Apple Inc. Reportedly Boosts iPhone 7 Production Orders

By Markets

Image source: Apple.

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According to a report in Digitimes, "sources from Taiwan-based touch panel makers" say that Apple (NASDAQ: AAPL)has boosted its "part and component orders for iPhone 7 devices." In fact, Digitimes claims that "order visibility for the fourth quarter of 2016" is 20%-30% better than the company had originally planned.

Digitimes' sources further say that iPhone 7 shipments from the iDevice maker's contract manufacturing partners during the second half of 2016 should come in somewhere between 80 million and 84 million units -- down from the 85 to 90 million iPhone 6s devices that were reportedly shipped during the back half of 2015.

Let's take a closer look at what this latest report could mean for Apple's business.

Better than anticipated, but expectations were low

Once it became clear that demand for Apple's then-new iPhone 6s series of smartphones wasn't as strong as expected (given the runaway success of the iPhone 6/6 Plus series), the company was forced to take significant (and swift) actions to bring down iPhone channel inventories as its fiscal year 2016 progressed.

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This year, Apple likely wanted to err on the side of caution until it got a clearer picture of the kind of demand the new phones would see. Based on this report (assuming, of course, that it's accurate), Apple has likely seen significantly better-than-expected customer response to these new iPhones.

Hey, wait -- don't those numbers imply that demand is down?

Although Apple has apparently boosted its iPhone 7/7 Plus build plans, it's clear that those build plans are still lower than they were a year ago. However, I don't think that investors can necessarily conclude that demand itself is down year over year by just comparing those build plan figures.

For one thing, as a result of building/shipping too many iPhones in the back half of 2015, Apple wound up slashing March quarter build plans significantly. Indeed, Japanese publication Nikkei claimed back in January of this year that Apple took down its iPhone 6s build plans by 30% for the March quarter relative to prior expectation.

Note that this 30% figure didn't refer to a sequential drop (normal seasonal patterns already call for a drop in iPhone sales in the March quarter), but to a drop relative to Apple's prior expectations on top of the expected seasonal shipment reduction.

This time around, I expect iPhone sales to be down sequentially as seasonal patterns would suggest, but my expectation -- particularly as Apple still seems to be extremely supply constrained on some models -- is that the drop will be more like the one that Apple saw during the iPhone 6 cycle than the severe one seen during the iPhone 6s cycle.

Now, if Apple winds up shipping fewer phones in the first and second quarters of fiscal 2017 relative to those shipped during the first and second quarters of fiscal 2016, then it would be reasonable to say that demand for the iPhone 7 series is down relative to demand for the iPhone 6s series a year ago.

Remaining optimistic

The new iPhones aren't "revolutionary," but they are extremely well-built, best-in-class premium smartphones that have a lot going for them both in absolute feature terms and compared to what even the best that the competition has to offer.

Indeed, I believe that from a competitive perspective, iPhone 7/7 Plus are much better positioned than last year's iPhone 6s/6s Plus were.

As a result of this, I remain optimistic that these latest iPhones will do extremely well for the iDevice maker and could even drive full-year revenue and unit growth in its iPhone business.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.