Yesterday I posted a few thoughts and my predictions for Apple’s fiscal Q2 results. Here’s my follow-up with some additional thoughts on the market implications and where we go from here.
I had predicted Apple would sell around 37M iPhones in the quarter. Consensus was calling for 38.2M. Apple blew away not only the consensus estimate but every estimate in the panel. 43.7M is a huge number given expectations. I’ll discuss the implications as I see them below.
The consensus estimate for iPad sales for the quarter was 19.3M. I predicted 17M and there was only one estimate from the panel of forecasters below mine. The actual figure was 16.3M – about 15% below the consensus estimate and about 4% below my forecast.
Total Device Growth
One of the most telling charts from my slide deck (see below), is the year-over-year growth in total device volume. It was 0.6% last quarter and 0.7% this quarter. Despite incredibly strong iPhone numbers, total device growth is near zero for a second consecutive quarter. In other words, revenue growth has come because of compositional shifts and not because of aggregate unit volume growth. While I haven’t heard others tout this figure, this is at the heart of Apple’s needed growth strategy. They are a hardware company (at least for now) that needs to growth unit volume.
Apple grew revenue by roughly $2B in the quarter from the year-ago period. This was nearly all driven by iPhone sales which represented $3.1B in revenue growth. The decline in iPad sales during the quarter resulted in a revenue loss of $1.1B. iPod revenue declined by about $500M while revenue from iTunes increased almost that amount. iPhones now represent 57% of total revenue while the iPad share declined to 17%. The share of revenue derived from iTunes increased from 8% to 10%.
But Apple’s quarterly results are more than just an iPhone story – they are a China and Japan iPhone story. Total revenue from China increased $1B from the year-ago quarter – representing about half of the total revenue gains. Revenue from Japan increased $800M. Revenue gains from China and Japan represent 93% of the total revenue increase from the year-ago quarter. Japan’s share of overall revenue grew by 21% from the year-ago quarter while China’s share of revenue grew 8% for the same period. The total share of revenue derived in the Americas declined by 3%.
I wrote yesterday:
To beat consensus, I think Apple will need to have shipped more lower-end models (4S and 5C) during the quarter. This will show-up in the average price of iPhones sold during the quarter. But it will also point to traction in emerging markets – places like China and India – so I think Apple will tout this fact if it materializes. Geographic expansion is how most large companies grow (think Coke and Pepsi) and Apple will need that within their arsenal in addition to any new product classes (read: wearables) or service sectors (read: streaming services, mobile payments) they might enter over the next two years.
And the results tend to suggest this. The average price of iPhones sold during the quarter is down 6% from the prior quarter. The geographic revenue figures combined with the strong iPhone unit volume results suggest the quarter was defined by iPhone sales internationally – though not all were emerging markets.
My prediction for iPad sales were not only directionally correct but also the most accurate of any forecaster in the panel of forecasters. Yes, Apple attributes much of the decline in iPad sales to channel inventory shifts, but those channel inventory shifts are driven by changing demand. I wrote this yesterday about the tablet market:
Lower tier and lower priced tablets have continued to gain momentum as the market has matured. These tablets are getting better and in an expanding set of use cases are “good enough.” Moreover, tablet ownership in the US is approaching 50 percent. Households are holding onto tablets longer or buying secondary and tertiary units for the household.
I still believe this is an accurate portray of the current tablet market. Moreover, Apple faces tremendous competition in the Chinese tablet market from white box Chinese manufacturers. Given that much of Apple’s revenue growth in the quarter came from China, I imagine Apple struggled to grow tablet sales there while at the same time tablet sales were likely declining in other markets (especially the US) for the reasons mentioned above. At the same time, the average price of iPads sold during the quarter increased about 6% from the previous quarter suggesting to me that Apple is potentially gaining a stronger grasp of the high-end tablet market while at the same time conceding share of the overall tablet market (the classic Innovator’s Delimma at work).
Ben Thompson argues to not “give up on the iPad” and while I think his arguments are generally valid, I think they are potentially misplaced. I believe more innovation will “appear” in the tablet market as the device segment continues to mature and new use-case scenarios are born. Academic research suggests it takes something like 7 years before the productivity gains of a new device are realized. We are still squarely in the experimentation stage of devices. But I would question Ben’s assumption of the iPad singularly as opposed to the broader tablet market. As I mentioned, secondary and tertiary use-case scenarios might not call for a high-end (read: high price point) tablet.
Here are some historical slides that I’ll update once the results are in later today.