Apple will "set the world on fire" with "unbelievably massive" sales of the next iPhone, analysts said this week.
"As well as they did with the iPhone this quarter, with all the rumors of a new iPhone [this fall], I was impressed with the results," Van Baker of Gartner said about Apple's second-quarter earnings released on Tuesday. "That tells me when the next generation comes out, they're going to set the world on fire."
On July 22, Apple reported it sold 35.2 million iPhones in the second quarter, a 13% increase over the same period the year before. The number was under Wall Street's expectations of 35.8 million, but still surprising to some, Baker included, because sales have tended to droop in the quarter prior to the debut of new models.
Virtually everyone expects Apple to unveil at least one new iPhone, possibly several, in September and the following months, if only because of a rising tide of component leaks from sieve-like Asian suppliers. That smartphone, dubbed "iPhone 6" by outsiders in lieu of any formal acknowledgement by Apple, will reportedly boast a larger 4.7-in. screen, with an even-bigger second model sporting a 5.5-in. display possible at the same time, or more likely, later this year or early in 2015.
Pent-up demand for a larger screen from Apple will trigger a buying spree, analysts have predicted. Smartphones with bigger displays are increasing their share of the total market, and are especially important in countries like China, where they serve as both phone and tablet substitute. Apple boosted the size of the iPhone's display from 3.5-in. to 4-in. with 2012's iPhone 5, but contrary to some expectations, used the same-sized screen for last year's iPhone 5S and 5C.
And China, as Apple CEO Tim Cook has repeatedly said, is the company's best growth opportunity.
"But there's a lot of pent-up demand among developed economies for a bigger iPhone, too," Baker contended. "I think [the iPhone 6] is poised to do extremely well."
Other long-time Apple watchers were on board, too. "I am extremely bullish about the iPhone 6," said Ben Thompson, an independent analyst who covers the technology field from his Stratechery website. "It's going to be unbelievably massive."
Apple seems to be expecting the same: In the second quarter, it committed a near-record $21 billion to third-party manufacturers for components and equipment as they presumably geared up for a string of new product announcements this fall.
Those commitments, as Apple has regularly laid out in its quarterly filings with the U.S. Securities and Exchange Commission, are pre-payments for outsourced manufacturing and the components those companies use to assemble products. As of the end of June, Apple had $15.4 billion in such commitments.
Also off the balance sheet was an additional $5.6 billion in obligations, mostly for acquiring manufacturing and tooling equipment put in place by Apple's component makers and product assemblers.
The $21 billion total, then, is an indication of Apple's own build forecasts for the coming quarters, and thus its expectations for sales. The $21 billion is 46% higher than the same period the year before, a quarter prior to the launch of the iPhone 5S and 5C. The $15.4 billion in manufacturing/component commitments is 18.5% higher than that line in the second quarter of 2013.
Jan Dawson, chief analyst at Jackdaw Research, after agreeing that the numbers are big, cautioned against reading too much into the data, which some have used to bolster opinions that Apple will introduce at least one new product category, probably a wearable line, this year.
Apple's pre-paid commitments for components, tooling and equipment to third-party suppliers and manufacturers exploded in the June quarter, a signal, say analysts, of a huge second half of 2014 for the impending iPhone 6. (Data: Apple, SEC filings.)
"It's so hard to put this into context, because Apple's revenues and shipments from iPhone are growing constantly, and it's virtually a certainty that the fourth quarter will be Apple's biggest quarter ever even if it doesn't launch new products," Dawson said in an email. "As such, you'd expect to see a ramp up in this stuff."
Thompson echoed that. "I do think most of the investment is for [the iPhone 6] specifically," he said in an emailed reply to questions Saturday.
Even so, Dawson was intrigued by the $5.6 billion in commitments for tooling and equipment, the largest amount Apple has ever poured into that bucket, and 24% more than the previous record of $4.5 billion in the second quarter of 2012. That was just months before the introduction of the iPhone 5 and the iPad Mini, the latter a new segment of its tablet line.
"I found it interesting that the 'other' commitment is by far the biggest ever, which covers things like production facilities and factories," Dawson said. "If they're investing in new ways of making products, that's where that would show up. I think it's extremely likely that Apple is planning for a very big iPhone quarter at the very least, but I think the sheer level of spending points to one or more new products, too."
The June quarter was the second straight that Apple had significantly boosted its tooling/equipment commitments. In 2014's first quarter, Apple reported $2.8 billion in such obligations, an 87% increase from the previous quarter, and with the exception of 2012's June quarter, the highest ever until the just-reported period.
In the last six months, Apple has committed $8.4 billion to the tooling/equipment category, 21% more than any other two-quarter stretch in the company's history -- another data point that may support Dawson's contention that Apple has something new up its sleeve.
Like Baker, Dawson and Thompson, most analysts anticipate a big second half for 2014's iPhone, again assuming that Apple does debut handsets with 4.7-in. or larger displays and, like last year, starts selling the new model(s) late in September.
Brian White of Cantor Fitzgerald, for example, has forecast Apple will sell 37 million iPhones in the third quarter -- a 9.5% increase over 2013 -- and 57.8 million in the final, fourth quarter, which would represent a 13.2% boost from last year.
China will be key, White said in a note to clients last week after Apple announced the June quarter financials. "We believe Apple has the potential to be one of the major beneficiaries in the smartphone world within China given its relatively new relationship with China Mobile and our expectation of a larger-sized iPhone 6," White wrote.
Apple struck a deal with China Mobile -- China's and the world's largest mobile carrier -- late last year; the carrier began selling the iPhone in mid-January. The iPhone 6 will be the first model available to China Mobile subscribers at launch.
Brian Marshall of ISI Group was even more bullish than White on the fourth quarter, predicting that Apple will sell 62 million iPhones in the year's last three months, an increase of 21.5% over 2013, when the Cupertino, Calif. company unloaded a single-quarter record of 51 million iPhones.
"If Apple releases new ~5-in. iPhone models in 2014 as expected, this could create a massive upgrade cycle," Marshall told clients Tuesday. "Not only have many in Apple's installed base been waiting for a larger phone, many loyal Apple users who switched to Android for a larger display are likely to return to iPhone as well."
Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer, on Google+ or subscribe to Gregg's RSS feed. His email address is [email protected].
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