Apple may release two iPhones in September
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Apple might surprise consumers this year by releasing not one but two iPhones, an analyst for Deutsche Bank Equity Research says.
Chris Whitmore predicted that at the same time Apple releases a fifth-generation iPhone, probably in September, the company will also show off a speedier version of the existing iPhone 4 that consumers will be able to buy for $350 without a contract. The lower-cost phone, he said, would feature a prepaid calling plan in which consumers could pay monthly for a limited number of talk minutes.
Apple’s iPhones are generally among the more expensive smartphones available. But a souped-up iPhone 4, Whitmore believes, could help Apple compete with less-expensive phones from other companies.
Whitmore said that sales of lower-cost, ‘mid-range’ smartphones are expected to grow three times as fast as sales of premium models, such as the current iPhone. By 2014, shipments of mid-range smartphones could surpass those of premium ones, Whitmore said.
‘We believe the time is right for Apple to focus on driving penetration into the mid-range smartphone market and drastically expand its addressable market,’ he said, noting that Nokia Corp. and Research in Motion Ltd., which sell lower-cost handsets, are both struggling.
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It’s time for a mid-range iPhone
We expect Apple to refresh the iPhone in September with two SKUs;
namely the iPhone 5 and a lower-end iPhone 4S handset. With Nokia
and RIMM struggling, the time is right for Apple to aggressively
penetrate the mid range smart-phone market (i.e. $300-500 category)
to dramatically expand its addressable TAM and market share. We
believe Apple could offer an unlocked iPhone 4S with a pre-paid
voice offering (parallels the 3G data plan vs. WiFi for iPad) which
would drive significantly greater penetration into its 1.5B+
subscriber reach (2/3 are pre-paid) through 200+ carriers in 98
countries. We estimate an iPhone 4S model priced at $349 would
likely be incremental to Apple’s corporate gross margin (add’l
details in Fig 6) suggesting it can push down-market without
negatively impacting profitability. We also believe near term
iPhone 4 demand is tracking ahead of our previous expectation due
to: the addition of 20+ new carriers in the Q, strong white iPhone
uptake and wider global distribution. We believe Apple’s
international channel and related penetration opportunities are
under appreciated and we are raising iPhone and EPS estimates (DB at
74M iPhones in CY11 and 90M in CY12 vs. prior 71M and 85M,
respectively). Although we expect Apple to move more aggressively
into the midrange smartphone market, it is not currently captured in
these estimates. Looking forward, we expect the upcoming iPhone /
iOS upgrade and channel/carrier expansion to support strong iPhone
demand over multiple quarters. We reiterate our Buy rating and $450
PT. Detailed estimate revisions, company valuation & risk details
are on pages 8-9.
1.5 billion subscribers and room to grow further
Apple added 20 new carrier relationships in 8 additional countries
in the June quarter, which we believe is supporting robust near term
unit demand despite a well-anticipated iPhone refresh in September.
Currently, Apple has partnered with 205 carriers in 98 countries
(vs. 151 carriers in 88 countries in the prior year) and we believe
Apple has plenty of opportunity to grow further (RIM has 580
carriers in 165 countries). As highlighted below, we aggregated
subscriber data from Apple’s carrier partners from 143 of the 205
carrier total to size the addressable subscriber base. We found
Apple has reach into over 1.5 billion subscribers, of which *500M
are Post-paid and *1B are Pre-paid clients. Apple shipped *87M
units over the past 2 years which suggests it has reached only 6%
penetration of its current addressable subscribers. Looking
forward, we believe Apple has room to run both in terms of greater
market penetration as well as incremental carrier additions going
forward.
BOM cost estimates for iPhone and iPod Touch
While we don’t expect Apple to provide details of the new iPhone
until September, we expect 2 iPhone SKUs will be introduced; namely
the iPhone 5 and a lower-end iPhone 4S handset. We believe the time
is right for Apple to focus on driving penetration into the mid-
range smart-phone market (i.e. $300-500 category) and drastically
expand its addressable market. Apple could further segment the
market by offering an unlocked iPhone 4S with a pre-paid voice
offering (similar to the 3G data plan vs. WiFi for iPad). We’d
expect this product to look a lot like the low-end iPod touch with
wireless connectivity built in.
