Analyst cuts AAPL rating on iPhone subsidy backlash, estimates $1B earnings miss
BITG Research's Walter Piecyk cut his rating of AAPL stock from "buy" to "neutral" in a note to investors on Monday, saying that telecoms are growing weary of paying high subsidies for the iPhone with returns that don't match Apple's high margins from the handset.
An AAPL downgrade hasn't been seen in quite some time as some analysts say the company will become world's first trillion-dollar corporation by the end 2014, but Piecyk asserts that wireless operators are looking to make changes that may lead to a drop in iPhone shipments next quarter.
Piecyk asserts that after raising average revenue per user (ARPU) by churning customers with subsidies, telecoms are going to begin contracting in subsidy payouts which will leave Apple with less iPhone sales in its third fiscal quarter.
"Operators, unwilling to stall the pace of ARPU growth, offered generous upgrade policies including some that enabled a fully subsidized phone upgrade only one year in to a two year contract," explains Piecyk. "We expect those policies to change as the faster upgrade rate of smartphones compared to legacy feature phones has been a costly surprise to post-paid and pre-paid operators, alike."
At issue are the "aggressive" upgrade policies instituted by the world's carriers. For example, with the latest iPhone 4S launch, some carriers offered upgrade subsidies for customers who were only about one year into a two-year contract.
Piecyk notes that AT&T is looking to adopt stricter upgrade policies to up margins and stop hemorrhaging cash in subsidy costs. If other major carriers follow suit, iPhone shipments may be affected as consumers may not be willing to pay full price for the handset. The carrier's margins are currently at a six-year low.
“We expect post-paid wireless operators to remain firm in their plan to stunt the pace of phone upgrades in 2012 and we expect to see some initial evidence of their success in the current quarter,” Piecyk says.
In regard to how greatly this will affect Apple, Piecyk expects that "in the United States, we expect iPhone sales to decline 4 million sequentially to 9 million with the largest impact coming from AT&T, Apple’s largest customer." This would relate to a worldwide drop in sales of 27.5 million units in Apple's fiscal quarter third quarter, "resulting in a revenue estimate that is $1 billion below consensus.”
AAPL stock closed up 2.55 points on Monday. | Source: Google
Wireless companies are no doubt taking an upfront hit when subsidizing the iPhone, however data has shown that they are willing to take a short-term loss for longterm gains. Sprint, for example, is planning on surpassing the purchase terms of an already costly $15.5 billion contract with Apple as it expects to make back the loss on subscriber revenue.
Adding to his iPhone assertions, Piecyk dismisses the rumors of an Apple HDTV launch in 2012 and downplays the Chinese iPad market citing the tablet's high price point.
Piecyk qualifies his bold statements by saying that Apple is likely to announce another great quarter when the company holds its earnings call on April 6 from strong iPhone sales in China.
"Of course, our thesis will not be supported in the current quarter as the pent up demand in China and the launch of the iPhone in 30 additional markets is likely to drive strong sales that will offset the sequential declines in other markets," Piecyk says.
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BITG Research's Walter Piecyk cut his rating of AAPL stock from "buy" to "neutral" in a note to investors on Monday, saying that telecoms are growing weary of paying high subsidies for the iPhone with returns that don't match Apple's high margins from the handset.
An AAPL downgrade hasn't been seen in quite some time as some analysts see the company as becoming world's first trillion-dollar coroporation by the end 2014, but Piecyk asserts that wireless operators are looking to make changes that may lead to a drop in iPhone shipments next quarter.
etc. etc.
In regard to how greatly this will affect Apple, Piecyk expects that "in the United States, we expect iPhone sales to decline 4 million sequentially to 9 million with the largest impact coming from AT&T, Apple?s largest customer." This would relate to a worldwide drop in sales of 27.5 million units in Apple's fiscal quarter third quarter, "resulting in a revenue estimate that is $1 billion below consensus.?
Hmmm... I thought a while back that AAPL would get hit hard after the 2nd quarter (fiscal) earnings. Not necessarily because AAPL deserves it... but these analysts have to earn their keep by getting the stock to drop so that institutions can pick it up a lot cheaper before the holiday quarter. jmho
company as becoming world's first trillion-dollar coroporation by the end 2014
I can't seem to locate the word "coroporation" in the dictionary.
Piecyk guesses that after raising average revenue per user (ARPU) by churning customers with subsidies, telecoms are going to begin contracting in subsidy payouts which will leave Apple with less iPhone sales in its third fiscal quarter.
"Operators, unwilling to stall the pace of ARPU growth, offered generous upgrade policies including some that enabled a fully subsidized phone upgrade only one year in to a two year contract," explains Piecyk.
So first he guesses...then he states that it's really the fault of the carriers for allowing upgrades before a contract is fulfilled. It sounds like the problem is really between the carriers for aggressively poaching each other's customers. I tend to have little sympathy for them considering I pay over $100/month for service. That's over $1200/year or $2400/contract. If they can't make up their subsidy of a few hundred dollars (please correct me if I'm wrong about the actual cost of the subsidy and talking out my a**), because they're giving people new phones every 12 months, then that's their own fault, not the fault of the handset maker.
