Apple, Inc. (NASDAQ: AAPL) should get greater margin contribution from iPhone 5S and 5C than iPhone 5 for the 16GB version and margins could even better Apple's guidance.
Apple announced it sold 9 million plus iPhone 5S and 5C devices in 3 days after its launch on Sept.20 and that demand for iPhone 5S has exceeded the initial supply. Separately, Apple announced that it expects to post fourth quarter revenue and gross margins near the high-end of its prior guidance range of revenues of $34 billion- $37 billion and gross margins of 36-37 percent.
Consequently, the new products will be accretive to the corporate margins immediately and likely improve over time as volume ramps and supply chain efficiency improve, thereby giving Apple flexibility to drive 5C prices lower in the future.
"We believe the combination of relatively lean inventories exiting the September quarter and a very large backlog of iPhone 5S orders sets the stage for a strong December iPhone quarter," Deutsche Bank analyst Chris Whitmore wrote in a note to clients.
The low-end version of the iPhone 5s with 16 gigabytes (GB) has a bill of materials (BOM) of $191, according to the preliminary results of a physical dissection of the device conducted by the Teardown Analysis Service of IHS Electronics & Media. When the $8 manufacturing expense is added in, the cost rises to $199. The compares to a $197 total cost for the original iPhone 5, based on the completed IHS teardown analysis from one year ago.
On the other hand, the 16GB model of Apple's iPhone 5c carries a bill of materials (BOM) of $166, based on a physical dissection of the production. Including the $7 manufacturing expense, the cost rises to $173. The 32-GB model carries a combined cost of $183.
While this is considerably less than the $197 BOM and manufacturing cost for the original 16-GB iPhone 5 based on the final results of the IHS teardown conducted one year ago, it's still on the high end for a smartphone.
To attain the cost an! d pricing required to merit low-end pricing of $400, while maintaining Apple's customary high hardware margin, the combined BOM and manufacturing expense for the iPhone 5c would have had to amount to about $130.
Many expected Apple to take an affordable strategy with the iPhone 5c, producing a lower-cost smartphone that would be priced at around $400 in order to address developing markets, such as China.
However, Apple offered a phone with a $173 BOM and manufacturing cost, and a $549 price tag without subsidies. Once again, Apple has stuck to its old tried-and-true formula of optimizing its iPhone hardware gross margins to attain maximum profitability.
The iPhone 5S has a BOM ("bill of materials") + manufacturing cost of $199 (vs. $207 for the iPhone 5); therefore, the incremental cost for the fingerprint sensor is entirely offset by cost improvements across most other categories.
Similarly, the BOM + manufacturing cost improvement on the iPhone 5C versus the prior generation is about $33 (or 16 percent) primarily from the plastic cover in the 'Mechanical' category, camera and processor. As a result, despite the ASP being $100 lower (i.e. $549 for the 16GB iPhone 5C versus the $649 iPhone 5) the margin profile for the new phone is accretive.
"The analysis shows both the iPhone 5S and 5C have greater margin contribution than iPhone 5 (roughly 1pt of additional margin for the 5S and 50bps for the 5C) for the 16GB version," Whitmore said.
Meanwhile, several retail checks reveal Apple is experiencing daily iPhone 5S stock outs at stores. On the other hand, iPhone 5C checks show that the stores had an ample supply of all colors and storage versions. Discussions with store representatives indicated that a portion of customers seeking the iPhone 5S were willing to purchase the 5C rather than wait.
"This occurrence was most common with customers upgrading either an iPhone 4/ 4S, with the iPhone 5C's feature set representing a meaningful spec bump compared to their ex! isting 4 ! and 4S, which made the iPhone 5C upgrade a compelling one," Whitmore noted.
In aggregate, demand for iPhone 5C is healthy, but it is not coveted in the same way as the iPhone 5S.
"High availability of the 5C lends credence to our view that roughly 2M of the 9M first weekend sales were related to channel restocking and sell-through was roughly 7M. However, in the aggregate, we believe carrier outlets are receiving less stock than Apple retail stores and aggregate inventory levels throughout the system are well below normal," Whitmore said.
As a result, Apple may report a decrease in iPhone channel inventory from last quarter's 11 million number due to the late quarter launch of the new products, inventory reduction of older iPhones through the quarter (prior to launch) and virtually no iPhone 5S channel inventory.
The combination of relatively lean channel inventories exiting the September quarter and a very large backlog of iPhone 5S orders sets the stage for a strong December iPhone quarter. When combined with October's iPad refresh, Apple appears well positioned to deliver a strong holiday quarter.
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