Apple Production Plans: Strength in Macs, Weakness in iPods and iPhones

by: Eric Savitz February 08, 2008 | about stocks: AAPL    

Eric Savitz

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I’ve come across a second Street research note addressing the status of Apple’s (AAPL) production plans.

Yesterday, as I am sure you will recall, I wrote a post about a note by Friedman Billings Ramsey analyst Craig Berger, who said that he had learned that Apple had recently increased its productions plans for the iMac, while reducing orders for iPods and iPhones. Some people criticized the findings, noting that there were several potential explanations. One theory: the company is slowing production of older models in preparation for new models. Others noted that Apple had already said that demand for iPods would slow in the quarter. And still others simply think I’m an idiot, a short-seller, a Communist, or all three. (Not guilty on all counts, by the way.)

Anyway, with that as background, I wanted to pass along a second note, this one from a Boston firm called Detwiler, Mitchell, Fenton, & Graves. They do an unsigned daily intelligence service called Channel Notes. The firm does very useful research on the tech supply chain, I’ve found. And today they addressed some of the very same issues raised in Berger’s note.

Here is the full text of what they wrote:

Our latest checks into Apple’s supply chain suggests continued improvements in PC builds offset by erosion in iPods and weakness in iPhone builds. In our first check since AAPL provided lackluster March Q guidance, PCs appear on track for another record Q with builds suggesting double digit sequential growth.

The builds indicate that March Q should defy normal seasonality for AAPL’s PC sales and increase meaningfully following a roughly 2.3MM unit December Q. For those wondering, it appears roughly 400K MacBook Air are included in the March Q builds.

iPod builds have declined by nearly 1MM units in the last 3 weeks driven mostly by declines in iPod Video builds (both iTouch and Classic) leaving iPod builds down roughly 15% y/y. We estimate AAPL overbuilt iPods by roughly 2MM units in the December Q which may help explain the large y/y decline. Finally, iPhone builds appear on track for roughly 1.3MM units, a data point which confirms many of the rumored production cuts floating on Wall Street last week.

That last item I believe is a reference to recent reports in the Chinese press on reduced production of the iPhone.

So let’s review. Again, we are hearing about strong demand for the Mac, in this case with suggestions of solid early demand for the MacBook Air. And again, we are hearing slowing production of iPhones and iPods. I concede that it would be nicer to have detailed information from the suppliers the analysts are talking to about these issues, but I don’t have it, so take it for what its worth; but a second firm telling the same story gives it some added credence.

Apple on Thursday fell 76 cents, to $121.24; the stock rebounded $1.01 in after hours trading to $122.25.

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This article has 14 comments:

  •  
    Feb 08 08:58 AM
    Suggests a blowout quarter. The profits from desktops and notebooks eclipse by several orders of magnitude profits for iPods etc.

    The note suggests overbuild of iPods in December quarter, Apple reported flat U.S. growth for that quarter ending and about 5% growth in Europe. Obviously manufacturing costs will be down this quarter for the iPod considering they have leftover inventory from preceding period.

    This is nothing but a shell guessing game. Apple will beat the quarter as usual my guess.
    Reply | Link to Comment
  •  
    Feb 08 09:26 AM
    "For those wondering, it appears roughly 400K MacBook Air are included in the March Q builds."

    Whoa. More than I would have expected, as a fraction of MacBook sales.

    iPod builds have declined by nearly 1MM units in the last 3 weeks driven mostly by declines in iPod Video builds (both iTouch and Classic) leaving iPod builds down roughly 15% y/y."

    Surprising, I guess, if the decline exceeds seasonal expectations. I think the Touch is a game-changer. I'm tempted to retire my perfectly good Nano for a Touch; particularly, since my wife won't let me get an iPhone.

    Any chance the iPod data is failing to capture all parts suppliers Apple uses?

    "“Apple has lowered its projected shipments of iPhones from two million units to around 1-1.2 million units” for the fiscal second quarter ending in March."

