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Estimating third and fourth quarter iOS shipments

In the 2011 Annual Report(10K) published October 26th Apple states:

The Company anticipates utilizing approximately $8.0 billion for capital expenditures during 2012, including approximately $900 million for retail store facilities and approximately $7.1 billion for product tooling and manufacturing process equipment, and corporate facilities and infrastructure, including information systems hardware, software and enhancements.

The history of these expenditures is shown below (the blue bars are statements from 10K reports including the one above shown as the right-most bar): Three 10Q reports so far this fiscal year have given us updates on asset values and the change in these values are shown as the right-most yellow bar. The asset value change suggests $3.9 billion has been spent so far of the $7.1 billion budgeted. Thus we can estimate that about $3.2 billion remains to be spent in the fourth fiscal quarter (thus bringing the yellow bar to parity with the blue bar in the chart above–a parity that was achieved or exceeded for five out of the last six years).

Assuming $200 million of the fourth fiscal quarter budget will be for land and buildings[1] results in an estimated $3 billion remaining for product tooling and manufacturing process equipment and data centers.

The history of spending for various cost centers is shown below.[2]

Note again the forecast for the fourth quarter based on budget given last October. Also shown below is the spending on machinery and equipment by quarter for the fiscal years 2011 and 2012 including the estimate for FQ4 2012. (Blue bars represent 2011 quarters and green represent 2012.)

As discussed previously, spending on machinery and equipment has shown a strong correlation with the output of iOS devices in the following quarters. The following chart shows the superposition of M&E spending in a given quarter and iOS output in the following quarter.

Note that due to the time-shifting the Expenditure for FQ3 does not have a corresponding output–expected in FQ4–and that FQ4 expenditure is estimated based on budget.

With this data in place, we can now begin to answer the question of what are the total iOS device shipments expected in the current (ending September)  and the following (ending December) quarters.

Our eyes are pretty good at seeing patterns in data so perhaps it would suffice to know the scale to the graph above and thus fill in the colored output bars to match the spending. But to make it a bit more precise, I drew the following chart:

It shows the same data but as an X-Y scatter plot where the X axis is quarterly spending and the Y axis is iOS unit shipments. Note that the actual data points are in the lower left area delineated with a dashed red rectangle.

I drew the blue line corresponding to an assumed linear relationship between the two variables to project the iOS output based on additional expenditures for FQ3 and FQ4.

I used error bars of -20% to show a possible conservative range.[3]

This yields an iOS output of approximately between 65 and 80 million units in the current quarter and 100 to 125 million in the fourth calendar quarter. The sum of the low ends of this estimate is 165 million units.

My current forecast is  53 million units in CQ3 and 110 million units in CQ4 which, together, add up 163 million. Close enough.

Stay tuned for a padcast report with more details on this approach.

Notes:

  1. The company spent $31 million, $66 million and $159 million for the first three quarters on Land and buildings. $200 million in the fourth quarter seems reasonable unless there is a pending large land deal closing in the next two months.
  2. I added leasehold improvements as a proxy for store openings and R&D expense as a proxy for overall product development. These are in contrast to expenditures for product production and support which are represented by Machinery and Capital Equipment.
  3. Note the other data points’ error bars
  • christophe Driver

    It seems the only year when Apple spend less than what it projected was 2009. A year with a difficult economy, and a hot product entering it’s third year (the iPhone at the time)… Sounds familiar? Maybe Apple will again spend less than predicted…
    PS: I apologize for my not so good english in advance…

    • frank

      IF that were to occur those dollars would need to flow down to the bottom line, so it would be a huge beat as that money has to be offset/accounted for by Sept 30th.

      • christophe Driver

        Very true, thank you. Still worth considering, seeing how 2012 looks more similar to 2009 than any over year on Horace’s growth cards…

    • http://www.asymco.com Horace Dediu

      2009 spending was the only underspending exception but 2009 was also the launch of the iPhone 3GS which probably had an easier manufacturing transition than anticipated.

    • http://www.asymco.com Horace Dediu

      2009 spending was the only underspending exception but 2009 was also the launch of the iPhone 3GS which probably had an easier manufacturing transition than anticipated.

