Apple’s iPhone X super cycle in doubt as earnings approach


  • TECH
  • Wednesday, 31 Jan 2018

Boxes of iPhone X are pictured during its launch at the Apple store in Singapore November 3, 2017. REUTERS/Edgar Su

Apple Inc. shares surged by almost half last year on predictions that Apple’s 10th anniversary iPhone would be a runaway hit.

But demand for the flagship handset, the iPhone X, hasn’t met the most optimistic expectations, according to securities firms including Sanford C. Bernstein, which ratcheted back estimates for the number sold by Apple in recent months. The suspense ends Feb 1, when Apple reports fiscal first-quarter results and provides forecasts for the current quarter.

”Investors are increasingly aware that this iPhone cycle will very likely bedisappointing relative to initial expectations,” Toni Sacconaghi, an analyst at Bernstein, wrote in a research note Jan 29.

Total sales climbed 11% in the December quarter, analysts predict, buoyed by higher average selling prices for phones and a deeper push into services such as apps, music and cloud storage. Even so, that’s just over one-third the pace of growth in the holiday quarter three years earlier, when Apple introduced larger iPhones, kicking off what’s known as a super cycle – a wave of device upgrades by existing users and first-time adoption from new customers – and fueling the share surge that made Apple the most valuable public company.

Apple stock has slumped about 7% since closing at a record on Jan 18, as analysts stoked iPhone demand concerns. Ming-Chi Kuo, at KGI Securities, warned that iPhone X sales weren’t as strong as anticipated in China. JPMorgan wrote that “demand has gone sour quickly”, and a survey by Consumer Intelligence Research Partners found iPhone X models made up just a fifth of iPhone sales in the holiday quarter.

This “may dash hopes of an iPhone X sales super-cycle akin to the iPhone 6,” analysts at Bloomberg Intelligence wrote in a recent research note.

The latest wave of bearishness came Jan 29 after Nikkei reported that the company told suppliers it was cutting the iPhone X’s production target in the current quarter by half due to slower-than-expected sales in the holiday season.

However, an executive at Apple supplier Murata Manufacturing Co told Reuters that the Nikkei report overstated output cuts. And Apple often reduces orders after the holiday season. Apple declined to comment, but Chief Executive Officer Tim Cook addressed similar questions during a first-quarter 2013 conference call with analysts.

”It’s good to question the accuracy of any kind of rumour about build plans and also stress that even if a particular data point were factual, it would be impossible to accurately interpret the data point as to what it meant for our overall business because the supply chain is very complex,” he said.

Even if consumers are buying fewer iPhones than predicted, they’re paying more, on average, for the devices they do purchase. The iPhone X, which went on sale in November, comes in US$999 (RM3,897) and US$1,149 (RM4,482) configurations, at least US$150 (RM585) more than any iPhone starting price that came before it. The new iPhone 8 and iPhone 8 Plus handsets also start at US$50 (RM195) more than their predecessors.

”Given Apple’s expanded price points and lineup, investors will have to absorb the concept of revenue, versus just looking at the unit number,” Shannon Cross, an analyst at Cross Research, said.

Apple shipped 80 million iPhones in the holiday quarter of 2017, with an average iPhone selling price of US$819 (RM3,195), up from US$695 (RM2,711) a year earlier, according to a Bloomberg survey of seven analysts. Morgan Stanley analysts are looking for an ASP of US$819 and total revenue of US$92.2bil (RM359.68bil), ahead of consensus estimates.

A large services business that’s growing quickly and billions of overseas dollars being brought home for more dividends or share buybacks should also offset any iPhone X demand weakness, according to some analysts.

”We expect iPhone average selling prices to be in line with expectations and iPhone mix to not be as bad as some are fearing,” said Michael Olson, an analyst at Piper Jaffray. “Combined with services growth and the hopes of what can be done with repatriated cash, that should help the stock hang in there despite concern around the iPhone cycle.”

Apple forecast overall revenue of US$84bil (RM327.66bil) to US$87bil (RM339.36bil) in the holiday quarter. Analysts are looking for US$87.1bil (RM339.76) on average, according to data compiled by Bloomberg.

When the company reports on Feb 1, it will also forecast revenue and profit margins for the following period, its fiscal second quarter. Analysts estimate revenue of US$67bil (RM261.37bil), which would be almost 30% growth – the biggest year-over-year increase for that quarter in six years.

The iPhone X was only on sale for roughly half of the holiday quarter, so sales in the first few months of 2018 may be buoyed by people buying the flagship model as more supplies become available, according to Consumer Intelligence Research Partners.

Sacconaghi at Bernstein said Apple’s fiscal second-quarter guidance is the key metric to watch. He’s looking for revenue of US$62bil (RM241.85bil) to US$64bil (RM249.65bil), which implies 50 million to 55 million iPhones sold in the period.

”Given all of the recent noise from Apple’s supply chain, buyside expectations may already be in line with lowered iPhone unit estimates, suggesting that a below-consensus March guide might not be much of a surprise,” he wrote in a note to investors on Jan 29.

Even if iPhone unit sales grow 3% or less this year, that would still likely translate into iPhone revenue growing 15% to 20% in 2018. That’s still a super cycle – just a very different one from prior cycles where unit growth was strong and average selling prices didn’t change much, Sacconaghi wrote.

The fiscal second quarter will also include the debut of the HomePod speaker, a new accessory that could help lift revenue from Apple’s Other Products division. That unit has swelled in recent years and now includes the Apple TV video streaming box, AirPods headphones, the Apple Watch, and accessories like the Apple Pencil for iPads. With 2017 revenue of US$12.9bil (RM50.32bil), the segment would rank 220 on the Fortune 500 if it was an independent company.

Investors will also be looking for Apple’s services business to continue its march to revenue of roughly US$50bil (RM195.05bil) by 2021. Last year, the segment generated US$30bil (RM117.03bil) in sales, up 23%. In early January, Apple said customers of its App Store, just one component of the services business, spent more than US$890mil (RM3.47bil) in the seven days starting on Christmas Eve. — Bloomberg


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