AT&T’s Smartphone Sales Point To A Strong Holiday Quarter For Apple

In what seems like a big positive for Apple (NASDAQ:AAPL), its largest carrier partner in the U.S., AT&T (NYSE:T), announced record smartphone sales for the fourth quarter 2012 and beat its previous guidance. The carrier said Tuesday that it had sold 10 million smartphones during the holiday quarter, making the quarter its best-ever not only in terms of overall smartphone sales but also iPhone sales. However, the sales number was not substantially higher than the same period last year when it sold 9.4 million smartphones and recorded 50% sales growth over the previous quarterly record.

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This may have disappointed investors leading to close to a 3% drop in AT&T’s share price by the end of the day. But the sales figure was in fact better than the previous Q4 guidance of 9.3 million the carrier implied when it had increased its annual sales guidance from 25 million to 26 million last month. While the slowing growth in smartphone sales may be reflective of a broader US market where smartphone penetration has crossed 50% as well as AT&T’s own lag in the LTE race, the 10 million smartphone sales figure seems like a big boost to Apple which launched the iPhone 5 just ahead of Q4 and made it its fastest rollout ever.

iPhone sales estimate

If we look at AT&T’s smartphone sales over the past year, we see that the iPhone accounts for an average of 77% of its total activations every quarter with the December quarter seeing a spike to 80%. Further, AT&T has accounted for 21%, 13%, 14%, and 18% of Apple’s iPhone shipments over the last four quarters. Considering that the iPhone 5 launch is a broader roll-out than the 4S and the possibility that the introduction of LTE may have caused a shift in iPhone mix towards Verizon, AT&T’s contribution to Apple’s total iPhone sales will tend to be towards the middle of that range. Assuming that AT&T accounts for 17% of total iPhone sales and that 80% of the rather conservative estimate of 10 million smartphones sold by AT&T are iPhones, we see that Apple will sell about 47 million iPhones in Q4 – exceeding our estimates for the quarter (by about 6%).

This still leaves a significant scope for upside if AT&T’s contribution to iPhone sales turns out to be lower than 17% due to the fast iPhone 5 rollout. For example, Apple’s holiday quarter sales in 2012 will include those in China as against the iPhone 4S rollout when China received the iPhone after December.

Apple will look to China to support growth

The 47 million sales estimate that we arrived at is still only about 27% ahead of iPhone sales in the holiday quarter last year. In the first four years after the iPhone was introduced in 2007, Apple had recorded close to a 90% growth rate in iPhone unit sales every year.

With the smartphone market in developed regions such as the U.S. saturating (U.S. smartphone sales grew y-o-y by just 9% in Q2), Apple will be looking to tap the  fast-growing emerging markets such as China to grow at close to historical rates. China, despite being only in the early stages of smartphone adoption, has already pulled ahead of the U.S. as the world’s largest smartphone market by volume. This is an incredible statistic given that 3G penetration in China stands at only about 20% currently. Considering the huge 2G subscriber base that the Chinese carriers are looking to upgrade to 3G, the potential for Apple to ride the boom is huge.

Apple’s revenues from greater China, which includes mainland China, Hong Kong and Taiwan, grew 26% year-over-year in Q3 and accounted for 15% of Apple’s revenues for the fiscal year.

As the country grows and the average Chinese buyer sees an increase in buying power, we expect to see a growing shift in demand from 2G to 3G smartphones. The iPhone can help Apple tap this phenomenal growth in demand. Currently, the iPhone is available on only China Unicom and China Telecom, the smaller two of the only three Chinese wireless carriers. A deal with the third carrier, China Mobile, which is not only the biggest carrier in China but also globally with more than 700 million subscribers, could almost double Apple’s addressable market in China. But it seems Apple might have to foot part of the subsidy bill and take a hit on margins for such a contract to happen. (see Apple Faces China Mobile-Sized Stumbling Block Limiting China Upside Potential) Considering the huge market potential of a China Mobile deal, this might be a compromise that Apple will eventually make – an event that could be the next big trigger for its stock.

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