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Old Jul 11, 2013, 10:53 AM   #1
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Verizon Could Face Up to $14 Billion in Unsold iPhone Purchase Commitments for 2013




Bloomberg yesterday reported on a research note from analyst Craig Moffett pointing out that Verizon could potentially face a massive bill from Apple of up to $14 billion this year based on current iPhone sales rates and the carrier's commitment to purchase a minimum number of iPhones from Apple.
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Under a multiyear deal signed with Apple in 2010, Verizon Wireless is obligated to buy $23.5 billion worth of iPhones in 2013 alone, according to Craig Moffett, a telecommunications analyst who left Sanford C. Bernstein & Co. earlier this year to start his own research firm. Since the purchase commitment is more than twice what Verizon Wireless sold in 2012, the company may have a shortfall of $12 billion to $14 billion, worth $4 to $5 per share, Moffett said in the report.
Apple routinely requires new iPhone carriers to commit to purchasing a certain number of iPhones over a period of years, a requirement that has led some carriers to balk at offering the device.

As Moffett points out, Apple's contract with Verizon requires the carrier to purchase more than twice as many iPhone this year as it did last year. During the first quarter of 2013, Verizon activated four million iPhones on its network, a figure representing roughly $2.5 billion in hardware value at Apple's average selling price of about $613 per unit.

While the first quarter may have been a somewhat slower one for the iPhone at Verizon following the iPhone 5 launch in September 2012, it only represented a 25% increase in units over the first quarter of 2012, indicating that the carrier is indeed well behind pace for meeting its purchase requirements for 2013.

Amounts in millions of dollars (Source: Moffett Research, company reports)
Apple is expected to introduce an upgraded iPhone 5S later this year, with a lower-cost plastic iPhone also apparently in the works, but it seems unlikely that those launches will be able to generate the massive increase in sales volume needed at Verizon to meet the carrier's contract requirements.

Moffett notes that it is unlikely Apple will require Verizon to pay the full amount of any shortfall this year, particularly if it reaches the $12-14 billion amount estimated by Moffett, but that any renegotiations will likely see Apple extracting some concessions from Verizon as the iPhone maker seeks to hold other carriers to their commitments.

Update: Nomura analyst Stuart Jeffrey has released his own note examining the situation and concurs with Moffett that Apple and Verizon are in a difficult spot. Verizon disclosed at the end of its 2012 financial statements that it holds $23.5 billion in purchase commitments for 2013, with Moffett and Jeffrey both believing that the iPhone accounts for the vast majority of that amount.

Jeffrey notes that Verizon could still satisfy its obligation by making a massive advance purchase of iPhones for 2014 at the end of 2013, although such a purchase would obviously have an effect on any purchase requirements to be built into a renewal contract with Apple. Alternatively, Apple could simply allow Verizon to roll over its commitment into 2014 in order to prevent Verizon having to make a massive expenditure at the of the 2013, although such an allowance would undermine Apple's minimum purchase agreements with other carriers.

Article Link: Verizon Could Face Up to $14 Billion in Unsold iPhone Purchase Commitments for 2013
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Old Jul 11, 2013, 10:56 AM   #2
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Ouch that's gonna hurt
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Old Jul 11, 2013, 10:57 AM   #3
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Very bad news for Apple.
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Old Jul 11, 2013, 10:57 AM   #4
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wouldn't the release of the 5S create even more sales? It's understandable how sales of the older phones are slow...
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Old Jul 11, 2013, 10:59 AM   #5
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Suddenly t-mobile's jump thing makes a lot of sense. Gotta get through that inventory.
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Old Jul 11, 2013, 10:59 AM   #6
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Originally Posted by tekno View Post
Very bad news for Apple.
How is that?

Read the thing through, not just the headline, and you'll begin to realize why analysts have a worse reputation that lawyers or politicians!
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Old Jul 11, 2013, 11:00 AM   #7
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Originally Posted by chairguru22 View Post
wouldn't the release of the 5S create even more sales? It's understandable how sales of the older phones are slow...
Yes, but the point is that they're trending behind their projections. They had already baked in continuing increases in demand for subsequent iPhones and it's falling short of expectations.
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Old Jul 11, 2013, 11:00 AM   #8
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karma verizon!!!!!!!! learn to release phones when all the other carriers due. maybe you will get more customers...
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Old Jul 11, 2013, 11:01 AM   #9
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And the geniuses keep training to push their employees to sell non iPhones....
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Old Jul 11, 2013, 11:01 AM   #10
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Originally Posted by tekno View Post
Very bad news for Apple.
Uhhhh did you read the article?
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Old Jul 11, 2013, 11:01 AM   #11
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How is that?

