Date of Estimate: April 30, 2017
Date of Reporting: Close of Trading - May 2, 2017
Period: Fiscal Year 2017 - Q2
Period Dates: January 1, 2017 - April 1, 2017

FY17-Q2 Estimates:

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Year-Over-Year Compare:

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The public has been calling for AAPL to raise its entry-level iPhone models from 16GB to 32GB - a move the company recently made on the iPad Pro's (and added to the price to compensate). AAPL is all about squeezing margins out of its hardware.  This is no more true than looking at the way AAPL has historically adopted components for its products - if it doesn't think the latest version of a component is going to make a difference for the customer experience, they won't spend the extra money to include it.  Examples of this include:

• Foregoing the latest QCOM RF transceiver on several iPhone models because they didn't feel like the networks would actually enable the faster wireless speeds 
• Being one of the last handset OEMs to adopt an 802.11ac BT / WLAN Module to enable faster wi-fi speeds.  
• Consistently undercutting other OEMs on RAM - others have been piling in 4GB of RAM in their smartphones for years now - AAPL went to 2GB in September-2014 with the new iPhone 6 and 6 Plus handsets
• Moving the new 9.7" iPad Pro power wall adapter down to 10W, when the iPad Air 2 (an inferior product ships with a 12W plug).

The iPhone 6 and 6 Plus models were the first iPhones that included a 128GB storage configuration, and also the first in the product's history that eliminated the 32GB storage option.  The new storage configurations are 16GB / 64GB / 128GB, with each tier adding $100USD to the price. AAPL also eliminated the 128GB storage configuration on the legacy models (e.g., iPhone 6 and 6 Plus) and did not offer it on the new 4" iPhone SE.

Something very interesting happened to the iPhone's Average Selling Price (ASP) when AAPL changed the storage configurations and added the larger 5.5" Plus models (which started at $749 off-contract for 16GB) in September-2014 with the iPhone 6 and 6 Plus variants.  Even with currency headwinds, iPhone ASPs jumped significantly Y-O-Y:

• FQ1-15: $687 (+8%)
• FQ2-15: $687 (+15%)
• FQ3-15: $660 (+18%)
• FQ4-15: $670 (+11%)
• FQ1-16: $691 / $740 Constant-Currency (0% / 8%)

What's Driving Record iPhone ASP?

FQ1-16 (Dec-15) produced the highest iPhone ASP in the history of the most profitable product franchise, both on an actual and constant-currency basis.  However, the trend of rising ASPs really started with the iPhone 6 / 6 Plus.  While one could argue that the iPhone 6 Plus (with its incremental $100 price-point) is driving ASPs higher, the fact remains that the iPhone 6 and 6S models are still the most popular handset within the installed base.  Mixpanelshows that as of April 15th, the iPhone 6 and 6S constitute over 52% of all iPhone usage,while the 6 Plus and 6S Plus represent a little over 14%.

So while it is true that the 5.5" models are helping overall ASPs, there is something going on with the 4.7" models (6 & 6S) that is a much bigger factor.  As AAPL continues to add better cameras with more functionality (e.g., 4K video), people are finding that 16GB just isn't enough storage as they still like their photos stored locally (on the handset). So, what they're doing is jumping from the entry-level 16GB to the mid-level 64GB and shelling out an additional $100. According to an analysis by IHS Technology below, NAND flash storage prices continue to fall and are now at ~$0.35 per GB.  So, 16GB of storage is costing AAPL $5.50 and 64GB is costing the company an incremental $17. Meanwhile, they're charging the customer $100, which equates to an incremental $83 of margin on each 64GB convert. Note that the data is for a 6S Plus model, but is used to show the effect of additional storage from a component cost and incremental margin standpoint with all else being equal:

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Source: IHS Technology - Estimated Cost of Apple iPhone 6S Plus (A1634)

The Bigger Issue With Offering a 32GB Entry-Level Storage Configuration...