    Is this lower than the guidance they gave at their last earnings call, last month?
    Reply | Link to Comment
  •  
    Feb 08 01:15 PM
    so apple is on track for selling about 6m iphones instead of the 10m this year, or achieving a market share of 0.5% instead of 1% they're aiming for? it'll be interesting to see which actions apple will take to reach their target.
    Reply | Link to Comment
  •  
    Feb 08 01:51 PM
    Samij: You must really have a lot of RIMM. No one can predict the end of the recession, but I would NOT draw any straight lines regarding iPhone growth: 1) This is usually the the worst quarter for consumer spending 2) more countries will come on-line 3) the SDK is due out soon. 4) 3G is coming to the iPhone. 5) 3G is coming to the US.
    Reply | Link to Comment
  •  
    Feb 08 03:27 PM
    Thomas, just interpreting the numbers. I didn't even add that, as everybody reading these notes nows, Apple gives very conservative estimates. If Steve says i 1%, Apple's really aiming to at least 1.5%. That's about 17-18m iphones to be sold this year.

    1) even if this was worst quarter for consumer spending, they are way way way behind their target. 2) there isn't any large cell phone market left to "come on-line". canada? only one gsm operator, not gonna bend for apple's terms. china? they laughed apple's management trainee bringing apple's term out of the door. korea, japan? incompatible technology. the rest? small pieces and apple's special terms mean that the negotiation will be lengthy and resource consuming. no quick fix there. 3) no sdk news, it was supposed to be due this month. what are they waiting for? 4-5) end of 3q, beginning of 4th seems likely for 3g iphone, won't have that much affect on sales. iphone will be old news by then anyway.
    Reply | Link to Comment
  •  
    Feb 08 04:42 PM
    That $18 per month kick back is absurd
    Reply | Link to Comment
  •  
    Feb 08 07:53 PM
    "That $18 per month kick back is absurd"

    Money in my pocket.
    Reply | Link to Comment
  •  
    Feb 08 07:55 PM
    "2) there isn't any large cell phone market left to "come on-line". canada?"

    The EU; they are only in England, Germany, France right now.
    Reply | Link to Comment
  •  
    Feb 09 06:29 AM
    Good to have a second source for supply checks, and thanks, Eric, for providing the information to common investors who otherwise wouldn't have access to such information.

    It seems to suggest that the strength in mac sales may overcome any "weakness" in ipods/iphones.

    Selling over 1 million iphones in this quarter will still be a remarkable accomplishment, especially since this is (1) in only the third quarter of production, (2) in the midst of a consumer recession, and (3) Apple is new to the market, having never sold phones before.

    This is still early in the game. I suspect that Apple will have plenty of tools to boost iphone sales numbers in the future.
    Reply | Link to Comment
  •  
    Feb 09 11:34 AM
    It is irresponsible and unethical to publish an article like this because its based on hearsay and not facts. The headline implies this is all verified and factual. Wow, Savitz, you checked with Detwiler et. al about this. Apple is not going to respond to this tripe because if they responded to all the baloney like this thats all they would be doing. To be fair I would have the same issue with this article if it predicted much higher then expected sales across the board.
    Reply | Link to Comment
  •  
    Feb 09 01:49 PM
    '"That $18 per month kick back is absurd"

    Money in my pocket.'

    Sure but it's not sustainable
    Reply | Link to Comment
  •  
    Feb 09 03:16 PM
    Actually, we don't know yet how much apple gets per month. We only know that RIMM, etc... get nothing.

    Also, the monthly cell charge of $59 is quite reasonable, and paying a similar price for some old tech such as Blackberry is laughable, especially when RIMM gets $0 per month from it.
    Reply | Link to Comment
  •  
    Feb 09 08:38 PM
    Brewer: Have you used a Blackberry? Have you ever administered a BES in a company before?
    Reply | Link to Comment
  •  
    Feb 10 03:54 PM
    "Sure but it's not sustainable"

    What is? NOTHING is permanent, including my ownership of AAPL and ATT stock.
    Reply | Link to Comment
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