  • Jordan B

    The original iPhone showed more than a one quarter delay between M&E spending and iOS shipments. I believe the same could be said about the iPad introduction. Have you looked into this at all? I supposed if iPad mini rumors are true, a theory could be tested soon.

    On a different note, how exactly is M&E spending reported? I believe you previously mentioned how Apple’s leverage allowed them to more or less delay payments to manufacturers. If this delay in payment increased, could this throw off the correlation your chart has showed?

    • http://www.asymco.com Horace Dediu

      I wrote about the delay last October (section titled Phase1: The original iPhone): http://www.asymco.com/2011/10/16/how-much-do-apples-factories-cost/

      Although there are variations in lead times, I chose to simplify the analysis and eliminate assumptions then adding a margin of error. As to the question of M&E spending, the company does not report it directly but provides an update in the 10Q on the current book value of each asset class. I derive spending as the difference in asset values. This ignores depreciation (which is reported but as accumulated across all assets.) So far depreciation has not affected the analysis.

    • http://www.asymco.com Horace Dediu

      I wrote about the delay last October (section titled Phase1: The original iPhone): http://www.asymco.com/2011/10/16/how-much-do-apples-factories-cost/
      Although there are variations in lead times, I chose to simplify the analysis and eliminate assumptions then adding a margin of error. As to the question of M&E spending, the company does not report it directly but provides an update in the 10Q on the current book value of each asset class. I derive spending as the difference in asset values. This ignores depreciation (which is reported but as accumulated across all assets.) So far depreciation has not affected the analysis.

  • graphex

    “in the fourth fiscal quarter…an estimated $3 billion remaining for product tooling and manufacturing process equipment and data centers”

    How do you hide 3 billion dollars of stuff? Besides what a daunting task it must be to spend 3 billion dollars, how in the world do you hide such a massive buildup of manufactured items on suppliers books or manufacturing floor and not have the vendor’s names becoming known. There has to be an awful lot of something being made right now that’s not being forecast or represented on the books in payables and inventory. Maybe they are all private companies or all have good accountants. ;-)

    • http://www.asymco.com Horace Dediu

      I don’t see why “hiding” is necessary or in effect. Last quarter Apple spent $32 billion on suppliers and that had to be kept in confidence. CapEx is a small part of how much cash flows from Apple to suppliers.

    • http://www.asymco.com Horace Dediu

      I don’t see why “hiding” is necessary or in effect. Last quarter Apple spent $32 billion on suppliers and that had to be kept in confidence. CapEx is a small part of how much cash flows from Apple to suppliers.

      • Craig L

        where did you see this? and what was this spent on?

      • KirkBurgess

        Cost of goods sold? All those iPhones, iPads & macs have to be paid for before they are sold.

      • newposition

        I remember reading somewhere that Apple usually gets paid by the customer before it pays it suppliers due to its supply chain efficiency. I think I read that on this site even, I cannot find the quote so I could be wrong!

      • http://www.asymco.com Horace Dediu

        That’s correct but eventually it does have to pay about 60% of its revenues to suppliers.

      • Tatil_S

        This may be true in a cash flow sense, but as soon as Apple takes the delivery of any component, the payment is due and the cost is incurred on the books.

      • http://www.asymco.com Horace Dediu

        Cost of sales. It’s how much Apple pays suppliers and is derived from knowing the gross margin and revenues.

    • http://www.asymco.com Horace Dediu

      I don’t see why “hiding” is necessary or in effect. Last quarter Apple spent $32 billion on suppliers and that had to be kept in confidence. CapEx is a small part of how much cash flows from Apple to suppliers.

  • KirkBurgess

    Excellent analysis.

    The only hiccup I can see is if apple is tooling for a entirely new product outside the current iOS family. In that unlikely scenario I imagine it would be the rumored HDTV – maybe 3 billion cash could be an investment in a partners next generation flat panel plant in return for long term exclusivity of its output. In this case the spending may precede the product intro by more than 1 or 2 quarters.

    Would that sort of investment be included in this budget?

    • http://www.asymco.com Horace Dediu

      I suspect there is some spending on a new product but as the iPad before it, the blend of spending is in proportion to volume and the initial volumes for any new product will be modest.

    • http://www.asymco.com Horace Dediu

      I suspect there is some spending on a new product but as the iPad before it, the blend of spending is in proportion to volume and the initial volumes for any new product will be modest.