If you believe, as I do, that the iPhone's record ASP is being driven more by people migrating up to larger storage configurations than by adopters of the larger 5.5" models at the higher price-point, then the bigger issue is the amount of customers that have been willing to pay the extra $100 for the extra storage that would feel comfortable with 32GB being enough:

"AAPL would lose significant revenue (and associated margin) from the "tweeners" who have been moving up to 64GB storage configurations at a $100 premium that would be happy to settle with 32GB of storage." 

If AAPL was to start offering a 32GB entry-level configuration at the same $649 / $749 entry-point (for the latest flagship 4.7" and 5.5" models, respectively), not only would they be losing margin by having to add in the extra 16GB of storage, they would also find a lot less customers moving up to the 64GB model.  After all, a lot of people likely fall into the "16GB is not enough and 64GB is probably too much" category.  ASP trends indicate that those people are playing it safe and shelling out the extra $100 at the luxury of excess capacity, rather than the risk of falling short of storage just when they're about to leave on a vacation.  If they had the option of a 32GB model, those people would likely resort to practicality and settle for the additional 16GB rather than pay the $100 premium for the extra 48GB.

The Bottom Line...

Could AAPL begin offering 32GB as the standard entry-level storage on new iPhone models?  Absolutely.  Should they? Financially-speaking - Absolutely Not.  The ASP trends' data proves that by keeping the entry level at 16GB, people desire the additional storage so much that they're willing to spend the extra $100 for the additional 48GB to move to the next storage tier (64GB). And for every person that does that, IHS' data would suggest it's an additional $100 on the top-line and $83 of gross margin.  83% margin is never a bad thing in tech hardware, and AAPL knows this better than anyone. 

Apple (AAPL) officially launched its new iPhone handsets, the iPhone 6S and 6S+ yesterday (Friday September 25th at 8:00AM local time). I have been through the launch “shenanigans” a number of times – as a consumer, investor, re-seller and blogger. Ironically, I have been in Hawaii for the past three launches, but was in Dallas for the 6S / 6S+ launch yesterday. I wanted to outline a few items that I observed about the new products, the launch, and the financial implications of the fiscal calendar.

WHAT DID I GET?

I opted for the 128GB T-Mobile (unlocked) 6S+ in Space Gray. As a frequent business traveler, I like the bigger screen, the extended battery life and the 6+ / 6S+ are still the only iPhones that have Optical Image Stabilization (OIS) – most people don’t know this (and I would bet, most do not care either, haha).

THE NEW PHONES:

This year was a “tock” year in the tick-tock tech nomenclature, which for Apple means same form-factor (for the most part), with new components and an OS with certain features that can only be used on the latest versions. I am not going to do a full of review the phone here, but here is a summary of the key feature upgrades:

• TouchID: TouchID is ‘markedly’ faster and more reliable than in any other previous iOS device.  This may seem ‘inconsequential’, but there is near instantaneous access now between ‘locked’ and ‘unlocked’. If you want to see how much faster, click here.
   
• New SoC: Apple continues to move its proprietary chip designs (based on ARM architecture) forward and the A9 promises 70% more CPU performance and 90% more graphics performance than its predecessor (the A8) – what this means for actual ‘normal’ use – I can’t really tell you. For the first time, Apple has embedded the M9 motion coprocessor in the A9 chip, which should improve efficiency and battery life.
   
• 2GB of RAM: Apple has historically been very conservative with RAM, with the iPhone 6 and 6+ still only having 1GB of RAM. Apple has doubled the RAM in the 6S / 6S+ to 2GB. Once again, what this means for your normal user, not sure yet, but certainly factors into some of the new features.
   
• 3D Touch: Ok, let’s face it. 3D Touch was, by-far, the most discussed feature of the new handsets. Essentially, it is as it sounds – it enables a 3rd dimension (pressure sensitivity) that enables direct access to certain key features within apps. One example is if you hard-press on the camera icon, it gives you direct access to a set of features such as taking a selfie, recording video, etc. This may sound like “I’ll try it a few times and never use it again”, but I think that is very premature. I view 3D Touch as all about efficiency – in the way you navigate the interface, which enables faster access to the features within apps that you use the most. I think we know that Apple has a pretty phenomenal developer community and they will probably do some things with it that even Apple has not thought of. Most apps are not 3D Touch enabled yet, so we’ll just have to wait-and-see.
   
