year's corresponding quarter and current macroeconomic headwinds for the projected year-on-year decrease. Even if the iPhone SE is a success, it's unlikely to offset slower current-gen iPhone sales. Look for Apple to provide more commentary on its iPhone SE sales figures during its April 25 conference call.


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