Read the thing through, not just the headline, and you'll begin to realize why analysts have a worse reputation that lawyers or politicians!
Well no carrier will agree to a similar purchase order in the future, that's for sure.
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Old Jul 11, 2013, 11:01 AM   #12
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They were late into the game and bit off more than they could chew. Oh well.
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Old Jul 11, 2013, 11:02 AM   #13
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They might as well offer deep discounts on the iPhones if they are going to loose that much money. I'm sure Verizon would prefer to give the money to their customers rather than to Apple.

And Apple may not like the deep discounts on their flagship product so Verizon may be able to extract some concessions from Apple
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Old Jul 11, 2013, 11:02 AM   #14
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I can see things like this and Apple going to other carriers allowing the carriers saying FU to Apple on its minimum purchase agreement.
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Old Jul 11, 2013, 11:03 AM   #15
Robert.Walter
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Wasn't Verizon one of the carriers offering its sales folks bigger incentives to sell anything but the iPhone, such that these folks started steering even iphone intenders to other brands?

Kinda schizophrenic if you ask me.
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Old Jul 11, 2013, 11:03 AM   #16
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Originally Posted by MacFan1957 View Post
How is that?

Read the thing through, not just the headline, and you'll begin to realize why analysts have a worse reputation that lawyers or politicians!
Um, the article states that "The sales shortfall bolsters analysts’ projection for Apple to report a 22 percent decline in net income to $6.87 billion in the third fiscal quarter, according to the average of estimates compiled by Bloomberg."

I mean, I hate analyst predictions on rumors but a 22% decline in net income is not exactly good news, however you cut it. And the analysts were quite accurate with their Q2 '13 projection of a revenue decline.

I'm not saying the sky is falling. Just that it's hard to construe this as good news in the long run for AAPL. They have a lot more tricks up their sleeve, I'm sure. But they better start capitalizing on some of those.
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Old Jul 11, 2013, 11:03 AM   #17
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Put the blame on Verizon

If this is true, Verizon should be to blame. Every time you go to a Verizon store the sales people are never pushing the iPhone. If you ask about the iPhone, they immediately try to get you to buy a different phone. Their sales reps are obviously incentivized to sale other phones, not iPhones.
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Old Jul 11, 2013, 11:04 AM   #18
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Anyone else expecting to see a huge iPhone advertising push from Verizon?
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Old Jul 11, 2013, 11:08 AM   #19
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Anyone else expecting to see a huge iPhone advertising push from Verizon?
I'm seeing a buy one, get five free promotion.
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Old Jul 11, 2013, 11:08 AM   #20
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Just shows that there are many more options for consumers and they are taking advantage of some of the other devices. Apple needs to refresh the iPhone more often IMO.
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Old Jul 11, 2013, 11:10 AM   #21
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There is a God afterall!

Verizon is pure evil! I'm glad they have to pay up
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Old Jul 11, 2013, 11:13 AM   #22
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Originally Posted by imgonephishin View Post
Um, the article states that "The sales shortfall bolsters analysts’ projection for Apple to report a 22 percent decline in net income to $6.87 billion in the third fiscal quarter, according to the average of estimates compiled by Bloomberg."

I mean, I hate analyst predictions on rumors but a 22% decline in net income is not exactly good news, however you cut it. And the analysts were quite accurate with their Q2 '13 projection of a revenue decline.

I'm not saying the sky is falling. Just that it's hard to construe this as good news in the long run for AAPL. They have a lot more tricks up their sleeve, I'm sure. But they better start capitalizing on some of those.
But this 22% decline is basically a rumor, no? Also, AAPL is up 7% for the month of July so this report at least doesn't seem to be negatively impacting the stock.
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Old Jul 11, 2013, 11:14 AM   #23
unplugme71
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As a company, if your product can't sell in my store, I shouldn't be held liable. Now if I'm purposely not selling or prohibiting sales of it, then I have no case.

It seems what Verizon is doing is preventing sales of the iPhone, so Apple should push to get the money.

However, I feel Verizon may just drop the iPhone completely. Heck, I'd even disable any off-contract iPhones on the network too. Yeah it may piss off customers, but it'll make Apple give in too.
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Old Jul 11, 2013, 11:14 AM   #24
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They were late into the game and bit off more than they could chew. Oh well.
Yes. Verizon thought they could sell more than they have been. This isn't good for either Apple or Verizon. Ideally Verizon would be selling everything they committed to and there would be no 'fine'.
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Old Jul 11, 2013, 11:15 AM   #25
Pos7al
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Wow, maybe it is time to make your phones capable of talk and data. (Granted, heard it will be available with next phone)

This is comical hearing that they were trying to push people to other phones.
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