• 12MP iSight Camera: Apple has never had the highest MP cameras (6 and 6S used an 8MP shooter), but it seems that its control of the entire silicon infrastructure has allowed it to stay on-par, if not exceed, its competitors, when it comes to image quality. Additionally, the new camera enables 4K video, which is sure to make all those that opt for the 16GB configuration feel very inadequate.  
   
• Rose Gold Option: The rose gold option was new for the 6S / 6S+ and it appears to be the most popular color as all configurations (storage capacity / carrier) of the rose gold color sold out first and have the longest current wait times. The ‘most mysterious Apple analyst in the world’ (they need to make a Dos Equis commercial about him) has gone on record saying that as much as 40% of pre-orders were rose gold 6S models. The real question is – could a guy get away with the rose gold variant? After seeing it in person – more than I thought, but still questionable.
   
• Weight: The 6S is 14 grams heavier (10.8%) than the 6, and the 6S+ is 20 grams heavier (11.6%) than the 6+.This weight gain was originally thought to be due to the new 7000 series aluminum chassis, but it is actually attributed to the taptic engine and associated display components that enable the 3D Touch functionality. I will say that the weight is noticeable. After all, you hold this thing a lot throughout the day – all the more reason why the Apple Watch serves a big purpose - limiting the need to pull your phone out (oh yeah, it tells time too).

THE PRE-ORDER PERIOD AND SAME-DAY RESERVATION SYSTEM:

Apple has, for all the launches I can remember, had a pre-order period between a few days after the product unveiling and the actual availability:

Note: [1]: The iPhone 5S was not available for pre-order and was available in extremely limited quantities on launch day – this was largely attributed to this model being the first where Apple implemented its TouchID biometric authentication home button based on technology acquired from AuthenTec in July-2012.

In any case, the decision for the longer pre-order period could have been due to a number of reasons:

• Simultaneous China launch
  One of the big mysteries from the 6/6+ launch in 2014 was the delay in the launch of the new handsets in China due to necessary “regulatory approvals”. The 6/6+ was eventually launched in China on October 17, nearly a month after the U.S. launch. It is possible that Apple wanted to ensure a simultaneous U.S. and China launch with the 6S and 6S+ this year, and therefore had to wait that extra week to obtain necessary approvals.
   
• New Same-Day Reservation System
  This was the first iPhone launch where customers could reserve a specific model when pre-orders started and be able to have a guaranteed time slot to pick-up the phone without having to wait in some crazy line – it is basically the “Personal Pick-Up” equivalent. In past launches, the Personal Pick-Up reservation system usually becomes available after the launch weekend. With this new system, Apple very well could have wanted that extra time for people to utilize the reservation system. It proved very effective and efficient for those (like me) who used it – no lines, no camping out, no robots (yup – robots). I put this pretty high up on the ‘reasons list’ for an extended pre-order period.
   
• Apple Financing
  As many people have heard, Apple is now offering its own financing (“The iPhone Upgrade Program”) to compete with the carriers’ installment plans. Apple is using Citizens Bank to provide 24-month financing on its iPhones to customers with an optional upgrade right after 12-months. The new plan allows a customer to finance with Apple and have an unlocked phone that it can then take to its carrier of choice and basically be on a month-to-month plan. While I will not discuss the ramifications for Apple or the carriers with this new plan, there very well could have been an extra ramp-up period needed to ensure that this could be logistically supported. The Apple-provided financing seems to be quite popular as people would rather direct their loyalty to Apple, as opposed to the wireless carriers. There were multiple reports floating around about Citizens being overwhelmed with the amount of credit checks it was running for these financings yesterday. A sales rep that I spoke to said that a little over half of the phones he sold during his 8-hour shift were done through Apple’s financing program.
   
