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Review of Apple's unit numbers released in legal filing prior to earnings

Apr 19, ’11 5:32 PM
Author Categories Financial

Thanks to Nilay Patel at This is My Next for posting the complaint filed on April 15th against Samsung by Apple which revealed some potentially material data about its performance in the last quarter (which won’t be public until the 20th).

On page 4:

“As of March 2011, more than 108 million iPhones had been sold worldwide”
“By March 2011, Apple had sold over 60 million (iPod touch) units.”

On page 5:

“By March 2011, Apple sold over 19 million iPads”.

These numbers are material because we know units sold prior to CQ1 and can derive the minimum units sold for these three product lines during Q1.

Namely:

  • Total iPhones sold before Q1: 89,971,000 implying a minimum of 18.1 million sold during the quarter (my estimate is 18.4)
  • Total iPod touch sold before Q1 (estimated): 55.5 million implying a minimum of 4.5 million iPod touch sold during the quarter (my estimate 5 million)
  • Total iPads sold before Q1: 14,789,000 implying a minimum of 4.2 million iPads sold during the quarter (my estimate is 7.3 million).

The only outlier in terms of delta to my estimates is the iPad units which has always been the wildcard.

Apple published lower bound figures but it’s a matter of speculation as to how far below actuals they are. Nevertheless, I would treat the iPad numbers with extreme caution.

  • joe zou

    "By March 2011" is pretty vague, beginning of March? End of March? if it's the beginning of March, iPad 2 was not event shipped yet.

    • HTG

      No surprise there… Apple knows that analysts will be crawling all over this filing for tidbits of data – if they published end of March numbers they might get a call from the SEC with a please explain for not releasing the info to the market…

      The purpose really is to say… 'we have shipped a lot of product', without disclosing exact numbers and timeframes…

      Horace and others probably shouldn't be too quick to jump to conclusions – anyway – it will be all out in the open tomorrow….

  • RattyUK

    Wondering if Apple are referring to iPad 1s and not iPad 2s there…

    • Raja D

      iPad in the document refers to one released in 2010. It is obvious that iPad 2 not included. Also Samsung has not had enough time to copy iPad 2 yet:)

      • Raja D

        IPad referred in page 1. Para 3

      • http://twitter.com/rogerdodgerTM @rogerdodgerTM

        In that file iPhone is iPhone. It is not iPhone 4 or iPhone 3GS, neither iPod touch is iPod touch 2nd gen or 3gen.

        On the other hand, I think iPad is referring to iPad 1 since Apple doesn't want you to know how many iPad 2 were sold.

      • http://twitter.com/rogerdodgerTM @rogerdodgerTM

        At least not until tomorrow. Of course.

      • rattyuk

        We'll find out tomorrow as you point out roger… But the guys over at Business Insider are falling over themselves at this "news".

  • http://twitter.com/rkrishnakumar @rkrishnakumar

    Like the others, does the fact that it's March 2011 change things up? Interestingly it also mentions by March 2011, and the iPad 2 was announced on March 2, so is it possible that 18 million iPad 1's were sold by March 2011, and the iPad 2 figures are not included?

    • asymco

      They certainly left themselves plenty of wiggle room, however two of the numbers were very closely matching my expectations for end of quarter data so that's the only reason I'm considering that all three were sampled around the same time. Conversely, my numbers could be way too low for the other products.

      • r.d

        Apple shipped a lot of ipad just as the quarter ended.

      • http://twitter.com/rkrishnakumar @rkrishnakumar

        Thanks for the prompt response! I noticed the similarities between your numbers and those released by Apple, do you plan to put out new figures/predictions after the release of these numbers?

      • Iosweeky

        I always felt 21 million iPhones was possible thus quarter…

  • http://twitter.com/bobegan @bobegan

    Typo, its 60 mill iPod Touch units..

  • Xian

    I'm sorry, I'm not sure what you mean by "extreme caution" with regard to iPad numbers. Do you mean that APPL could be setting up for a big disappointment when it reports on Wednesday OR do you mean that the iPad numbers in the documents should be treated with extreme caution?

