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iPhone Hackers Lend Apple a Hand

Robert Holmes

Because Apple (AAPL - Cramer's Take - Stockpickr) has both history and hackers on its side, there's a good chance it's going to surpass its recently reaffirmed iPhone sales target.

CEO Steve Jobs, CFO Peter Oppenheimer and COO Tim Cook have all come out in the last two weeks to reinforce the point that Apple will reach its goal for 1% of overall mobile phone sales, or 10 million units worldwide, by the end of 2008.

But is Apple still playing coy? Could an estimate of 10 million iPhones end up being too low? If the company's trend of underpromising and overdelivering extends to its estimates of iPhone sales, the answer is yes. And the company will undoubtedly get by with a little help from their software hacking friends.

(And to see why Apple hackers are so important, watch my video.)

"The 10 million number is almost like any other number that Apple hands out, which means they'll exceed it easily," said Carl Howe, director of enterprise software research with the Boston-based Yankee Group, an independent technology research company. "Historically, they've been very conservative about numbers because they don't want to disappoint."

At the same time, some analysts have been ratcheting back their estimates for iPhone sales. Both Bank of America and JPMorgan Chase have lowered their expectations for iPhone sales going forward, choosing to thumb their noses at Apple's vow to meet expectations.

Apple is known for offering conservative guidance, only to top Wall Street's estimates when it does report. While that usually applies to Apple's quarterly earnings, some believe that the company is adhering to the same pattern now with the expectations for the iPhone.

"Second-quarter revenue guidance was typically conservative, consistent with the past two years," said RBC Capital Markets analyst Mike Abramsky in a research note. Late last year, Abramsky said that he also expects Apple to blow past targets and report iPhone global sales of about 12.5 million at the end of 2008.

Since Apple offered its mild second-quarter outlook on Jan. 22, shares have fallen more than 20%. After the company hit a 52-week high in late December, Apple's stock has tumbled roughly 40%.

Shaw Wu, senior analyst with American Technology Research, said that he still has a high conviction that Apple will ship 10 million iPhones by the end of 2008, as evidenced by the number of software-unlocked phones that grant owners the ability to use the iPhone on any GSM carrier's network.

"To a degree, what gives us confidence is the large number of hacked phones signaling strong intrinsic demand," Wu said in a research note. "While near-term trends look difficult with a looming recession and a slowdown in consumer spending, we continue to believe Apple is well-positioned to weather the storm better than most with its strong fundamentals."

Apple's Oppenheimer acknowledges that software unlocking is "occurring at a significant rate," but spins the subject as a display of unprecedented demand. "We view this as a positive indicator in future demand and interest in the iPhone," Oppenheimer said during a Morgan Stanley technology conference last week. "This gives us confidence in what we're doing."

Interest about the number of hacked iPhones peaked after Sanford Bernstein analyst Toni Sacconaghi noted the difference in the number of phones Steve Jobs said the company has sold -- 4 million as of his MacWorld 2008 speech in January -- and the number of iPhone activations that exclusive U.S. provider AT&T (T - Cramer's Take - Stockpickr) was reporting -- fewer than 2 million.

When European sales are subtracted from the difference to account for phones being used on Deutsche Telekom's (DT - Cramer's Take - Stockpickr) T-Mobile network, O2 and Orange, Sacconaghi estimated that more than 1 million units are either sitting on store shelves or have been unlocked by hackers.

RBC's Abramsky estimates that 25% to 30% of all U.S. iPhone sales and as much as 40% of European iPhone sales are sold to hackers, which addresses the "missing" iPhone problem.

"Unlocked sales, though a headache for carriers, are positive for Apple and in our view bode well for global iPhone demand," said Abramsky, adding that further international demand in countries in which Apple has not yet launched will help the company exceed its 10 million goal.

"The number of unlocked iPhones has been really tough to track down effectively," argues Charles King, principal analyst with Pund-IT, an information technology industry analysis firm. "Apple hasn't really offered any guidance on that, and it's very hard to parse out where these iPhones could have gone, as many of them are probably sitting unsold somewhere."

The consensus, though, is that the practice of cracking the iPhone's software code is ramping up. The proliferation of unlocking programs and the increasing ease of use have made software unlocking an accepted practice among users.

Cody Overcash, the co-founder and co-owner of modmyifone.com, a site dedicated to altering the iPhone's software, said his Web site saw a 20% traffic increase from the daily average for the previous month on Feb. 13, the day after a free downloadable program called ZiPhone circulated the Internet, enabling users to open the software on their phone with just a single click of a mouse.

"There is no question that third-party unlocking is boosting iPhone sales worldwide," says Overcash. "With between 20% and 40% of all iPhones being sold unlocked, Apple cannot deny that unlocking equals iPhone sales. [Apple] should be back behind closed doors cheering for the instant advancements in unlocking."

Overcash says that modmyifone.com has seen more than 20,000 downloads of the latest software unlock by the site's readers, a staggering number considering Overcash's site is just one of many dedicated to retooling the iPhone.

Apple's Cook said during a Goldman Sachs conference that the company understands that there will always be a level of hacking, but that "having people stepping over each other for the phone isn't a bad thing." He added that the company is fighting back with software updates, continuing the game of cat-and-mouse with hackers, but that the best remedy would be to expand into more geographical areas.

Moving into new markets is something analysts also think will spark iPhone sales. During its annual shareholder meeting, Apple said it will introduce the phone into India and China by the end of 2008. Exactly whom Apple would partner with and how they'd join overseas are critical points, King says.

"The China and India markets are considered to be the future goldmine for IT vendors, and the adoption of new consumer technologies is very rapid," he adds.

Another bump in sales could come in June, when Apple will roll out the next iteration of the iPhone's software that will allow users to access email through Microsoft's (MSFT - Cramer's Take - Stockpickr) Exchange servers.

The update also will allow users to download third-party applications to run on the phone, including games from Electronic Arts (ERTS - Cramer's Take - Stockpickr) and Sega as well as business applications from Salesforce.com (CRM - Cramer's Take - Stockpickr).

Know What You Own: Apple operates in the technology sector, and some other stocks in its sector include Research In Motion (RIMM - Cramer's Take - Stockpickr), Hewlett-Packard (HPQ - Cramer's Take - Stockpickr) and Intel (INTC - Cramer's Take - Stockpickr). These stocks were recently trading at $97.33, $47.31 and $20.18 respectively. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section, and to stay up to date on the technology sector, don't miss TheStreet.com's Business Technology section.