      • http://twitter.com/ChristianPeel Christian Peel

        You have often raised the idea that Apple may have learned how to continuously innovate. Also, their new products seem to gain market acceptance faster than previous products; see http://aaplinvestors.net/stats/iphonevsipod/ I do not think it is too much of a stretch to imagine a new product that ships more units (say 6M) or generates more revenue in its first quarter than the iPad did in its first quarter. Combine spending on such a new product with spending on data centers and I think the iOS numbers will come down.

        A related but likely unanswerable question: would an ‘iPhone nano’ or an iPod nano with a GSM chip be considered iOS or not?

        Very useful analysis, thanks!

      • http://www.asymco.com Horace Dediu

        I, of course, assume that any new product will be an iOS product.

      • http://twitter.com/handleym99 Maynard Handley

        I suspect Apple will be jumping into the upcoming smartwatch category soon. Such a device will have most of its intelligence in an associated iPhone (or iPod Touch) and will be basically a big battery, a screen (ideally combination LCD/AMOLED + eInk), and BT hardware.

        Point is — it won’t run iOS. Doing so would make no sense — far too much cost in terms of HW and battery for no obvious gain.

        Tooling up for such a device will take some money, especially assuming that it will
        (a) be popular — tens of millions sold right away and
        (b) be sufficiently differently manufactured from what Apple is doing today that substantial new tooling is necessary.

      • http://www.asymco.com Horace Dediu

        I suspect that Apple will not be jumping into any watch category, ever.

      • jan6

        Much like tablet category before iPad, smartwatch category is neither new nor upcoming. I would say that wearable watches all together are a category to be totally disrupted and destroyed by smartphones.

        At least I don’t wear them anymore. Wanna know the time? Look at your iPhone! Isn’t that exactly what the job-to-be-done theory predicts? Woman might continue to wear them as a fashion statement.

        But if all you want is to know the time?

      • http://policydiary.com/ John S. Wilson

        I’m with Horace on this. Smart watches may become a thing but there’s not a high enough margin for Apple to be interested. And I also think, as he does, that iOS is the future. No way Apple invests in a new category that doesn’t include it.

    • MA51

      Any chance that the spending is related to the investment in Apple’s new flagship HQ building? Not sure how something like this would be in the accounting. I recall reading a rumor that they were buying glass bending machines since the building will not have any straight glass.

      • http://www.asymco.com Horace Dediu

        Not in the current period. Ground has not been broken yet as I think there are permits yet to be being obtained. Building should take until 2015 so expenses will be spread out over several years and they will be identified as Land and Buildings not as Machinery and Equipment.

  • westech

    If Apple enters the TV set business, how and when would this show up in the M&E capital expenditure forecast? Is there any indication that some of it is already in the current quarter?

    • http://www.asymco.com Horace Dediu

      I suspect there is some spending on a new product but, as with the iPad before it, the blend of spending is in proportion to volume and the initial volumes for any new product will be modest.

  • http://twitter.com/lantinian Nikolay Andreev

    53 million iOS units in Q3?

    Simple logic tell us that in Q3 the ever increasing next gen product rumors will lead to even more iOS sales slowdown. Especially for the iPhone, less so for the iPad because of its recent availability in China.

    Apple has just 2 months of effective last gen product sales, since once the invites go out rumors will hit mainstream.

    Even if they manages to sell 15 million iPads, 15 million iPhones and 5 million iPod touches, that stil leaves them to sell another 18 million iOS devices in 18 days.

    I am thinking that you are making an incorrect assumption that all new investments in Machinery and Equipment will go solely for iOS device production. Now maybe Apples considers iTV and iOS device too, but I don’t think they will release it in Q3

    I also think that Apple maybe investing a lot in an 13″ Retina Macbook Pro production capacity too, as its the best product to go again the Windows 8 hybrid laptops in the holidays.

    • KirkBurgess

      20 million iPads, plus 28 million iPhones plus 5 million iPod touchs. Piece of cake.

