Apple’s iPad Surprise and Other Interesting Earnings Bits

Apple’s Fiscal Q3 earnings were a bit more interesting than I thought. Much of this interest came from extensive commentary from Tim Cook on a range of things from iPad to Apple Watch, to autonomous systems, and the iPhone in emerging markets like India. First, let’s start with the iPad.

iPad
iPad unit shipments were up 14% YoY. I suspect this had a lot to do with the new aggressively priced iPad Apple launched earlier in the year as well as some regional help in China and enterprise/EDU. iPad ASP was down, which does suggest the $329 iPad drove a good volume of sales. This is not surprising as there was still a large base of iPad two still in use and it made sense it was time for some upgrades. Half of iPad sales in China were also to new customers to iPad. For quite some time we have been watching the iPad slowly grow its base and lure in China, and this trend continued in the June 2017 quarter.

Apple’s main mission with iPad remains to reposition it as an entirely new type of computer. This is the goal of their ads, and it may be slowly working. We need to see how the fall plays out with iOS 11 and iPad, but according to a poll, we ran 36% of our respondents had not yet seen Apple’s new iPad commercials. 24% indicated these commercials had still not increased their consideration to buying iPad over a new PC or Mac. 16% said they are still happy with the PC or Mac they have, but they may consider switching to iPad when their current notebook/desktop needs to be replaced. Only 5% of respondents had already made the switch from PC/Mac to iPad. I remain convinced there is a lot of upside for iPad. However, there is still work for Apple to do.

Apple Watch
Apple Watch is quietly off to a strong 2017. It appears both the March and June quarters of 2017 were up approximately 50% YoY. In each quarter Apple shipped approximately 2.3-2.6 million Apple Watches. This is not as strong 2015 quarters but much better than 2016. As of now, I’m relatively confident 2017 will be Apple Watch’s best sales year yet.

By most research estimates, Apple is the second largest watch brand to Rolex in revenue, and regarding end, customer sales Apple sells more watches each year than all Swiss watch brands. Note this interesting snippet from a Wall St. note on the European luxury market.

The other thing to consider about the Watch is the data collection platform it is becoming. With an installed base nearing 30 million people, Apple is getting more health, fitness, and overall activity data than any company out there. Even as Apple is anonymizing that data for user privacy, they are still benefitting from learning the data trends which overall helps make better products and more personal services over time for the end customer.

Autonomous Systems
The most interesting part of Tim Cook’s commentary on autonomous systems was not his affirmation that they are interested in autonomous systems/vehicles but that the applications for autonomy go beyond vehicles. He said you are all thinking about this too small! It seems many have lost the forest for the trees by just looking at autonomous systems through a vehicle lens. Apparently, Apple has much larger ideas in mind. So what can that be?

Robots, for one, may be an interesting angle here. If perhaps, we are heading toward a future where we have personal robot assistants then Apple is certainly well positioned for that future. Autonomy can also benefit Apple’s assembly factories helping them further cut manufacturing costs. It was Tim Cook’s coy comments about autonomy being more than just for cars/vehicles I found the most intriguing and worthy of deeper thought.

The iPhone just getting Started in Emerging Markets
Apple remains bullish on emerging markets like India, and even lower tier areas of China. This lines up with our data that suggests consumers are moving up the price chain not downwards even in price sensitive markets. So long as Apple has competitive price products, that are not too much more expensive than the competition, then I agree they have some ground to gain in markets like India, lower tier China, and SE Asia.

Continued investments in these regions in store fronts, developer ecosystems, local services, manufacturing, etc., are all necessary for Apple to grow their installed base in these regions. Apple is playing the long game here, and we can’t forget it is a long game.

Set up for a Big Year
The last thing I want to call out was the confidence coming from Apple management. I don’t read this as being cocky but more just sensing the winds are trending in their favor for the next 12-18 months. Honestly, I’ve been scouring reports and data we have, and I can’t find much evidence to counter Apple’s confidence. Nearly every Wall St primary research study indicates a huge number of iPhone customers waiting for the iPhone 8. Upgrades have been delayed, and consumers have engaged in what I now call the great wait for the iPhone 8. I know it rhymes.

Apple is not just poised for a big second half but a big 2018. With developers jumping on ARKit as fast as any new toolset Apple has released, there is going to be a new developer app boom around AR which will be exclusive to iOS. This will also be a very public display of innovation. AR is going to demo very well, and iPhone customers will be more than happy to show off all the cool features of AR which will only help in driving consideration of their Android owning friends to switch.

As I mentioned here, AR will also help drive exclusive experiences and new app innovation in China that will generate even more interest to iOS from Chinese Android owners.

Apple’s ecosystem as a whole is getting bigger and more powerful. I’m fond of saying platforms broker trust, and that trust only deepens over time and becomes attractive and hard to leave. Apple is creating value for third parties not just themselves and this again contributes to the rich value of the ecosystem.

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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

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