• Revenue Smoothing
  While Apple claims that it never does anything for the “90-day clicks” (e.g., quarterly financials), it is still the most valuable and watched company in the world that is judged on its quarterly reporting. Apple recognizes revenue on its iPhone units using the following criteria: In-store purchase at an Apple retail store: Point-of-Sale; Online purchases through Apple.com: Evidence (via signature from a 3rd party carrier) that delivery has been made; and, 3rd Party channel sales: Sell-in to authorized 3rd party retailers (wireless carriers, big box retailers, etc.) – note that these sales are recognized at the point when the channel takes delivery, regardless of when these units are sold through to a 3rd party.

So what’s the point? Well, given that Apple’s fourth and final fiscal quarter will end today (September 26th at 11:59PM PDT), there will only be 2 full days of sales of the 6S / 6S+, as compared to last year when there was 9 full days (a point originally surfaced by my friend, Chuck Jones of Forbes – the most accurate Apple analyst in the world). That extra week may not seem like a lot, but when you think about the types of volumes of iPhones that Apple moves at the front-end of a launch, it is very significant. Last year, Apple shipped (or recognized sales of) approximately 10 million units in its launch weekend alone, and it was extremely supply-constrained (as it is this year). I have done an analysis of what the potential revenue and unit shift impact could be of having only 2 full sales days of the new iPhones (6S / 6S+) this year versus the 9 full sales days last year:

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Notes & Assumptions:
[1] For FQ4-14: A low-end of 15M iPhone 6 / 6+ units and a high-end of 20M iPhone 6 / 6+ were included. Of the 10M units reported as sold during 2014 opening weekend – 50% sold on Friday, 30% sold on Saturday, and 20% sold on Sunday.
[2] For FQ4-15: A low-end of 11M iPhone 6S / 6S+ units and a high-end of 13M iPhone 6S / 6S+ units will be sold on opening weekend, with the same pro-rata allocation by-day as 2014.  However, amounts only include Friday (9/25/15) and Saturday (9/26/15) as all sales on Sunday (9/27/15) will be pushed into FQ1 16.
[3] ASP of $650 – this is an estimate based on 6 / 6S ASPs knowing that ASPs were depressed at the beginning of the cycle and will be again due to supply constraints of the 6+ / 6S+ model, which has a +$100 entry price.

So ultimately, I am estimating that the 7 days of fewer sales of the new iPhones that Apple will be recording in its fiscal fourth quarter on a year-over-year basis will ultimately shift:

• Between 6.2M and 9.6M iPhone unit sales into the holiday quarter (FQ1-16)
• Between $4.0B and $6.2B of iPhone revenue into the holiday quarter (FQ1-16)

I did mention “smoothing”. It is no secret that Apple is facing tough year-over-year compares this upcoming holiday quarter. They shipped a staggering 74.5M iPhone units in last year’s holiday quarter (most of which were assumed to be 6 / 6+ models) and recorded total revenues of $74.6B. So, this shift may actually prove to be a tailwind for that year-over-year compare. Of the 32 analysts polled on Yahoo! Finance, they have an average estimate of $74.54B for Apple’s FQ1-16, which is pretty meager growth of less than 3%. While that number may rise, there is still many questions about growth that will probably keep it range-bound.

BUT WHAT ABOUT THIS QUARTER?