As highlighted below, using iSuppli data and current supply chain
checks we estimate the BOM cost for a refreshed 16GB iPhone is *$170
while an iPod Touch has a BOM of *$140. These estimates exclude
packaging, logistics and distribution costs but does gives a sense
of Apple’s manufacturing margin across the handheld product
portfolio. Looking forward, we expect Apple to standardize the
design and components of the iPhone and iPod Touch platforms to the
extent possible with the primary cost difference between the iPhone
and iTouch captured in the Radio frequency module (baseband,
transceiver, RF components etc) totaling *$20 per device. Using an
unlocked iPhone ASP of $649 we believe the manufacturing margin to
Apple is *70% for the existing iPhone 4 while the iPod Touch has
*38% margins ($229 ASP for the 8GB version). Using this framework,
we believe an 8 GB iPod Touch with a RF module could be priced *$350
(unlocked without a contract) and still generate healthy
manufacturing margins of *53%. We provide a simple sensitivity
analysis in Fig 7 of an iPhone 4S handset showing manufacturing
margin based on retail ASPs ranging from $229-499.
Apple taking share in smartphones
As highlighted below, Apple has made significant share gains in the
smartphone market and currently has 17% share in 1Q11, placing it
2nd behind Nokia which continues to lose share (*25%). We believe
this standing accurately reflects the quality of the iPhone hardware
and iOS ecosystem, with Apple shipping *17M iPhones the March
quarter. Apple’s share gains have been particularly impressive
given that the company entered the market in 2007. In addition,
Apple’s share gains coincide with severe challenges at Nokia and
BlackBerry who have experienced steady declines in market share over
the last 2 years. Specifically, in 1Q11 Nokia and BlackBerry
accounted for 25% and 13% market share, respectively (vs. 41% and
21% share in 1Q09). On the other hand, Samsung and HTC currently
have 12% and 9% share, respectively due to growing adoption of the
Android platform. When analyzing market share by OS, Android leads
with 36% share aided by multiple vendors adopting Google’s free and
open source software. Android is followed by the Symbian OS with
27% share and iOS with 17% share. Looking forward, we expect a near
term iPhone refresh will support further share gains for Apple and
we believe the smartphone OS market to primarily be a 2-horse race
between Android and iOS.
Mid range smartphone has enormous market potential
As highlighted below, third party data from Gartner sizes the mobile
handset market at 1.8B units in 2011 with feature phones /
smartphones (priced $150 and above) representing 20% of the market
or 362M units. Within the smartphone category mid-range smartphones
(*$150-300 ASP), accounted for * 40% of smartphone shipments and
premium smartphones ($300+ ASP) accounted for *60%. As highlighted
below, the mid-range smartphone category is expected to grow at a
32% CAGR to 2015 while the premium category is expected to growth
12% Y/Y. We expect Apple to move down market and target the
emerging mid-range smarthphone market. We also believe Apple can
standardize the design and components (iPhone 4 and iPod Touch) and
leverage its scale to address this market profitably.
Raising estimates
As highlighted in the table below we are raising our AAPL CY11
rev/EPS estimates to $110.6B/$27.00 (vs. prior $108.7B/$26.00) and
CY12 $131.9B/$31.00 (vs. prior $128.7B/$30.00) driven by higher near
term iPhone unit demand (20 incremental carriers in the Q, white
iPhone, full Q of Verizon etc). We also raise our CY11 iPhone
estimate by an incremental 3M iPhones (2M in June quarter) and 5M
incremental iPhones in CY12. This translates into an increase in
our CY11 EPS estimate from $26 to $27 and CY12 increases to $31 from
$30. Please see Figure 13 for more details of the estimate
revisions.
