Apple Earnings Review

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.

Screen Shot 2015-07-22 at 4.39.00 PM

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.

Apple Watch

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.

Published by

Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

29 thoughts on “Apple Earnings Review”

  1. What surprised me most about Apple is the degree to which they have become a single
    product company highly dependent upon China for future growth.

    And despite all the fanfare, the money spent in advertising, and even the entire web and
    the blogosphere making free PR for the Apple Watch, they still could not move the market of smart Watch beyond mere curiosities nor even crack it, and that says a lot more about the wearable market than it say about Apple.

    1. Agree. But most of this, being an iPhone centric company, growth mainly from China was all predictable.

      The wearable market is suffering from some of the laws of diffusion of innovation as well for many parts of the market. I believe this is accelerated in Apple’s ecosystem but there is still an adoption cycle which is necessary.

      1. You’re probably right, but I my opinion the Smart Watch market will require some real breakthrough in sensor technology, Voice UI and Internet of Things, before it can becomes a most have product, I do not expect the sale to be that much higher next quarter.

      2. I agree from anecdotal observations that there are many in the passionate user base who are still waiting on th Apple Watch. They seem to just be a bit cautious about jumping onto a version one product, with strong intention to buy the next one. It’s not the typical tech adoption life cycle, but I’m pretty sure that demand will ramp up with the next version at least.

        Awareness of the product is pretty amazing and I find myself surrounded by even primary school kids wanting to play games on the device.

        There are quite a few reasons to be bullish.

        1. i doubt that demand will ramp up with the next version as you suggested

          I do believe that many people are interested in the Watch only because of its popularity and heavy marketing push, not for its usefulness or ability,

          1. What I am suggesting is that there are still a lot of early adopters waiting for the next version, and who would likely buy it if small issues like native apps and battery life (which isn’t really an issue but is still perceived as one by many) are resolved. Ben’s research with Wristly suggested that techies are more cautious about the Apple Watch, and that is certainly something that I am seeing anecdotally. At this early stage, if early adopters start buying the next version in earnest, which they seem to be quite willing to, it will make a large impact on sales.

            As for the usefulness of the Watch, if you spend a lot of time moving around in your work or even just as a soccer mom, it’s really quite obvious. Apple does face a challenge communicating the benefits, but I have absolutely no doubt that they are quite significant.

          2. Based on current input and output communication layer of the OS, I do not think that native App will make that much difference soon, in the context of the phone you already have in your pocket.

            What I think can help turn it around will be some breakthrough in sensor, Beacon, proximity, and the voice UI technology, including the Internet of Things.

            Although I’ll like to see the Smartwatch market take off, but it is safe to say that Apple needs the Apple Watch far more than consumer do.

          3. I don’t think that your view can incorporate the fact that customer satisfaction for the Watch is very high. If it was just popularity and marketing, satisfaction would not be this high. You are free to doubt the customer satisfaction report that Wristly did, and you are free to doubt the internal Apple surveys that Tim Cook referred to. However, I would apply at least the same level of scepticism to the reports that Apple Watch interest is tapering off.

            What I do sense, and it probably relates to your comment, is that many people do not appreciate the value of the Apple Watch as it is in version 1. Many people do not understand that people very often miss calls because they can’t feel the buzzer in their trousers while walking, or because they have it in there bag, and that this is an issue for them. They don’t understand the immediacy of responding to a message from your child when you are driving to pick them up (I think the Apple Watch will make Car Play and similar devices obsolete for many people).

            The Apple Watch is very useful as it is, but there is a difficulty in communicating that to potential customers, even early adopters. Why would customer satisfaction be so high if the current product was not very useful? Apple Watch will benefit strongly from the additional features that are coming, but maybe more significantly, it will benefit from more people realising its current usefulness.

            The bottom line is that there is a huge amount of upside within the next year from both a technical improvement perspective and a technology diffusion perspective. A breakthrough would be welcome, but not absolutely necessary.

            Compare this to the iPad. The iPad (and the Netbook) was relatively easy to understand because it sandwiched between well understood products. People knew what it could do. However, this is also what caused momentum to stall. As smartphones improved and as notebooks got smaller, the niche that the iPad occupied got smaller and smaller. Being sandwiched was good for the short-term, but became a problem in the mid-term. The future of the iPad rests on how successful it is in escaping the sandwich and finding a niche which it can own for itself. This requires a breakthrough, which is what the IBM partnership is about.