So with my estimates of $4B - $6B of revenue being shifted to the holiday quarter, the question becomes, how will Apple make up for it this quarter? After all, the company provided decent guidance of revenues between $49 billion and $51 billion. Assuming they come in at the top-end of that range (as has been the norm), it would imply year-over-year revenue growth of 21%, which would include forex headwinds (likely 8% – 10%).  I think it is safe to say that Apple knew exactly when they would be launching the new iPhones and how the quarter cut-off would affect the recording of revenue – meaning, I don’t think Luca Maestri provided the guidance to the Street and then looked at the calendar and had an “oh crap” moment.  Here is where I think they make it up:

• Stronger sales and higher ASPs of the iPhone 6 / 6+ models than the 5S / 5C leading up to the respective product refreshes. 
  You will certainly have that contingent of buyers that will hold off on purchases knowing that a refresh is coming. However, the “S” refreshes tend to be more subtle to the general public and there was so much ‘buzz’ last year about the larger screens which I believe led to a lot more people hold off on buying. Going along with that, let’s call a dud a dud – the 5C did not sell very well and I would imagine that Apple was not refilling the channel on those SKUs in FQ4-14. In fact, they were likely just watching any remaining channel inventory bleed off until it was officially discontinued.  Additionally, the 6 / 6+ has significantly higher ASPs than the 5S / 5C did. In fact, even with the challenging forex headwinds, iPhone ASPs were up to $660 last quarter. Apple went so far as to mention that on a constant-currency basis, ASPs would have been up by an additional $24 to $684. Given these data points, there is clearly strong demand for higher storage configurations and the 5.5” 6+ form-factor (+$100 addition to ASP).
   
• The Watch
  The Street was not particularly impressed with implied watch sales when the company reported in late-July. Estimates have been all over-the-board, but I would say consensus was about 2.5M units shipped. On its earnings call, Apple noted significant supply constraints, including not being able to put inventory into its own retail stores until mid-June – specifically it noted that distribution was limited to 680 points-of-sale (for perspective, the iPhone is distributed at over 200,000 points-of-sale). In the September quarter, Apple will receive the one-time benefit of building a channel inventory for Watch, where revenue is reported on a “sell-in” basis, as well as expanded geographical distribution through its own retail stores. This expanded channel and geographic distribution includes:
  
  Best Buy. The electronics retailer reported that given strong demand, it had accelerated the rollout of the Apple Watch to include 900 of its “Big Box” stores carrying the product by the beginning of September, and all 1,050 “Big Box” stores carrying it by the end of September. Given that sell-in happens in-advance of actual sales to end-customers, I would imagine that all of this sell-in revenue will be captured in the September quarter.
  
  U.S. Wireless Carriers. Both Sprint and T-Mobile indicated that they would both be carrying the Apple Watch starting on September 25th at 200+– once again, sell-in channel revenue that will be captured this quarter.
  
  International Retailers. In addition to Best Buy, T-Mobile, and Sprint, Apple has expanded 3rd party Watch sales to retailers throughout Europe, Australia and Canada.
  
  Geographic Expansion. Lastly, Apple expanded sales of Apple Watch at its own retail stores in 7 countries (Italy, Mexico, Singapore, South Korea, Spain, Switzerland, and Thailand) on June 26 and another 3 on July 17 (Netherlands, Sweden and Thailand).

 While the 3rd party channel inventory build will be a nice tailwind revenue stream in the September quarter, it is unknown how many units are being carried by these retailers. Additionally, there is a one-time benefit nature to this revenue as once it is established, Apple will refill it, but you’ll likely not see the unit sell-in at the levels they are to initially establish it. I fully expect that once the holiday season rolls around, Apple will further expand distribution of Apple Watch in the United States and abroad, which could be the second catalyst to Watch revenue growth. In the United States, I could foresee the following being strong candidates to carry the product: Hermes (Confirmed – sales to start in October – proprietary model); Target (Sport only); Nike (Sport only); Nordstrom, Neiman Marcus & Bloomingdales (Watch and maybe Edition).

OVERALL THOUGHTS:

• The iPhone 6S and 6S+ appear to have gotten off to strong starts with healthy demand (as evidenced by lead times) and will receive a nice tailwind from the quarter cutoff helping with the year-over-year compare;
   
• The iPhone units and revenue that will be shifted to the holiday quarter (FQ1-2016) due to the quarter cutoff will be made up by: Stronger sell-through and higher ASPs of the legacy 6 / 6+ models, and strong watch revenue due to substantial expansion of the 3rd party channel as well as expanded geographic distribution.
   
