iPhone Sales Must Nearly Double To Offset Price Cut
Dan Frommer, in the new Silicon Valley Insider, provides a helpful analysis the financial impact of Apple’s $200 price cut on the iPhone.
According to the post, in order to make up for the $200 cut (which comes directly out of Apple’s bottom line), Apple will have to sell 78% more iPhones to deliver the same gross revenue. In generating a model, Frommer estimates that Apple’s gross profit on the iPhone was previously $449, which drops to $253 after the price cut (see chart for details). Using Silicon Alley Insider’s assumption that the company was poised to sell 900,000 phones per quarter at the original price, Apple would need to sell 1.6 million at the new price to achieve the same gross revenue. Are those numbers attainable? Probably, according to Frommer:
The price cut, an expected European launch, and the upcoming holiday season should give Apple a nice bump in sales.
Of course, Apple’s business model isn’t to simply sell hardware. The reduced margins are reasonable if the increased number of phones trigger additional iTunes downloads and sales of ringtones.
To assess the impact of the price cut, Piper Jaffray analyst Gene Munster conducted a thorough survey of Apple stores. According to the Apple 2.0 blog, by combining his data with the Sep 10 announcement that Apple had sold its one-millionth iPhone, he estimates that since the price drop, iPhone sales have increased 200% – from 9,000 per day to 27,000. While he doesn’t expect that surge to continue, he projects a sustained 50% increase in sales at the new price.
Meanwhile, Credit Suisse analyst Rob Semple suggests that while the lower price will drive market share, it will have a negative impact on short-term cash flow:
We are revising our model to reflect the impact of the new iPhone pricing, and likely softer than anticipated iPhone demand. Our CY08 FCF estimate goes from $7.3 to $6.8B and our FY08 EPS stimate goes to $4.50 from $4.66.
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