  • actualbanker

    BTW: The share price is now above the level it was going into the big earnings “miss”. (at $602 in early trading)

  • gbonzo

    Your estimate for Q4 (110 million for Q4) is way too high. I’m sorry to say but you should see that your ruler broke already in Q2. Apple hardware unit sales have grown for 45% per year for four years (includes iOS, iPods and Macs) and that growth is now going down. Tim Cook may say that people waiting for iPhone 5 is a major reason for slowing growth, and that may be true, but it is not the only reason. Use Google Insights for proper data, I think that metric already predicted this demand slowdown, even if the timing was off for 3 months because of China.

    • http://www.asymco.com Horace Dediu

      You can read a second point of view (this time with respect to sales rather than units) here: http://www.appleinsider.com/articles/12/07/31/apples_growing_expenses_signal_blockbuster_56b_holiday_quarter.html

      • gbonzo

        $56 billion would be 20% annual revenue growth, because holiday quarter last year was $46 billion. I can buy that. Your 110 million iOS devices means 80% annual unit sales growth for iOS (61 million -> 110 million) which would mean, I think, something like 50% annual revenue growth for Apple. (I estimated those 110 million iOS devices to bring $60 billion of revenue and total Apple revenue to be $70 billion if your unit sales estimate comes through.)

  • Tatil_S

    A couple thoughts, as I don’t expect iPhone sales to jump so much in the current quarter: At some point depreciation has to bite into the asset value change at more noticeable levels. Apple may have budgeted some large pot of money for that spaceship building (and maybe it expected to start spending earlier than it has so far). Data centers may now be taking up more of the M&E budget than it has in the past. (A new one in Oregon and the expansion in NC) If a new iPhone and even iPad mini is really only 2 months away, it is difficult to imagine $3.2 billion worth manufacturing equipment can be purchased, brought to factory floor, calibrated while workers are trained before they start adding to the manufacturing volume during that short time span.

    • http://www.asymco.com Horace Dediu

      The spending did not just begin. Nearly four billion has already been spent in support of the next product cycle with two billion in the second calendar quarter. I believe the spending in the current (third calendar) period is for production late in the year and into next year. Regarding the campus, I don’t think ground has been broken yet and construction is expected to last a few years. The run rate is unlikely to be higher than $100 million per quarter. Data center spending remains a mystery and calibration of this value is very difficult however, using Google’s capex as a proxy, Apple’s budget is way over (an order of magnitude?) what would be assumed reasonable.

      • Tatil_S

        Apple’s FQ2 investment on M&E has already failed to foretell iOS shipments in FQ3. iOS shipments are unlikely to grow during summer that much, so Apple’s $2 billion M&E investment in FQ3 will also fail to foretell FQ3 iOS sales. That is a lot of pent up M&E, before taking your estimated $3.2 billion spending in FQ4 into account. I can think of four possibilities: 1) Apple missed its own sales estimates and ended up overspending. 2) The spending in FQ2 and FQ3 is for a different product, but Macs don’t sell in such great volumes and I don’t see why Apple would spend that much so far in advance of any new product intro (let’s say the oft rumored TV). Any product flop would result in gigantic losses. 3) The spending is for making components that Apple normally buys, such as building a fab for semiconductors or screens. If so, its gross margin should improve, as the cost of this fab would now be an asset rather than buried in the cost of goods sold to compensate a vendor for investing in such facilities. 4) I was gonna say data centers, but you already shot that down if Apple’s capex is so much more than Google already.

  • Jim Zellmer

    Contemplating an Apple that goes for market share and does not leave a “price umbrella” results, IMHO, in the following iOS products this fall:

    iPod Touch: (new name?): $199 on up. Now available in unlocked Wifi+3G (iPhone 5 is LTE/”4G”)

    iPad: $299 on up with at least 2 form factors, LTE and wifi versions. At some point, there will be a larger version.

    iPhone: Multiple form factors across the price points. Remember iPod starts at $49. I just gave the Samsung Galaxy SIII a spin. I understand the retail appeal of the larger screen, but agree with some that the form factor yields a “thumbless” wasteland – and I have not small hands/fingers.

    Apple TV: Others have speculated far more intelligently than I.