• The mechanics of iPhone launch distribution (e.g., reservation system) and the new financing programs are both net positive to the brand and will further increase retention of the growing installed base;
   
• Apple will report strong Mac sales based on the back-to-school season and very weak iPad sales, neither of which will be significant to the Street’s sentiment; and finally,
   
• I will be keenly interested in any changes to the revenue recognition of iPhone sales specifically related to units financed through Apple’s Upgrade program. 

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I previously estimated that AAPL would need to draw down its channel inventory by around 2.5 million iPhone units in order to meet the $2 billion channel inventory draw down (across all product lines) that the company projected on its FQ2-2016 earnings call.

That 2.5 million units turned out to be significantly less than the actual number of iPhone units (4.0 million units) that AAPL cleared from the channel in FQ3-2016. My 2.5 million unit estimate was significantly off for a couple reasons (the latter being the most significant):

• I projected iPhone channel inventory draw down based on an ASP of $640, which turned out to be $45 higher than the actual ASP of $595 - a factor of both forex and a strong mix of the SE model.
   
• Actual channel inventories were reduced by $3.6 billion (across all product lines) compared to the projected $2.0 billion, of which the majority the company said was related to the iPhone.

Performance within the iPhone product line:

To understand the full dynamics of the unprecedented iPhone channel inventory draw-down, it's first important to look at how the various models performed:

The iPhone SE: The iPhone SE's popularity was underestimated by the company, but it was able to adjust production to satisfy demand. AAPL stated that the iPhone SE was in short-supply for basically the entire quarter, although it was in supply-demand balance by quarter's end. This popularity also was seen in the $65 y-o-y drop in ASP, of which $20 was attributed to forex.

The iPhone 6S and 6S+ underwhelmed: It is not a "shocker," but the 6S and 6S+ has not sold as well as expected, which was no more evident than in Tim Cook's response to a question about the upgrade cycle on the earnings call:

"...the iPhone upgrade rate for the iPhone 6S is very similar to the iPhone 5S. And I guess in retrospect, maybe that was a predictable thing, although we didn't predict it in the beginning." (Emphasis added)

How iPhone product performance factored into the massive channel inventory drain:

Simply put, the iPhone SE played a major role in AAPL's quarter in a couple of ways:

• Demand stimulus: It helped AAPL hit the high-end of its revenue guide by creating a new demand stimulus for the product category that makes up the majority of the company's revenue.
   
• Unit volume target: Although AAPL states it does not manage to The Street, it is widely-known that The Street puts extreme scrutiny on iPhone shipment volumes, not ASP. The iPhone SE enabled AAPL to not only hit unit shipment expectations, but it also helped it drain significantly more 6S and 6S+ units from the channel than it had projected. AAPL stated on its earnings call that the 4 million unit channel draw-down was of the "higher-end" iPhones, which one could logically infer were 6S and 6S+ units.

Implications for FQ4 and the iPhone 7:

While it might be easy to assume that the strong iPhone SE performance was a one-time benefit, it will certainly factor into the current quarter's performance (FQ4-2016), which is expected to include a product refresh (the "iPhone 7"):

• Low-end of target channel inventory: By enabling AAPL to clear the channel of 4 million iPhone 6S and 6S+ models, the company exited the quarter in a favorable position as shown by Cook's response to a question on the earnings call about iPhone channel inventory:

"...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. Obviously the revenues could have been much higher if we would have expanded the channel, but if you don't need to do that, that's not how we think about the business." (Emphasis Added)

• Model composition of channel inventory: In FQ2-15, the company drew down 1 million iPhone units in advance of the 6S / 6S+ refresh in Sept-2015 and also exited at the low-end of the 5-7 week forward-looking channel inventory target. What is different about this year's channel inventory is that the mix is likely much more favorable for the product refresh. As the SE was in supply-demand balance by quarter's end, you would have to assume that the channel inventory is far more favorable with a 'healthier' mix of SE units combined with a substantially reduced amount of 6S / 6S+ units.

