by TheMacroEvent
Apple reports Q4 earnings on Thursday, November 1st, after the bell. Here are a few things to watch for:
1. iPhones? iPhones
iPhones are it. They are the brain of Apple, making everything else go. iPads? Macs? Accessories? Inconsequential. The company will live and die by iOS.
Here’s why. The company has built the massive product, and gotten in the hands of millions of users. It is THE mobile platform, even if it doesn’t have a dominant market share.
And it’s a cash cow. If you have an iPhone, you’re likely to be buying subscriptions, apps, making in-game purchases. And Apple gets a cut of all of that.
It’s also really the only phone the young folks will consider using. You know, the consumers who really matter.
However, most people who want an iPhone have an iPhone. It’s mostly upgrades from here. So how many people are actually upgrading? Or are more people with older models holding out?
As I wrote a few months ago, people are waiting longer and longer to upgrade. And that hurts Apple. We used to upgrade every two years, then the phones got better and we could stretch it out to three. I’m still using my four-year-old iPhone 6+, and with iOS 12, it’s running better than it has in two years.
Sample of one, but I’m just part of a larger trend.
Second, any comments on Xs/XsMax/Xr sales?
The company rolled out the new devices this month, so there won’t be able sales figures for Q3 yet. But the company is definitely going to provide some updates on the new slate of iPhones, especially with the crucial Q4 coming up.
But look for comments on the Xs Max – will the up-to $1500 price tag turn off buyers? What about the Xr, which a bunch of reviewers called the best iPhone for your dollar ever?
iPhone ASPs have been slipping in recent quarters. The people who wanted the X last year bought the X, then everyone else who just needed to replace their iPhone 4 just seemed to buy the cheaper models.
[Note: There are charts and a link to all the data here]
Q3 is a down quarter traditionally, but look for some expectation setting.
2. Services growth
Services are the future of Apple, not the iPhone. For so long, the company buttered its bread with the iPhone.
But since almost everyone who wants an iPhone has one, it’s not all about services. Apple’s iPhone sales as a percent of the company’s revenue has only fallen over the past few years, from over 66% in 2015 to an expected ~60% in 2019.
Services, on the other hand, has more than made up that gap, growing from just under 9% in 2015 to an expected 16%+ in 2019.
On a rolling four-quarter basis, iPhone sales growth has rebounded from around -5% in mid-2016, but is only expected to be around 1% – or less – through 2019.
Services, on the other hand, has grown nearly 7% over the past few quarter, and is expected to keep chugging along at 5% quarter-over-quarter or so through next year. That 20%+ growth makes services THE focus for Apple’s future.
To top it all off, Services margins are much higher than device margins. This is only going to be a bigger and bigger story around Apple’s future.
3. China
China sales have clawed their way back in the past few quarter. On an annualized, rolling four-quarter basis, sales in China hit a low in the June 2017 quarter, but have since snapped back, hitting the highest level since the September 2016 quarter in Q2.
However, Apple’s sales in China – as a percent of all sales – has continued to fall since peaking in Q2 2015. For Apple, this is a dual-edged sword. China is obviously the biggest growth market in the world, and Apple is losing market share, falling to the number 5 spot earlier this year [CNBC]. On the other hand, Apple is becoming less reliant on China as a growth driver – probably good given the trade tensions between the two countries.
Still, Apple made a deal with China Mobile, which has a subscriber base of 900 million people. Clearly they’re still trying to break through in China.
But speaking of trade uncertainty…
4. Tariffs and trade
The company has posted four consecutive quarters of sales growth in China, but can for how long? Apple was exempted from tariffs for most products, including the Apple Watch and AirPods back in September [WSJ], but the White House is threatening tariffs on all imports from China, depending on how the talks between Trump and Xi play out at next month’s G20 [Bloomberg].
If all Apple products are covered by tariffs, that’s a massive, material risk for the company.
The New York Times wrote in June that the Trump administration said it would spare Apple from tariffs, and the Tim Cook has been lobbying both the US and Chinese governments through the escalating trade spat. But that may not be enough.
WSJ noted recently that “In the U.S., the proposed tariffs of 10% would have added more than $11 to the import cost of about $115 for a Chinese-made Apple Watch Series 3, according to market researcher IHS Markit. Analysts say Apple would either eat those costs on the device, which retails for $269—and similar costs on other products such as AirPods—or pass the costs on to retailers and consumers.”
If an iPhone Xr, at $750, is around three times that amount, that could work out to an extra $33 per phone. And that’s with a 10% tariffs. A 25% tariff has been thrown around, which could make that $750 iPhone Xr suddenly cost around $83 more, or $833.