One week ago we reported something unpleasant for the world's largest company: China Daily had reported that Apple's key Taiwanese supplier, Pegatron, had halted hiring "due to poor iPhone sales." Today, Credit Suisse confirms much of the cautions laid out previously in a note in which it says "iPhone supply chain orders have weakened recently. In our view, the continued weak supply chain news could weigh on Apple shares for the next few weeks/quarters."
As a result of the change in sales expectations, the Swiss bank is lowering its CY16 EPS estimates by 6%, but since it doesn't want to get on Tim Cook's bad side, says that it continues to "believe that with high retention rates, continued installed base growth, and the optionality of a smaller 4-inch iPhone, Apple remains an Outperform."
In other words, the current weakness, previewed here, is "transitory", or so CS hopes.
Here are the details from Credit Suisse' note on Supply-chain cuts:
Production cuts. Apple has lowered its component orders by as much as 10% according to our teams in Asia. The cuts seem to be driven by weak demand for the new iPhone 6s, as overall builds are now estimated to be below 80mn units for the December quarter and between 55-60mn units for the March quarter. We lower our CY16 units to 222mn from 242mn to reflect this and assume 235mn for 2017 (6% growth y/y).
Downward revisions anticipated, but coming sooner and deeper. The downward revisions came in earlier (November 2015, versus December 2015) and deeper (by 10% versus earlier expectations by 5%) than anticipated. We believe the softer- than-expected demand could be due to (1) currency volatility, (2) the lack of attractive Apps supporting the new force touch function (which has been the key selling point of iPhone 6s), and (3) macro uncertainties.
Data points suggest a weaker 1Q16. Current data points suggest the production cuts are mostly in the December quarter. However, as the new smartphones have only been available in the market for one month, we believe 1Q16 cuts could be potentially more significant. As a result, we now expect the component supply chain to see a single-digit YoY decline in 4Q15, and ~20% YoY decline in 1Q16. The aggregate number of iPhone builds is now expected to be in the range of 55mn to 60mn in production in the first quarter of 2016.
Pegatron sets solid 4Q guidance. For assemblers, 4Q15 earnings appear solid based on guidance, but 1H16 may be at risk due to iPhone. iPhone component cuts could lead to 1H16 risks for assemblers. Apple may shift to greater 6s orders to Pegatron as Hon Hai is exclusive on the new 4" model. We expect Pegatron to ship 22/18mn iPhones in 4Q15/1Q16 and 66mn/70mn in CY15/16.
Is the supply chain a good read? It is worth remembering that Apple's supply chain is vast with an additional complication with the timing between Apple's sell-in and sell-through numbers. Additionally, what is important to note with these estimates is the strong correlation (R = 0.95) between production builds and reported sales, as shown in Exhibit 2 over time.
Specifically, we found that the December quarter builds are being estimated at around 80mn, which would suggest iPhone growth in 4Q15 and indicates our iPhone estimates of 78mn remains intact and conclude the weakness in the supply chain comments is more likely an indicator of iPhone volumes in 1H16. As shown in Exhibit 3, we lower our total iPhone unit estimate by 20mn for CY16 to 222mn.
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If CS is right (in confirming what we previously reported both a week ago and a month ago using channel checks) and if the consumer, both US and Chinese, is tapping out then the recession is surely upon us now that even this company, which until now had shown dramatic resilience to any economic fluctuations, finally feels the sting of the disappearance of the global middle-class.
However, this too will surely be good news for stocks, which will surge on hopes that central banks will be forced to implement even more easing as part of the Fed's 128th mandate: keeping iPhone sales brisk and from the bottom left to the upper right.
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It appears some are agreeing with us and the CS report...