Despite my prediction of relatively flat iPhone channel inventory movement exiting fiscal Q3, Apple drew-down 600,000 units from the channel, which put them at the low-end of its 5-7 week forward-looking target range. The draw-down is not all that surprising given that the 6S / 6S+ are both expected to launch in the current quarter and Apple has historically always taken down channel inventory in a quarter preceding an iPhone refresh.
Katy Huberty of Morgan Stanley probed on this a bit with Cook in the Q&A:
- Q: ...why drain channel inventory when iPhone 6 is selling so well?
- A (Cook): As Luca mentioned, the channel inventory did go down by 600,000. We sold more units than we thought we would and so that was a part of that. The other part of it is that we always run with just the amount of inventory that we think we need. And so to the degree that sales are distributed in the countries with disproportionally with shorter supply chains, or the standard deviation demand is less, we would always choose to have less. And so in this particular quarter, we were able to end basically right at the bottom end of our range and we view that as a good thing, not a bad thing.
I interpret this as Cook basically saying that the sell-through was stronger-than-expected and that they chose the "conservative approach" to avoid future large fluctuations in channel inventory (e.g., FQ1 2013, FQ4 2013).
Here are a few things that I think the channel inventory movement means:
- Apple will, as widely suspected, refresh the 6 and 6+ at the back-end of the current quarter (late-September) given the historical nature of draw-downs on this particular product.
- Both Cook and Maestri indicated that the channel inventory exiting the current quarter was at the "low-end" or "bottom end" of the 5-7 week forward-looking range. If you assume, as I have, that channel inventory was likely at 5-weeks - this comes out to 3.29M units per-week (16.45M / 5-Weeks) of forward-looking demand. If you extrapolate this to the 13-week quarter, it implies forward-looking demand of 42.77M units. However, given the nature of refreshes with so many units back-loaded, it would be incorrect to assume that demand is equally weighted by-week throughout the quarter. For example, during FQ4 2013 and FQ4 2014, the launch weekends of the 5S / 5C and 6 / 6+ accounted for 27% and 25% of reported unit sales for the quarter, respectively.
- And one other thing - channel inventory reflects inventory held by 3rd party sellers, which does not include sales made directly by Apple - either through its brick-and-mortar or online stores.