AAPL has positioned itself, via the unexpected success of the SE, to unburden itself from excess 6S and 6S+ units heading into the expected product refresh in September. FQ2-2016 was a positive quarter for AAPL on a number of levels, but one of the most significant and least discussed was its ability to clear the channel of a couple million more units of the underwhelming 6S and 6S+ than it had originally projected.

I believe Cook's uncharacteristic commentary about a specific product's channel inventory during his "prepared remarks" to open the earnings call underlies the optimism that was recaptured during FQ2-2016:

"iPhone accounted for the vast majority of the channel inventory reduction. iPhone unit sell-through was down just 8% year on year, an even greater improvement over the March quarter than we predicted, and we expect the September quarter sell-through comparison to improve further. We feel good about our channel inventory levels and believe they position us well for the months ahead." (Emphasis Added.)

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.

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Source: AAPL 10-Q Filings and Earnings Call Transcripts from Seeking Alpha

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.

AAPL held its annual spring event on March 21st, which Cook claimed would likely be the last media event ever held on the current AAPL campus as the company migrates to its new headquarters, which will have a much larger, state-of-the-art auditorium for future product unveils.  So what did they announce?

• Environment - AAPL discussed its commitment to the environment. The company showcased its ability to run 100% of its U.S. operations on renewable energy and now has 93% of its Chinese operations on renewable energy. Additionally, AAPL showcased a new R&D project called "Liam", which is a robot that is able to facilitate the recycling and reuse of components by using precision robotics to breakdown the components of old iPhone's for alternative use.
   
• CareKit - AAPL announced a new software development kit focused on disease management - a creation off of the success the company has had with its ResearchKit platform - it's an open-source project.
   
• tvOS 9.2: AAPL announced that it had released a new version of its tvOS software for the Apple TV. Improvements include the ability to create app folders, bluetooth keyboard support and Siri remote dictation.
   
• iOS 9.3: AAPL announced the release of iOS 9.3 for all of its latest iOS devices.  The main improvements include a new "night vision" feature, upgrades to its Notes app (password protection & sorting), and upgraded CarPlay features.
   
• New Apple Watch bands: AAPL introduced new bands made from a nylon material & introduced new colors of both the sport straps and milanese loop bands.
   
• Apple Watch Sport price reduction: AAPL reduced the entry-level price on the The Apple Watch Sport (aluminum case) with the 38mm now starting at $299 and the 42mm starting at $349 - both down $50.  Interestingly, they did not move the price down on the Apple Watch (steel case).
   
• iPhone SE: AAPL introduced the newest member of its iPhone family - an upgraded 4" iPhone w/ the same chassis as the iPhone 5S, but with significant upgraded internals [more below]
   
• iPad Pro 9.7": AAPL also introduced a smaller companion to the 12.9" iPad Pro introduced in October that has many of the same features, and even some new ones (upgraded screen technology, 12MP camera w/ flash, & 256GB configuration) that leaves its larger 'brother' yearning.

Like many things AAPL-related these days, much of these announcements (mainly on the product side) were already known via various leaks from the supply chain and other "sources familiar with the company".  So the biggest surprise was not any of the new products but rather, the price of the iPhone SE.

AAPL Surprises on Price, but Rarely to the Downside:

The iPhone 5C 'saga'

In September-2013, AAPL introduced its first plastic iPhone - the iPhone 5C. It wasn't described as plastic, but for all intents-and-purposes, it was.  The 5C was expected to be AAPL's foray into the mid-tier priced smartphone market, until it wasn't. The entry-level 16GB 5C (which was essentially the iPhone 5 in a colorful plastic shell) started at $549 (off-contract), which was only $100 cheaper than the flagship at-the-time (the iPhone 5S). The 32GB version was $649 (off-contract), which was equal to the base-price of the entry-level 16GB 5S.

