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Apple iPhone Demand Isn't Great, But iPhone Strategy Is
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The iPhone still accounts for nearly two-thirds of Apple’s (AAPL - Free Report) revenue, so despite the solid double-digit increase in services revenue and the $100 billion share buyback announcement, these are almost distractions and the iPhone remains the most important story in Apple’s earnings.
And iPhones didn’t do that well in the last quarter, as they were also subject to the broader slowdown in the market resulting from increased penetration in developed markets, rising prices and limited scope for further innovation that have in combination lengthened replacement cycles.
But Apple Is Hanging in There
Analysts were expecting iPhone demand of 52.3 million units and an average selling price (ASP) of $742.
While the company missed on both counts, unit sales of 52.2 million were almost in line with expectations with the ASP of $728 coming in well short. But the ASP is up 11% from $655 in the year-ago quarter, demonstrating the fact that Apple’s attempt to get some people to upgrade was successful.
The company’s long-term strategy appears to be to have a number of devices at different price points that are gradually moved to the next version of those categories, so the ASP continues to grow over time, though less dramatically, from year to year.
Apple CEO Tim Cook said on the call, “I think that our iPhone line shows that there's a variety of different customers in a market that is as large as a smartphone market and so we're going to continue to provide different iPhones for folks to meet their needs.”
The important thing here is to keep these products different enough so that people buying a higher end version have a good reason to do so and the company’s own sales aren’t cannibalized. Apple has, in recent years, expanded its product line to include devices at various price points at the same time positioning those devices as leading edge products at each of those price points. So effectively, it’s selling the Apple experience for less by targeting those that are willing to make some compromises because they can’t afford the top-of-the-line product.
That strategy appears to have worked in the last quarter because it generated double-digit unit growth across markets like Japan, Canada, Switzerland, Turkey, Central and Eastern Europe, Mexico and Vietnam.
And There Remains Significant Growth Opportunity
Says Tim Cook: “I don't buy the view that market's saturated. I don't see that from a market point of view or – and certainly not from an iPhone point of view.”
After all, last year, “There were still 0.5 billion feature phones sold in the world. And so many of those were sold into emerging markets… And we still believe that over time every phone sold will be a smartphone. And so it seems to us that with that many feature phones being sold, that's a pretty big opportunity.” So Apple is putting a lot of “energy” into India, given the size of that market and the fact that “they're investing enormously on the LTE networks. And the infrastructure has come quite a ways since we began to put a lot of energy in there because of their leadership and so forth.”
Note that market saturation is more of a problem for companies selling less differentiated products. But for a company that mainly sells premium varieties, there is some growth opportunity in targeting other segments of the market as long as its own sales don’t get cannibalized. And Apple has done a very good job on that front.
But What About Gross Margin?
Obviously, while selling phones at lower price points brings down the ASP, it adds to volumes. So Apple tries to offset the ASP hit with flagship devices that are priced really high (as with the iPhone X).
Higher-ASP products don’t however mean an immediate jump in gross margins, because products usually have a higher cost structure at launch. Margins only improve over time with increased efficiencies and higher volumes.
In the words of CFO Luca Maestri, “Our primary consideration is always around maximizing gross margin dollars, and that is the approach that we take around for example pricing decisions.” In other words, prices are determined to generate the kind of volumes that will maximize gross profit dollars.
And all the while, the installed base will keep growing, creating opportunities for Apple to sell even more of its margin-accretive services.
Wrapping Up
There has been a lot of concern about iPhone X uptake following Taiwan Semiconductor’s (TSM - Free Report) warning, but Tim Cook insists: “The iPhone X is a beloved product. And so I think that it's one of those things where like a team wins the Super Bowl, maybe you want them to win by a few more points but it's a Super Bowl winner and that's how we feel about it. I could not be prouder of the product.”
Recommendations
Apple shares carry a Zacks Rank #4 (Sell). Some technology stocks worth investing in instead are Cypress Semiconductor , Baidu (BIDU - Free Report) , Ellie Mae and Ciena Corp. (CIEN - Free Report) , since all of them have Zacks Rank #1.
