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As the world’s most valuable company, Apple faces unusual scrutiny when it comes to earnings. The company is tight-lipped in the best of times, so every utterance during its quarterly public earnings call is carefully dissected for the most minute of clues.
This time around, the bottom line is that the bottom line rocked: Apple posted record revenues for the holiday quarter. But it was the fate of the iPhone X that had analysts and journalists sifting the tea leaves to try to resolve a growing disconnect. On the one hand, reports had pegged the iPhone X as the world’s best-selling smartphone in the holiday quarter; on the other hand, numerous reports indicate that Apple was ramping down production of the device for the current and future quarters.
Which of these is true?
The answer, unsatisfying in a world that craves instant judgement, is that they are likely both true. And to make the muddled verdict even worse, it probably doesn’t really matter in terms of the company’s overall health.
Speaking generally, Apple’s earnings report for the recent holiday quarter was highly unusual and complicated. iPhone sales were down, but with an asterisk: This quarter had 13 weeks, rather than 14 weeks like last year. Yet … revenues still fell short of analysts’ expectations. Yet … the company still saw a big bump in iPhone revenue and average selling price. What we’re left with is multiple arrows all pointing in different directions.
Naturally, CEO Tim Cook offered a very straightforward analysis. The iPhone X is a huge hit. End of story.
“iPhone X was the best-selling smartphone in the world in the December quarter, according to Canalys, and it has been our top-selling phone every week since it launched,” he told analysts. Cook added that the “iPhone 8 and iPhone 8 Plus rounded out the top three iPhones in the quarter. In fact, revenue for our newly launched iPhones was the highest of any lineup in our history, driving total Apple revenue above our guidance range.”
No doubt this is 1,000 percent true. But still, what does it really mean for a phone to be Apple’s best-selling? Less than would appear at first glance.
Apple’s introduction of new iPhones this year was unique. First, because the company introduced two new flagship phones, the iPhone 8 generation and the iPhone X. But also because rather than trimming its lineup to three generations of phones, it decided to continue selling the iPhone 6s generation, along with SE, iPhone 7 generations, and of course, the new ones. With deeper discounts on older versions, Apple was offering some stellar deals on phones that are far from out of date.
This means a couple of things. First, iPhone sales are spread across a wider range of versions. That lowers the “best seller” bar a bit. In addition, the iPhone 8 and 8 Plus went on sale in September, so the initial rush of demand for the versions would have subsided by the time the iPhone X went on sale in early November.
Apple undoubtedly still sold a lot of iPhone X units, the main factor in driving up the average selling price. The company said iPhone ASP increased to $796 from $695 in the 2016 holiday quarter. But with some versions going for more than $1,200, it wouldn’t take a gigantic number to skew that figure up.
Another nugget worth noting: Cook said supply has already caught up with demand.
“The team did a great job of getting into supply demand balance there in December,” Cook said. The question, of course, is whether that means Apple fixed any manufacturing issues, or whether demand just slacked off. Cook also said iPhone X continued to be the best-selling phone throughout January. But Apple doesn’t have a backlog of demand as it heads into the current quarter.
Then there are the stories floating around about how production of the iPhone X is going down. In part, that’s a natural phenomenon. The big rush of sales for a new version normally tapers off after the holidays. This year, given no backlog, that will be even more true.
In addition, Apple CFO Luca Maestri explained that sales of the iPhone X will see the biggest slowdown this quarter, along with the iPhone 8s, which means the average selling price is going to take a bigger hit than usual.
“As we reduce inventories of these newest products, the overall ASPs for iPhones in Q2 will naturally decline sequentially by a higher percentage than we have experienced historically,” he said.
The result is that Apple guided to between $60 billion and $62 billion in the quarter, below analysts’ estimates of $65 billion. That means Apple’s revenue might only grow up to 17 percent from the same quarter a year ago — a “problem” literally every company on the planet would love to have.
Depending on the actual ASP Apple expects, that could also mean the number of iPhones Apple sells in the quarter remains flat or even drops from the 50.76 million it sold last year.
In Q2 2017, iPhone sales represented 63 percent of total revenue. Assuming this held true for the current Q2 2018, that would amount to $39 billion for iPhone revenue out of the projected $62 billion revenue.
ASP for the iPhone was $655 in Q2 2017. That could put the low-end estimate for iPhone sales this quarter at 56 million units. If Apple was still close to the $796 ASP from last quarter, that would imply 46 million iPhones sold.
Of course, the number is more likely to be in the middle, or just around the 50.76 million units from last year.
And this is probably what’s throwing Wall Street analysts. The number of iPhones Apple has sold has remained roughly flat over the past two years. Stretching back a year, analysts had convinced themselves that the rumored iPhone X would trigger a “super-cycle.” This was what happened in fiscal year 2015, when Apple introduced the iPhone 6 generation, with its bigger screens.
The number of units the company sold in the holiday quarter that year soared 46 percent. It was such a rocketship that the iPhone 6s year would see the company’s first annual dip in iPhone sales. Things improved with iPhone 7, but revenue and units were still below the magic of 2015.
It’s clear Apple is going to see revenue go up for the current fiscal year 2018. But iPhone shipments may be roughly flat, or even down a bit, which has analysts, who love to love Apple, rationalizing new definitions of “super-cycle.” Maybe the super-cycle is not a one-year thing, but a three-year thing?
But what’s also likely is that there isn’t really any rumored catalyst in the near-term pipeline that will boost the number of iPhones sold. Surely the cost of the iPhone X will drop in the coming months, and that may tempt more buyers. But smartphones also last longer, so the rush to upgrade doesn’t have the same immediacy it did a few years ago.
The final twist in all of this is that none of it may matter to Apple.
The company’s making more money from selling the same number of smartphones. It’s seeing strong growth in services, as the economic leverage of its ecosystem continues to kick in. It owns the smartwatch market, such as it is. And it’s got the HomePod coming soon. The result is that the company continues to print more money than it knows how to spend.
The only real drama is whether shareholders will find that story satisfying and continue to ride. My guess is that with growing dividends and share buybacks and steady revenue increases, Apple won’t to be hearing too many complaints from investors for years to come.
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