            With the Apple Watch, Apple is exploring a new frontier which is expanding as smartphones are getting bigger. It will not be sandwiched.

    2. I really don’t understand people claiming Apple is a single product company. Their Mac business is bigger than at any time in their history. If you just took their Mac business or their Services business, they’d be bigger than many other companies.

      15 years ago, Apple Computer Inc. was essentially a single product company and a much smaller one at that. Now they are far bigger, with a bigger Mac business, a bigger iPad business, a bigger iPhone business, and because the iPhone is growing so fast they’re suddenly morphing into a single product company? Apple has never been further away from being a single product company in their entire history than they are right now except maybe in 2012 when the iPad was selling like crazy and iPhone sales were lower. Growth in the iPhone doesn’t suddenly make them a single product company. They have at least 5 (iPhone, iPad, iPod, “Other”, and Services) distinct products, all of which are larger than many other huge companies out there. Just because the iPhone has grown so fast that it eclipses all of the others doesn’t suddenly make them a single product company.

      1. that’s not the best way to look at it

        The point is, if you take the iPhone out of their portfolio, they will automatically become a very small company with no clear future.

        1. Apple has built a huge company on the back of the iPhone and it is responsible for most of their growth. Just arbitrarily removing products and seeing how the company looks afterward is now how we judge a company? How does the iPhone magically vanish? Can we do this with all companies? If we took Windows out of Microsoft it should suddenly become a small company with no clear future. If we took search ads out of Google well…they wouldn’t exist. So what? Of course they would have no clear future because their future includes the iPhone. If the iPhone had never existed, they would have created some other future. Your statement, while true, is absolutely meaningless for evaluating Apple.

          1. Do not confuse a company’s products, with its business model.

            The difference is that Apple is a product company that needs to sell a lot of IPhone every single year just to maintain their business, which is different from Google say without search may easily turn to YouTube, Gmail, Chrome, Android and Cloud platform to make money in advertising and still remain a dominant company

            Microsoft is still a huge company with lots of potential, despite the collapse of Windows, their main product.

            Now imagine the IPhone getting disrupt the same way that Windows has been, where Apple will turn to recover their value?

          2. I’m not confused. You seem confused. Even if the iPhone business collapsed, they would still have their other product lines that alone are massive. That’s my point and one you keep forgetting.

            Google could not easily turn to YouTube, Chrome, etc because those products make little to no money and in some cases even lose money for Google. Google subsidizes all of them with search ads. Google is a one product company. Period. Their entire business is based on that.

            Microsoft Windows is still huge and has in no way collapsed.

            Apple would be a much smaller company by about half if the iPhone business collapsed. They’d still be bigger than Microsoft and Google with their other product lines. That’s what I’m pointing out.

          3. you don’t get it

            Google make their money on advertising, not search which is still their best product, but they still have another platform with billions of users such as YouTube, Chrome, Android, Gmail, that are growing very fast with a lot of potential for future monetization.

            in the case of Apple the only Product that is Growing and with a lot of potential for future growth is the IPhone.

            the IPad line is down, IPod is collapsing, the Mac is a mature category with very small growth, the Watch isn’t take off and none of this category can become a dominant product without the IPhone at a time when we are moving to the cloud

            the two company are not comparable hence wall street valuation

          4. Um…have you looked at Google’s financials lately? They make no little to no money from YouTube, Chrome, Android, or Gmail. Those products are break-even. We’ve been hearing about the potential for monitization for years. Still waiting.

            iPod is shrinking yes. 15 year old product line that was replaced by the iPhone. Macs are growing at a relatively decent clip with no sign of slowing down. iPads are shrinking yes, but it’s because the refresh cycle hasn’t hit yet. Watch is 3 months old and it’s ridiculous to say that it isn’t taking off, especially since it’s already outsold the iPhone and iPad for their own launches.

            Yes the two companies are not comparable. Google is a one product company with strong fundamentals and a solid business plan. They are slightly overvalued on the P/E multiple. Apple is a strong and diverse company that is valued at nearly twice Google and is slightly undervalued on a P/E multiple. So…you’re right. Wall street has decided that Apple is a stronger company.