    Dear Leader’s analysis of the Sculley era’s numerous errors includes:

    “The Mac-user interface was a 10-year monopoly,” says Jobs. “Who ended up running the company? Sales guys. At the critical juncture in the late ’80s, when they should have gone for market share, they went for profits. They made obscene profits for several years. And their products became mediocre. And then their monopoly ended with Windows 95. They behaved like a monopoly, and it came back to bite them, which always happens.”

    http://web.archive.org/web/20040201210852/http://www.msnbc.msn.com/Default.aspx?id=4052227&p1=0

    Does this year’s capex explosion imply going for market share? We will soon see.

    Wild Card: 2G iPod: tiny with a few simple apps.

    Posted at at Chateau Gassee as well.

    • oases

      Cook maybe have said they’d not leave a price umbrella in a previous quarter. But in the latest conference call when asked specifically about the iPhone pricing umbrella he said they were going to just concentrate on making the best products and ‘we’re going to stick to our knitting’. Their plan seems to be high margins for iPhone and lower margins for iPads. If they see iOS as a product then the iPad is the worker bee and the iPhone is the queen bee. Remember that Jobs’ words about Apple not going for market share in the past are quite old – he may have modified his ideas somewhat since then, and they were about a company with a narrower range the modern company. What he said then may be being applied to the iPad but not to the whole company.

  • Jones

    They are building a new $2 billion headquarter in Cupertino–that’s where a lot of this is going.

    • http://www.asymco.com Horace Dediu

      There are several reasons why we can dismiss this idea: 1. The time frame being covered by this analysis ends in two months. The building of the new headquarters has not begun yet and is unlikely to during this time frame as ground has not been broken. 2. The expenditures related to this effort would be applied over the life of the construction project. The project is expected to be completed in 2015. Assuming construction begins in 2013 and that it will be paid for over an 8 quarter period the expenditure rate will probably about $250 million per quarter (which I think is a bit high). Payment for the land has already been booked in 2010 and I’m assuming an additional $2 billion for construction. 3. The company reports Land and Buildings asset value separately from Machinery and Equipment on a quarterly basis so the only unknown is the split between the two in the 10 K budget. That means only one quarter of this fiscal year is unaccounted for.

  • jan6

    That pattern in the last graph only holds for a company that is “selling iPhones as fast as we can make them”. I would argue that spending on machinery and equipment is more like a maximum boundary to next quarters iOS shipments. Nonetheless Apple is preparing for growth.

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  • Stefan Popescu

    The smartphone market which was created by the Iphone five years ago has now matured.
    Feature phones are in decline which means a lot of feature phone buyers will buy a smartphone instead of a feature phone but they are not necessarily interested in having a smartphone or using all their features, apps, etc. The fact that Android users are consumming less apps vs IOS users confirms that. Compared to the PC world – people buy a PC but are using it mostly as a typewriter (Word+Excel) and maybe browsing. This buyer profile will fuel the growth of smartphone sales in the quarters to come. Since they are not primarily interested in apps (and capabilities) they are interested in specs (eg screen size, CPU, etc) and this is a differentiating factor that the Galaxy S3 was able to take advantage of. When a market becomes mature it’s an inflexion point where the importance of market share overtakes the importance of profits as Steve Jobs was saying in that interview. Especially when you consider the multiplying effects of the platform’s ecosystem. The winner in the phone battelfield in the next 3-4 quarters will send a strong signal to the world and its platform will also get increased traction as the platform of choice for developers and consummers and maybe for the more latent enterprise market. That will be to the detriment of the competing platforms.
    Ramping up huge production capacities confirms Apple will go for market share in my opinion. And with increased capacity they will probably go for lower price points. Lower price points will also have the effect of lower margins but Apple can certainly afford that. For Samsung that will mean they will suffer increased competition from the other two large manufaturers of feature phones who are ascending into the smarphone market: Huawei and ZTE. I am speculating heavily here but from a market perspective an entry point at $299 for the Iphone 5 would be a coup de grace for many: Nokia, HTC, LG, etc.
    Samsung, Huawei and ZTE will be pushed down into the $200 range which will leave them very low margins and they will have a hard time to survive.

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  • Juan

    I’m stunned by the scale of the iPhone roll-out: 120 % (!) more carriers in 42% more countries…iPhone 5 will have 240 carriers in 100 countries by end of year compared to 100 carriers in 70 countries for the iPhone 4S. I think this validates your correlation-theory of OPEX and iOS device sales.

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