It seems it is more interesting to write about Apple earnings when there is controversy. This time, it was two-fold. Wall St. had a high degree of confidence, as did I, iPhone shipments would be above 50m units. They were not and Wall St.’s expectations were priced into the stock (which remains undervalued) and then corrected once said expectations were unmet. Apple beat their own expectations, but not Wall St.’s. This is Apple’s life.
The second controversy was around the Apple Watch. We knew Apple would not disclose sales figures. Yet many of us were confident revenue from the category where Apple is lumping Watch revenue into (“Other”) was expected to be north of three billion dollars. It was not. It came in at 2.7 billion. So this became an exercise in financial reverse engineering to figure out how many watches they sold. I have several thoughts on both story lines.
The iPhone continues to grow. Apple will likely grow iPhone shipments for the full 2015 year between 11-18% based on my best and worst case scenarios. iPhone YoY growth continues to increase, despite everyone’s concern it will slow down. This quote from Tim Cook during the earnings call is a key part of the story:
In terms of the… what’s going on with iPhone: The 35 percent growth [year-over-year] is almost three times the market and if you look at it at a little narrower regional level, western Europe grew 30 percent versus a market of 7 [percent] so four times market; Japan grew over five times market; we doubled in Korea versus a market that was shrinking; and in India we grew at 93 percent. And this is on top of the greater China numbers that we’ve already covered that grew 87 percent during the quarter against a market of five percent.
And so we did exceptionally well, I think, in any way that you look at it. In terms of our—the percentage of customers that have upgraded to a 6 and 6 Plus versus those that have not upgraded, it’s 73 percent, meaning that 27 percent of the install base of customers prior to the launch of 6 and 6 Plus have now upgraded.
Several points to make. First, to the installed base. 7% of the base upgraded this quarter. The iPhone has a greater than 80% repurchase rate (higher according to Apple internal market research) so we know The iPhone is sticky. So it is a fairly safe assumption a healthy number of the other 73% will likely upgrade as well to a new iPhone.
Apple also noted the most Android to iPhone switchers of any previous quarter. Interestingly, this was predicted in a report from the Yankee Group in 2013 called “Android’s Leaky Bucket”. This research focused on iPhone owners and owners of some of the most successful Android devices at the time and found continually high repurchase rates of iPhone owners and much repurchase rates and interest to consider other brands including iPhones by current Android owners. Last quarter, private research I read indicated as much as 18% of iPhone sales came from Android switchers in the US and as high as 28% from China. While the US smartphone market was really terrible this last quarter, we can assume a good portion of Android switchers came from non-US markets.
To the point of other markets, Tim Cook quoted a number of growth statistics. Doubling in Korea was an interesting point, followed by a tweet from Francisco Jeronimo of IDC.
Growth in European markets like Germany and Spain is fascinating. These were very Android-centric markets. Speculation as to why Apple is suddenly doing well could be a combination of larger screen and an emphasis on security. 93% growth in India would imply over 700,000 units sold in the last quarter according to my model. So Apple is on pace to pass 2m iPhone sales in India. Then we have China.
China will be Apple’s biggest market on many fronts before too long. Growth of 87% implies 12-14m iPhones sold in China last quarter according to my model. Economic concerns could have hurt it but I think we are still just learning what China seasonality looks like. My continued research of the China market gives me confidence that Apple’s ceiling there is still much larger giving them a great deal of headroom to grow.
The iPhone remains beautifully positioned to continue to grow and gain share over the long-term.
Our projections were 4.7m Apple Watches. Acknowledging this as a tricky product to track, we were leaning heavily on supply chain guidance. We knew of several component providers with exclusive parts for the Apple Watch. Build orders and ODM output seemed to indicate build orders in the 5 million range of Apple Watch. Using some yield concerns to estimate down, the 4.5-4.7m range was our guess. It turns out yield may have been much worse than our projections and a higher build order than Apple’s sales expectations was made to compensate.
Second, it appears preorders were even weaker than expected. Which is fascinating even in its own right. Not because we didn’t think people wanted to see it and touch it before buying, but that we believed the number in Apple’s passionate user base who would quickly jump to buy this product was much higher than 1-1.5m people. While I still believe this is true, it can suggest even Apple’s base was somewhat skeptical and wanted to feel and touch before buying. Important if true.
Apple cautioned to just use the increase in revenue to the other quarter, which came out to around one billion dollars, and use that to estimate Watch numbers. Tim Cook also indicated that products in the “other” category saw declines. So we don’t know if Apple Watch contributed 110%, 120%, 130%, etc. A 10% decline is probably likely and a 20% one could be reasonable as well. With an ASP in the $430-$450 range, it seems we can work out, with a reasonably educated guess knowing what we know, that Apple sold in the range of 2.5-3m Watches. There is a way to work the math to get above 3m but I’m less confident in that scenario at this point.
Furthermore, what does this say about momentum? Apple stating they sold more in June than in April or May is positive for momentum. Catching up with supply chain and getting into retail helped momentum positively. Apple expanding retail locations and getting Apple Watch into more stores will be a key driver for momentum. And now, with low yields seeming to be fixed and the Watch in retail, we are still seeing supply chain ramp up not down. So, from what we can see, there are positive signs the Apple Watch is gaining steam from a sales standpoint.
Lastly, thoughts on the Mac and the iPad. The Mac continues to grow steadily and take share. We expect this to keep happening. The iPad is still slumping and this was expected. The iPad is selling like a notebook and is exhibiting signs it is working with PC market dynamics not mobile phone market dynamics. ~300 million PCs get bought each year and that is Apple’s opportunity to gain share of with both Mac and iPad.
Next quarter will be interesting and, while iPhones will suffer the calm before the storm of holiday new hardware, the Apple Watch will likely be a primary story again.