Analysts: Apple's carrier partnerships have likely peaked, Q4 iPhone 6S sales could be flat

Apple (NASDAQ: AAPL) is close to maxing out the number of carrier partners it will reach, with most major operators around the globe already selling the iPhone, according to a report from analysts at Wells Fargo. Furthermore, the upcoming "S-cycle" product launch for the new iPhone expected to be released this fall likely will mean fewer sales to carriers than the bonanza iPhone 6 and 6 Plus launch from the last holiday shopping season.

In a research note, Wells Faro analysts Maynard Um, Munjal Shah and Jason Ng note that for Apple "growth will have to come from deeper penetration at existing carriers as its current carriers account for almost 95% of the world's total mobile subscriptions."

"Based on our research, Apple currently has deals with 414 operators globally," they noted. "This compares with BlackBerry (NASDAQ:BBRY), which had reported 665 carriers globally at the end of 2013. However, while this suggests Apple has a significant number of carriers still left to add, we note that the remaining carriers only account for 5% of the world's total mobile subscriptions and believe they may not all be addressable without a less expensive iPhone (approx. $250 wholesale or less)." 

Furthermore, they noted as BlackBerry added over 600 carriers, units per carrier declined, "which we believe is due in part to a smaller subscriber base at each new carrier."

The analysts estimate that Apple's 414 carrier relationships account for 95 percent of the world's total mobile subscriptions of 6.76 billion in the 193 United Nations member countries. "While we expect Apple to continue to add new carriers, we note these are likely to be smaller carriers given Apple has presence in roughly 70% of the UN member countries," they added.

As more people in emerging markets upgrade from feature phones to smartphones in the years ahead, the analysts expect Apple to add iPhone users in Africa, the Asia-Pacific region and the Middle East ,where its country penetration is low. While India also appears to be an opportunity given the fact that Apple has not signed many carriers in the region, the analysts noted that the "Indian market is driven more by retail partners. We believe this is, in part, due to the multi-layer distribution model that adds cost to the iPhone. As such, Apple hired a new national distributor, Brightstar, whereas prior to this, Redington was the sole distributor."

Apple sold a whopping 74.5 million iPhones in the holiday quarter and followed that up with 61.2 million unit sales in the first quarter, an indication of strong momentum. Counterpoint Research reported earlier this week that the iPhone 6 and 6 Plus were the top-selling smartphones globally by unit sales in April. "While new carrier additions help to drive higher units, iPhone units per carrier are stronger than in any past cycle, which we believe is driven by the desire for larger screen form factors," the Wells Fargo analysts wrote. "We also highlight that prior to this quarter, new carrier additions have been under 10 per quarter though, as we highlight in the next section, this has accelerated materially in the current quarter. Additionally, the mix shift to the mid-range (64 GB memory configuration) has helped drive [average selling prices] higher."

However, the analysts also think the next iPhone product cycle "may see deceleration given we believe S-cycle may be cyclically weaker." They wrote that their analysis of prior iPhone cycles suggests the upcoming product launches, with at least one iPhone expected to be called the iPhone 6S, may lead to lower unit sales per carrier (historically, the non-"S" iPhone cycles, or major iPhone revamps, have seen stronger year-over-sale sales compared to "S" cycles). To counter this, the analysts noted in the iPhone 5s cycle, "Apple added carriers fairly aggressively, which we believe helped to offset the slowing per carrier demand."

For the iPhone 6S, the analysts are expecting a lower unit per carrier growth sequentially. Historically, Apple's December quarter iPhone unit sales growth has come, in part, from new large carrier additions. "We note that Apple does not appear to have any new large carriers to add this December quarter that we are aware of that can be material to growth, in our opinion," they wrote.

Lower overall sales volumes from the 6S product cycle are likely to dent carriers' third- and fourth-quarter smartphone sales. However, with so many U.S. carriers moving to equipment installment plans, which offset subsidy costs for carriers, the operators are not as worried as they had been in the past about the impact of iPhone launches to their balance sheets.

The Wells Fargo analysts expect Apple to sell around 75 million iPhone units for the December quarter, which would be basically flat year-over-year. If Apple adds more carrier partners than the analysts expect, though, the company could wind up selling more phones.

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