The iPhone 6S is widely expected to be unveiled in September, following Apple’s historical pattern of iPhone refreshes, so it should come as no surprise that the company appears to be ramping production. However, a clue from Apple’s 10-Q filing suggests that the iPhone 6S might not be the only new product to be released in the last three or four months of the year.
iPhone 6S production may be ramping
In a report dated Aug. 4, RBC Capital Markets analyst Amit Daryanani and his team highlighted the extremely high level of off-balance sheet commitments in Apple’s 10-Q filing with the Securities and Exchange Commission. The high number, combined with the current time of the year, suggest that Apple is ramping up production of the iPhone 6S.
The RBC team also says that the amount earmarked for manufacturing and component purchases is the highest they’ve ever seen. As a result, they say it’s possible that Apple may be ramping up production on more than one upcoming product. They don’t make any suggestions about what other products Apple may be preparing to launch, but there are plenty of rumored devices like a new Apple TV box and possibly an iPhone 6C.
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Apple’s manufacturing, component commitments climb 41%
Apple stated in its 10-Q that its manufacturing and component purchase commitments were $21.7 billion, which is an increase of 40.9% year over year, according to Daryanani. Other off-balance sheet commitments amounted to $.8 billion. Included in that category are purchase commitments for tooling, research and development, advertising, capital assets, and other spending. The amount is a 14.3% decline from last year’s number.
Clearly Apple has big plans for the second half of this year and possibly the first half of next year. The RBC Capital team suggests that the company could be “securing capacity for incremental products” in addition to production capacity for the iPhone 6S. Further, they stated that the spike in Apple’s purchase commitments is in line to “modestly higher” than the trends which have been recorded previously before product launches.
Is there more room for iPhone growth?
One topic that’s been up for debate for the last few years is whether Apple is too reliant on iPhone sales. Indeed, the smartphone continues to contribute most of the company’s revenue, and growth of the installed base appears to be slowing. Some analysts even question whether 2016 will bring more growth However, UBS analysts Steven Milunovich and Peter Christiansen said in their report dated Aug. 3 that they still seem room to run.
They expect the iPhone 6S to bring more growth in Apple’s fiscal 2016, although they warn that one swing factor in the amount of growth is new users. For 2016, they increased their iPhone unit estimate from 232 million to 245 million but still see room for more upside. The UBS team also noted that Apple’s June purchase commitments suggest upside to the company’s September quarter “based on historical regression.”
How many new users can the iPhone 6S garner?
The UBS team noted that upgrades among Apple’s current iPhone installed base make up approximately two-thirds of all iPhone shipments, which makes this measurement fairly predictable. They’re expecting a 15% increase in iPhone upgrades, assuming that 76% of the base has upgraded to the iPhone 6 by the end of fiscal 2016.
The UBS team also noted that less than 10% of the iPhone installed base upgrades to the iPhone 6 line per quarter, which is about what they expect. About 73% of the installed base has yet to upgrade, and the analysts think this means that iPhone growth in 2016 is likely.
Apple still riding high on China
The big question mark is new iPhone users, which include switchers and first-time smartphone buyers. They note that this number is widely variable and will make predicting iPhone 6S demand difficult. They expect about an 8 million unit increase in new user volume in fiscal 2015 at 31% of iPhone shipments.
Further, they say China is the big driver of new iPhone users because they think about half of buyers in China are new Apple users. The UBS team is also wondering whether the iPhone 6S won’t be available in China immediately. Last year, availability of the iPhone 6 and iPhone 6 Plus in China was delayed. Obviously this will make a big difference in early demand for the iPhone 6S.
Milunovich continues to rate Apple as a Buy with a $150 per share price target.