    Thanks very much

    • asymco

      Not in the least expecting a disappointment. A little sensitivity analysis shows that the worst case scenario is earning $6.10. What I meant is treat estimates (including my own) with extreme caution. That's a product that is completely unpredictable right now.

      • Xian

        Thank you very much for your quick response and clarification.

        Favorite blog on the net.

  • Ziad Fazel

    The lag of reporting actual sales, rather than shipments, might be higher with the new iPad2 and its new retail channels right at launch.

    Whereas the reporting channels for iPhone and iPod Touch sales are mature and proven.

    • Kizedek

      Yeah, I can see what you mean. But in Apple's case, isn't their "innovative" inventory channelling system a system more reflective of actual sales to end users anyway? Regardless of how many new stores they add to the mix (such as Toys-R-Us)? In other words, are they so dependent on the reporting mechanisms of individual retailers and whether or not these mechanisms are mature or proven in order to get accurate numbers?

      Apple seems to keep less inventory "in the channel" than any other manufacturer, apparently (does anyone know how Apple ships its units to final store locations?). I get the impression that you don't get thousands and thousands of Apple units sitting in a regional Walmart or Target warehouses awaiting shipment to final local store destinations ("stuffing the channel").

      I get the impression that small orders (5-50 let's say) get shipped directly from the assembler to each local store. I further get the impression that the stores don't receive further shipments until these are sold. I also get the impression that "stockpiling", as Best Buy is supposed to have done, is hard to do with Apple.

      So, if there are any unsold units of Apple products "in the channel", it could be, at worst, in the order of 5 or 10 x number of stores, maybe tens of thousands for any given product, but certainly not a very significant number. Apple seems to be good about stating what is left in inventory after a quarter, and their figures for "shipped" pretty much match "sold", and if they say "sold" they mean "sold to end users".

      With the iPad, you might be lucky to find 5 or 6 in a given store, with 5 or 6 more directly on route to the store. I know I could hardly find the iPad1 when visiting the US last May/June… I had to call several BestBuys before finding one that still had some — three 64GB 3G models in stock.

      • Ziad Fazel

        Thanks, Kizedek. Good questions.

        I note that others have commented the numbers probably do not include iPad2, for various reasons like Apple wanting to keep them confidential, and/or not being able to claim Samsung copied that product before its release. But let's focus on our inventory discussion.

        "are they so dependent on the reporting mechanisms of individual retailers and whether or not these mechanisms are mature or proven in order to get accurate numbers?"

        Basically, yes. Shipments to retailers are not sales, and while activations give some indication, these also could be delayed with people buying as gifts or shipping from US to other countries before their launch. Activations are not GAAP reporting, either.

        I might have used the wrong words with "mature and proven." Here I mean there are new retailers getting iPad2 and it may be taking them longer to report their sales back to Apple as ones where the reporting is established and frequent, perhaps even daily. Some retailers may only be giving Apple a monthly or weekly report, which affects a product only out a month.

        "I get the impression that you don't get thousands and thousands of Apple units sitting in a regional Walmart or Target warehouses awaiting shipment to final local store destinations ("stuffing the channel"). "

        Not stuffing the channel, but getting enough units out for a big launch, balancing the risk of a large inventory v customers coming away from launch weekend empty-handed. These would be stored anywhere in the channel from the shipping company warehouses, the retailer warehouses, and the stores themselves. Apple sold about 15m iPads in its first year, so about 40k/day, all constrained by production. On launch weekend they sold at least 500K. That is over 12 days of sales, and probably two months of startup production ramp. See Horace's analysis of iPhone for context.
        http://www.asymco.com/2011/03/28/predicting-iphon…

        "But in Apple's case, isn't their "innovative" inventory channelling system a system more reflective of actual sales to end users anyway?…Apple seems to keep less inventory "in the channel" than any other manufacturer,"

        Apple does manage inventory (and supply chain overall) extremely well (Tim Cook rocks) but they are not unique. Dell perfected this in the computer industry in the 90s, spawning many Harvard Business Review studies, and setting the example for many other companies to generate working capital from their operations. Apple did it, especially with their operations in Ireland, before the great offshoring movements to Mexico and Asia in the last decade. I work in this field and know it well.