Nobody knows exactly how many iPhone 5C's AAPL ended up selling prior to its discontinuation in September-2015, but consensus is that the product never really caught on in large part, because of price, and overall lack of the latest features.  I was actually very favorable of the 5C - it was a great phone with good build quality, but like many, my only complaint was that it lacked the features that I had grown used to with the 5S (TouchID mainly).

The iPhone 5SE 'surprise'

After hearing Greg Joswiak (which was somewhat of a surprise in-and-of-itself) go through all of the specs of the new iPhone 5SE, I was completely expecting the entry-level 16GB configuration to be priced at $499, which would be $50 less than the entry-level iPhone 6.  That made sense to me based on prior AAPL pricing decisions combined with the specifications of the new device:

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Source: www.apple.com

So out of 19 different specifications, the iPhone 5SE wins on 6 of them [Green shaded cells], while the iPhone 6 wins on 2. They are 'equals' on 11 of them [Yellow shaded cells]. Some may argue that the 4.7" screen size is not necessarily a positive, but given the acceleration of iPhone sales post Sept-15 (launch of 6 & 6+), it's pretty clear that the broader market favors larger screen phones. 

From a pure "spec" basis, I was actually pretty surprised by the 2GB of RAM in the 5SE - AAPL historically has been very conservative with RAM in its iOS devices.  The iPhone 6S / 6S+ were the first iPhones to get 2GB of RAM and even the iPad did not get 2GB of RAM until the iPad Air 2, which was released in October-2014.  The new 9.7" iPad Pro is also only running off of 2GB of RAM, as compared to the 12.9" iPad Pro, which has 4GB.  My 'guess' is that the bare minimum amount of RAM needed to fully utilize the power of the A9 SoC processor is 2GB. I'm sure AnandTech will be able to discuss it in much more depth, and with much more expertise that will put my speculation to shame.

Price:

Back to price. I would argue that this is AAPL's first foray ever into the "mid-tier" smartphone market. I do not consider lowering the price on legacy models to the "mid-tier" equivalent to pricing a new phone with the latest specs at the "mid-tier".  Many will argue that paying $399 for a phone that's been on the market for over 2.5 years is ridiculous. What those same people don't realize is that this $399 phone has specs that are superior to a phone released in September-2015 on many different levels, AND is $150 cheaper.  

AAPL truly astonished me with this pricing..and in a good way.  I think it's a clear sign that AAPL has generated enough economies of scale by leveraging tooling on a proven chassis & a global supply chain, to make a quality phone with sufficient profit at a "mid-tier" price point.

Will people buy it?

People buy smartphones on the specs that matter most to them - and generally-speaking, those are consistent across the board. Most people do not know, nor care what SoC (processor) is in their smartphones; they also don't care how much RAM is in the phone.  What they do care about is the camera, the screen size, the battery life, and the price. That said, as shown by AAPL's charts during its keynote on Monday, there are still many iPhone users that value the one-handed use that a 4" phone affords.  When you combine that with the upgraded camera, increased battery life and the price-point, I think the iPhone SE has a very good chance of becoming a successful addition to the current iPhone lineup.  It's not going to win over people who just want the bigger screen sizes.  But, it's also not going to provide a "compromised" experience - something that the iPhone 5C did in spades.

I am excited to see the reception of this 'new' phone from the masses.

The Bottom Line:

As smartphone adoption continues down the path of saturation abroad, AAPL's ability to continue attracting the emerging middle class to its most profitable product will become increasingly important.  Bringing an 'accessible' smartphone to the market with the company's incredible brand-power will enable it to reach a demographic that historically settled for "dumbed-down" versions of its latest models.  The iPhone SE is on-par with AAPL's flagship models, but at a significantly reduced price-point, and that will enable it to continue building sales overseas in markets that never could afford its products.

MacRumors has compiled a number of reviews that are generally favorable to AAPL's newest iPhone:

iPhone SE Reviews: Blazing Fast with Impressive Battery Life