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
Image: Bigstock
Apple iPhone Demand Isn't Great, But iPhone Strategy Is
The iPhone still accounts for nearly two-thirds of Apple’s (AAPL - Free Report) revenue, so despite the solid double-digit increase in services revenue and the $100 billion share buyback announcement, these are almost distractions and the iPhone remains the most important story in Apple’s earnings.
And iPhones didn’t do that well in the last quarter, as they were also subject to the broader slowdown in the market resulting from increased penetration in developed markets, rising prices and limited scope for further innovation that have in combination lengthened replacement cycles.
But Apple Is Hanging in There
Analysts were expecting iPhone demand of 52.3 million units and an average selling price (ASP) of $742.
While the company missed on both counts, unit sales of 52.2 million were almost in line with expectations with the ASP of $728 coming in well short. But the ASP is up 11% from $655 in the year-ago quarter, demonstrating the fact that Apple’s attempt to get some people to upgrade was successful.
The company’s long-term strategy appears to be to have a number of devices at different price points that are gradually moved to the next version of those categories, so the ASP continues to grow over time, though less dramatically, from year to year.
Apple CEO Tim Cook said on the call, “I think that our iPhone line shows that there's a variety of different customers in a market that is as large as a smartphone market and so we're going to continue to provide different iPhones for folks to meet their needs.”
The important thing here is to keep these products different enough so that people buying a higher end version have a good reason to do so and the company’s own sales aren’t cannibalized. Apple has, in recent years, expanded its product line to include devices at various price points at the same time positioning those devices as leading edge products at each of those price points. So effectively, it’s selling the Apple experience for less by targeting those that are willing to make some compromises because they can’t afford the top-of-the-line product.
That strategy appears to have worked in the last quarter because it generated double-digit unit growth across markets like Japan, Canada, Switzerland, Turkey, Central and Eastern Europe, Mexico and Vietnam.
And There Remains Significant Growth Opportunity
Says Tim Cook: “I don't buy the view that market's saturated. I don't see that from a market point of view or – and certainly not from an iPhone point of view.”
After all, last year, “There were still 0.5 billion feature phones sold in the world. And so many of those were sold into emerging markets… And we still believe that over time every phone sold will be a smartphone. And so it seems to us that with that many feature phones being sold, that's a pretty big opportunity.” So Apple is putting a lot of “energy” into India, given the size of that market and the fact that “they're investing enormously on the LTE networks. And the infrastructure has come quite a ways since we began to put a lot of energy in there because of their leadership and so forth.”
Note that market saturation is more of a problem for companies selling less differentiated products. But for a company that mainly sells premium varieties, there is some growth opportunity in targeting other segments of the market as long as its own sales don’t get cannibalized. And Apple has done a very good job on that front.
But What About Gross Margin?
Obviously, while selling phones at lower price points brings down the ASP, it adds to volumes. So Apple tries to offset the ASP hit with flagship devices that are priced really high (as with the iPhone X).
Higher-ASP products don’t however mean an immediate jump in gross margins, because products usually have a higher cost structure at launch. Margins only improve over time with increased efficiencies and higher volumes.
In the words of CFO Luca Maestri, “Our primary consideration is always around maximizing gross margin dollars, and that is the approach that we take around for example pricing decisions.” In other words, prices are determined to generate the kind of volumes that will maximize gross profit dollars.
And all the while, the installed base will keep growing, creating opportunities for Apple to sell even more of its margin-accretive services.
Wrapping Up
There has been a lot of concern about iPhone X uptake following Taiwan Semiconductor’s (TSM - Free Report) warning, but Tim Cook insists: “The iPhone X is a beloved product. And so I think that it's one of those things where like a team wins the Super Bowl, maybe you want them to win by a few more points but it's a Super Bowl winner and that's how we feel about it. I could not be prouder of the product.”
Recommendations
Apple shares carry a Zacks Rank #4 (Sell). Some technology stocks worth investing in instead are Cypress Semiconductor , Baidu (BIDU - Free Report) , Ellie Mae and Ciena Corp. (CIEN - Free Report) , since all of them have Zacks Rank #1.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>