        But for a launch, companies make intentional decisions to prepare much more inventory than normal, and make financial provisions to cover recalling all that inventory in case of a defect (or carry it indefinitely in case of poor sales, ahem Galaxy Tab). That launch inventory may have been spread thin across thousands of Best Buys, but across all of Apple's channels the total inventory was many multiples of production and sales higher than steady state.

        And just as Dell's advantage of immediate information about sales volumes and mix through direct sales became diluted as it opened up retail channels, same effect on Apple. You get more sales, but slower feedback to your supply chain. Having their own chain of retail stores keeps Apple in the loop better than Dell, but still affected by slower reporting from other retailers on a month-old product.

  • r.d

    According to Goldman Sachs
    iPad has gross profit of $218. http://static4.businessinsider.com/image/4dadb5c5…

  • Kevin

    The iPhone will beat wall street analysts consensus by 2 million. It's the higher margin product if I'm not mistaken

  • poke

    If the iPad 1 sold at the same rate it did in the June-Sep quarter in 2010 (before the holiday season) between January 2011 and March 11th when the iPad launched, that works out at about 3.2 million iPad 1s (assuming steady rate of sales). Add 1 million iPad 2s sold between the launch and the end of the quarter and you have the 4.2 million figure. Hoping this isn't the case though.

    • xian

      Poke, but doesn't the complaint read "by March '11" not "As of March '11" as with reference to iPhone numbers? That would imply, to me at least, 4.2 million on or approximate of March 1 2011.

      If they shifted a couple of million iPad2s during the two week launch period (March 11-March25) that would at bring it to approx 6.2 million.

      I am of the mind that they are referring to iPad1 numbers in their complaint.

      • poke

        I agree that it's probably just iPad 1 numbers. But it's interesting that the figure is roughly in line with selling the same number of iPad 1s as in Q4 2010 plus a bump for the iPad 2 launch. It could be that the iPad will sell much like the iPod, with a big bump in sales around the holidays, but that rise isn't sustained into the following quarter. Because the new iPad was released after the holiday quarter, rather than just before (as with the iPod), we're seeing iPad sales fall back to their pre-holiday plateau before the new product release causes sales to rise sharply.

      • batfink

        4.2 is also consistent with the production rate of 2 – 3 million units per month reported at the end of 2010. To me the tea leaves and the language point to 'by March' meaning early / start of the month. Meaning the iPad 2 launch and iPad 1 clearance numbers will change the picture considerably.

        On top of which, Apple would never pre-release definitive numbers; one, it's just not their style, and two, they're in a blackout period until tomorrow's earnings announcement. The SEC *could* have their walnuts if they so-desired, and to avoid that risk Apple could simply have held onto the lawsuit for two more days.

        There is no way these are final sales numbers.

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  • addicted

    An additional point about using these numbers is how accurate (and up to date), the information Apple provided to the law firm. I wouldn't expect them to provide immediate numbers. But the Wednesday numbers just got a little bit more intriguing.

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  • Dave

    I doubt Apple would use an outside law firm for anything. Apple's legal department is probably amongst the best and given Steve's penchant for secrecy, I cant see him trusting Apple's most important secrets with any outside entity. That said, I too think we are seeing numbers which are not counting the iPad 2.

    • joey

      Actually, Apple uses OMM over the years for most of their big disputes. I'm guessing thats who is involved in this case, too. In-house lawyers are just for day-to-day stuff, not big disputes, as in-house lawyers are typically not as specialized and current as the ones at firms. Appleinsider has even mentioned OMM before.

      • addicted

        +++

        There are very few companies that use in house legal, and advertising services.

        I bring up the advertising aspect, because for a long time (and still) a lot of people attributed all of Apple's success to its marketing. Something I found hilarious, considering the same firms they used were available to all their competitors. If that was all there was to it, why didn't MS, etc. just go ahead and hire their advertising agencies?