At issue are the "aggressive" upgrade policies instituted by the world's carriers. For example, with the latest iPhone 4S launch, some carriers offered upgrade subsidies for customers despite only being about one year into a two-year contract.
Piecyk notes that AT&T is going to adopt stricter upgrade policies to stop hemorrhaging cash in subsidy costs. If other major carriers follow suit, iPhone shipments may be affected if consumers aren't willing to pay the premium price of entry.
I don't know what they are talking about. When the iPhone 4 was new, AT&T gave full subsidies to any customer who upgraded to an iPhone 3GS within a year in order to lock in customers ahead of the Verizon iPhone 4 launch a few months later, but after Verizon started selling the iPhone, AT&T rescinded the 1 year subsidy pricing for anyone who wanted to upgrade from the iPhone 4 to the iPhone 4S, forcing customers to wait 18 months. With AT&T this became the norm, yet they still sold out of iPhones.
These geniuses are claiming that thanks to a lack of subsidy pricing for people just 1 year into their contract, it will slow shipments of the iPhone? LOL... While the iPhone market might be closer to saturation in North America, globally the opportunities for iPhone's subscriber growth are enormous. Take that and short it.
Troubling news.
How can an analyst prediction be troubling news? Apple stock was up today so obviously this one downgrade doesn't mean much to wall street.
The one other thought that I had about this and its a crazy one at that, is that Apple could just buy Sprint for a song if the carriers try to be punitive towards Apple with their policies.
I'd like to see them back it up by shorting the stock.
heh heh....yeah, right in front of a quarterly earnings report no less.
So first he guesses...then he states that it's really the fault of the carriers for allowing upgrades before a contract is fulfilled. It sounds like the problem is really between the carriers for aggressively poaching each other's customers. I tend to have little sympathy for them considering I pay over $100/month for service. That's over $1200/year or $2400/contract. If they can't make up their subsidy of a few hundred dollars (please correct me if I'm wrong about the actual cost of the subsidy and talking out my a**), because they're giving people new phones every 12 months, then that's their own fault, not the fault of the handset maker.
Exactly. It's not the handset makers fault/problem that the carriers allow upgrades before a contract is complete. As far as subsidies, wouldn't this impact SamsungHTCMotorola too? Verizon has a $350 subsidy for the Galaxy Nexus and Droid Razr Maxx. AT&T has a $350 subsidy for the Galaxy Note. T-Mobile is offering the $599 Galaxy S II for free with a 2-year contract. This includes a $320 instant rebate, $200 mail in rebate and a $79 web only rebate. These carrier subsidies impact more than the iPhone.
So first he guesses...then he states that it's really the fault of the carriers for allowing upgrades before a contract is fulfilled. It sounds like the problem is really between the carriers for aggressively poaching each other's customers. I tend to have little sympathy for them considering I pay over $100/month for service. That's over $1200/year or $2400/contract. If they can't make up their subsidy of a few hundred dollars (please correct me if I'm wrong about the actual cost of the subsidy and talking out my a**), because they're giving people new phones every 12 months, then that's their own fault, not the fault of the handset maker.
He's not saying whose fault it is, he's saying that it won't go on forever and when it does stop, it's Apple that sells less phones. I think it's eventually true but I think he's a bit early on this prediction.
I have to say, of all the purveyors of negativity on Apple, this guy at least has a reasonably plausible argument. I think he does exaggerate the impact and ignore compensating growth factors. But at least it is a coherent argument.
You're kidding right? This is a weak, circular argument, as rhetoricians know. Weak.
I'd like to see them back it up by shorting the stock.
Oh, of course he won't do that....
And by the way, here's what this guy said earlier this year:
Back in December, for example, BTIG’s Walter Piecyk (registration required for link) predicted Apple would sell 30 million iPhones in the December quarter. Now he figures it will sell a record 35 million, thanks to the particularly strong demand in the U.S., showcased by the Verizon number Shammo disclosed yesterday. His rationale: If Verizon’s iPhone sales are that high, then so are AT&T’s and Sprint’s, as well.
“Yesterday, Verizon disclosed it had sold 4.2 million iPhones which is above our estimate of 3.75 million and in early December AT&T referenced strong iPhone sales at the UBS conference which we now estimate translates to sales of 7.0 million iPhones, which was above our estimate of 5.25 million,” Piecyk explains. “We are also raising our estimate for Sprint to over 2.0 million from our prior estimate of 1.75 million. This adds up to more than 13 million iPhones sold in the United States in calendar Q4 2011, up from our August estimate of 10 million.”
That’s a big number, one that means the U.S. will represent almost 40 percent of iPhone sales in the quarter, a big spike over the quarter prior, when the U.S. represented about 26 percent of iPhone sales.
And if it’s in the right ballpark, Piecyk says it means Apple could be on track to sell 125 million iPhones in calendar 2012 — 17 percent more than his earlier prediction of 107 million.
http://allthingsd.com/20120105/30-mi...ry-35-million/
These sad clowns are under no obligation to tell the truth in their little PR fluff pieces, and time after time they've proven the are only out for their own interests... which is what anyone should assume anyway.
If the carriers take a united stand, they'll be liable for a collusion lawsuit that would end with AAPL owning them.