          5. what was the revenue for YouTube, Chrome, Android, or Gmail. from Google Financial?

            You clearly don’t get it my friend

          6. “…the Watch isn’t take off.”

            Hmmm… 97% satisfaction rate.

            Let’s revisit this over the next few quarters.

          7. “Microsoft is still a huge company with lots of potential, despite the collapse of Windows, their main product.”

            They certainly haven’t made their mark in SmartPhones and the Surface has not exactly wowed the crowds. Xbox is nice, but always playing second fiddle to the PS4.

            Microsoft’s Profits have been flat for a while and they have just had their worst quarter ever.

      2. Not quite single-product, but there’s clearly one big product making up 60% of sales, with a stable of also-rand that barely break 10% of sales individually.
        Plus that 60% has a strong halo effect that drives other sales to a huge (appstore, accessories, iWatch since it is iPhone-exclsive) or more reasonable but probably real degree (desktop Macs, iPods, services, Cloud,…).

        1. But Apple’s product line-up has always been minimal. They have always prided themselves (rightly or wrongly) that all their products could fit on one table.

          What’s problematic is that Apple continues to do well NOT doing business as everyone expects or as traditional thinking says they should. And even as they move in directions naysayers say they must (or DIE!), like China with iPhone (or enterprise with IBM), now all of a sudden China growth is a weakness!? Criminy! This is just ridiculous. (you may or may not have said any of this. Not really my point. So this is not me calling you out on anything. But certainly Kenny).

          I don’t mind contrarian views. Always good for reality checks. But changing the argument just to be argumentative (as most Wall Street Apple bears love to do) is not helpful, nor rational. It’s just making sh*t up about something they clearly do not understand.

          As Falkirk (and others) have said, show me you understand why Apple is successful before expecting me to believe you understand why Apple will fail/”is failing”.


    3. “they still could not move the market of smart Watch beyond mere curiosities nor even crack it, and that says a lot more about the wearable market than it say about Apple.”

      See, I don’t get why you think Apple is doing anything other than what it planned to do with the Watch. It is currently out-selling the rest of the wearables market, combined if I read that correctly, elsewhere. And as Ben says in another response, “Anything north of 3.2 million would make it the best-selling first generation product in Apple’s history.” That mens, in case you aren’t keeping up, it ramped up faster than either the iPod, iPhone, or iPad.

      But, as I heard a wise man say “Do not confuse a company’s products, with its business model.” Apple’s business model is hitting on all cylinders. I don’t see how you can think otherwise.


    4. “… they still could not move the market of smart Watch beyond mere curiosities nor even crack it.”

      This doesn’t comport with the recently announced marketshare for Watch.

      75% of the smartwatch market. Pretty good for a strung out introduction which reached minimal retail distribution (680 brick and mortar sites) in week 11.

      Next quarter’s estimates will provide a better view of Watch. I expect Watch to have double this quarter’s numbers and to have grabbed a 90% marketshare.

      If true, we might think that Watch has “cracked” the market.

    1. Speaking not in Apple’s calendar.. I know that is confusing but because I model them with all other smartphone vendors and the overall smartphone industry I added up 2015 estimates.

  2. OK, now that I’ve recalibrated for calendar years…

    Just a wild guess, but seems to me 20% YOY unit growth seems very attainable. Actually, it sounds more like the floor.


    45M iPhones CQ3 2015/FQ4 2015 – vs. 39.272M iPhones year-ago quarter

    77M iPhones CQ4 2015/FQ1 2016 – vs. 74.47M iPhones year-ago quarter

    The compare: 192.6M iPhones sold by Apple in more-or-less CY 2014 (a few days off due to fiscal year/ends on Saturdays accounting)

    1. A9
      Force Touch
      32GB RAM for cheapest model (instead of 16GB).
      Double fast LTE
      Better Battery Life

      The NEW 4″ 6C with A8, Touch ID, Force Touch (About 8M of these)

      China Mobile’s continued LTE rollout, another 80M LTE customers
      Another 10 monster China Apple Stores

      Only 77M for Christmas quarter? How about 85M to 90M?

Leave a Reply

Your email address will not be published. Required fields are marked *