      • Brenden

        Advertising and Marketing aren't necessarily the same thing. A big part of marketing is understanding your market and designing products that people will want to buy. This can be achieved through various means, including market research and also just having smart people at the company who "get it." I think the latter is what provides Apple with it's biggest advantage, and as Steve Jobs has pointed out, it's not something you can have just by writing a big check.

      • kizedek

        yep, Apple knows its Purple Cows.

  • Neil

    So Apple is going to miss iPad target by over 2 million units?

  • Neil

    This would absolutely crush the stock ? Thats a huge miss.

    • Xian

      No. "by March 2011" would indicate the numbers do not include the iPad2 launch

  • Federico

    The filing says iPads not iPad 2. Hoping maybe against hope that iPad 2 figures are not reflected.

    • Hamranhansenhansen

      Of course they are not reflected. How would Samsung have been able to copy iPad 2? It is not germaine.

      • xian

        EXACTLY. Thank you.

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  • Wayzom

    It is funny watching all the wanna be analysts trying to spin this into an iPad2 miss in their cute little blogs. The document is pretty clear that the iPad sales do not include the month of March..There is no ambiguity whatsoever.

    It seems clear they cut of the number at the beginning of March for a number of reasons. It was likely the most solid data they had when they wrote the filing and it also keeps them from pre-announcing anything about iPad 2 sales.

    • addicted

      Read as: Buying opportunity.

  • Wayzom

    To be clear I am not referring to this post, but all the ping backs trying to garner clicks with sensational headlines.

  • skips

    One can apply some sanity checks to the numbers. For instance, Apple has repeatedly stated that the iPod Touch sells at approximately 30-40 percent of the rate of the iPhone. These percentages suggest that the iPod Touch number that would be commensurate with the iPhone number should be about 5.5 to 7 million. If one assumes that the 4.5 number corresponds to two months and the rate was unchanged in March, the total would come out around 6.7 million, which is consistent.

    For the iPad, it is a bit more difficult to sanity check the numbers. However, if one assumes that the sales rate is continuing to grow and the numbers from Apple's 2011Q1 were inflated 50 percent due to the holiday buying (approximately half way between the iPod and the iPhone changes), a number of 6 million for the 2011Q2 period would not be unreasonable. Thus once again the 4.2 million is consistent with two months of sales and a total sales figure of 6 million for the quarter would not be unreasonable. Obviously, there are some larger uncertainties about this number due to the shortage of iPad 2s and the lack of clarity over whether the problem was with production or excessive demand.

    Nonetheless, it will be interesting to see what Apple reports tomorrow.

    skips

  • Hizkyas

    One thing to note is that if you read the lawsuit, the iPhone 3GS, the iPhone 4, the iPod Touch and the iPad are mentioned but the iPad 2 is not mentioned. Although similar, the iPad 2 has distinct features such as camera. I am inclined to think that the 4.2 number only includes iPads and not iPad2s.

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  • KenC

    As noted, "by March" leaves ALOT of wiggle room. I usually assume that would mean March 1, but as Horace notes, the other "by March" the touch numbers seem to be a whole quarter's sales, unless those were flying off the shelf. Either way, we'll know tomorrow at 4:30pm ET.

    • joe

      iphone and ipod number is "as of march 11", ipad number is "by march 11", ipad 2 started shipping March 4 and are not included.

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  • http://twitter.com/artman1033 @artman1033

    Horace:

    13,000 page views of this page….

    47 retweets! You must have hit a nerve!

    KEEP UP THE GOOD WORK!

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  • Omar

    I’m not sure why some of these blogs are seemingly writing articles suggesting Apple missed their sale mark with iPad2. I guess there’s a huge following out there that wants to see the most successful and innovative American company fail.

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  • YipYipYipee

    Excellent job on the AAPL quarterly numbers, Horace. As usual, you’re making the affiliated analysts look like amateurs. Speaking of which, please email me a set of lottery numbers. I’ll split it with you 70/30… In your favor of course! 😉

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