Apple Inc. (NASDAQ:AAPL) seems to be preparing for the iPhone 7 launch, as is typical for this time of the year, and the company doesn’t seem to be expecting much out of it, probably because it’s not a huge upgrade from last year. On the other hand, it sounds like sales of the less expensive iPhone SE are going very well, and it might be this underdog handset that gives Apple Inc. (NASDAQ:AAPL) the boost it needs to return to unit growth for its smartphone. But how much of a problem will cannibalization be?
iPhone 7 production flat with last year
In a report dated August 22, Longbow analysts Shawn Harrison and Gausia Chowdhury said their contacts in Apple Inc. (NASDAQ:AAPL)’s supply chain report that production on the iPhone 7 is tracking flat with that of last year’s iPhone 6s. Production on this year’s model is apparently in full swing, while cuts in iPhone 6s production continued into the September quarter, although the drop appears to be much greater than previously expected. The analysts said the drop looks to be 40%, compared to the previous forecast of a more than 30% reduction.
They add that production for the iPhone SE is now projected at more than 7 million units for the September quarter, compared to 5 million previously. In fact, some of their contacts see the potential for upside to 9 million iPhone SE units in the quarter.
In total, their contacts in Apple Inc. (NASDAQ:AAPL)’s supply chain are projecting a decline in the low-single digits compared to last year for iPhone production in the second half of the calendar year. For the full calendar year, they’re expecting a 10% year over year decline. Longbow is projecting a 4% decline in iPhone shipments for the second half of the calendar year (excluding the extra week in the December quarter), which is in line with consensus, and a 9.5% decline for 2016, which is a little worse than the consensus of a 9.4% decline.
Apple’s margins in focus
A natural accompaniment to the iPhone SE doing better than expected and the iPhone 7 remaining flat with last year is pressure on Apple Inc. (NASDAQ:AAPL)’s margins. However, the Longbow team said there’s a lot of talk among the company’s suppliers about price downs, and they’re not the only ones talking about Apple’s recent pressure on some of its suppliers.
Harrison and Chowdhury report that their contacts have highlighted price downs that are bigger than usual at 10% to 20%, compared to the typical price downs falling into the mid-single digits. They added that almost all of their contacts in Apple Inc. (NASDAQ:AAPL)’s supply chain is involved in the price downs, including the company’s contract manufacturing partners. The parts of the chain that don’t appear to be affected are the camera and speaker suppliers.
The Longbow team noted that these price downs should benefit Apple Inc. (NASDAQ:AAPL)’s margins in the second half of fiscal 2017.
Still upside to Apple’s iPhone numbers: Goldman
The Longbow analysts are projecting a 9.5% increase in iPhone shipments for the September quarter, which would bring the number to 44.2 million units. Wall Street estimates range from 40 million to 46.8 million units.
Goldman Sachs analysts are forecasting 44.6 million units for the quarter but added in their August 22 Hardware note that their July supply chain checks suggest possible upside to that number. Consensus stands at 43.4 million units. The firm said in June that it expects a mix shift toward the iPhone SE as consumers prefer the less expensive model with upgraded specs over the iPhone 7 with its (probably) lack of major upgrades compared to the iPhone 6s last year.
