Apple Inc. attracted a swathe of new iPhone customers over the holiday period, auguring well for a more significant upgrade to its flagship product this year — and the services revenue that these devices are increasingly generating.
Existing iPhone users upgraded to the latest iPhone 7 models at about the same rate as the iPhone 6S a year earlier, Chief Executive Officer Tim Cook said in a conference call with analysts. Yet Apple still managed to sell 3.5 million more phones in the three months ended Dec. 31, indicating growth was driven by new customers.
The iPhone 7 represented a modest update to its predecessor, the 6S, adding water resistance, an improved camera, battery life and processor while retaining similar styling. Expectations are mounting for a more significant upgrade to Apple’s flagship product later this year, which is the 10th anniversary of the iPhone’s launch. That may persuade more existing iPhone users to open their wallets for the next model.
“When we’re able to innovate with new generations of products, clearly that plays a role in the upgrade rate,” Chief Financial Officer Luca Maestri said. Apple reported total revenue rose 3.3 percent to $78.4 billion, with earnings of $3.36 a share, in the holiday quarter, exceeding analyst forecasts. The shares gained as much as 3.5 percent in extended trading, after the results.
Samsung Electronics Co. recalled its flagship Galaxy Note 7 smartphone in September after a fault that caused some batteries to burst into flames. That reduced competition in the market for large, high-end smartphones and likely helped attract new customers, according to New York-based BTIG analyst Walt Piecyk.
“Once they get you in their ecosystem, they’ve got a far better shot at getting you to buy another one of their phones,” Piecyk said. “If anything, the fact that it wasn’t stickiness and services and upgrades makes you feel better about future growth.”
Americans are taking longer to upgrade their smartphones, partly because wireless carriers have phased out plans that offer discounts for new devices every two years. That puts more pressure on handset makers to find new customers — something Apple pulled off in late 2016.
Last year, Apple suffered a rare year-over-year revenue decline, as iPhone sales tumbled, particularly in China, where competitors such as Oppo and Vivo introduced cheaper phones with similar performance. In the first fiscal quarter, sales in mainland China grew, excluding the effect of a strong U.S. dollar, Cook said.
Cook’s response to last year’s sales decline was to push more services, such as Apple Music, the App Store and iCloud. These businesses are more profitable than iPhones and iPads, and they increase the chances customers will buy future Apple gadgets because users’ apps and data are tightly woven into the company’s operating systems.
Services revenue grew 18 percent to $7.2 billion in the most recent period. Apple said it aims to double the annual total to more than $50 billion by fiscal 2021. “The App Store is going to be a significant driver of growth,” CFO Maestri said. “A lot of it comes from the fact that our installed base of devices around the world continues to grow very well.”
SALES BEAT ESTIMATES
Apple Inc. reported quarterly revenue that topped analyst projections, fueled by demand for the company’s latest and priciest iPhones. Apple said sales rose 3.3 percent to $78.4 billion, with earnings of $3.36 a share in the three months through Dec. 31. Analysts forecast profit of $3.22 a share on revenue of $77.3 billion, according to data compiled by Bloomberg. The shares gained as much as 3.5 percent in extended trading, after the results.
“We were surprised by the strength of iPhone 7 Plus where we were actually short of supply throughout the quarter. We’ve been able to come into supply-demand balance in January,” Chief Financial Officer Luca Maestri said Tuesday in a telephone interview.
Introduced in September, the iPhone 7 represented a modest update to its predecessor, the 6S, adding water resistance, an improved camera, battery life and processor while retaining similar styling. Expectations are mounting for a more significant upgrade to Apple’s flagship product later this year, which is the 10th anniversary of the iPhone’s launch.
Apple said it sold 78.3 million iPhones in the final quarter of 2016, generating $54.4 billion in revenue in the period. The average sales price for each iPhone was $695, compared with $691 a year earlier. Analysts had forecast iPhone unit sales of 76.3 million and an average selling price of $688, according to a Bloomberg News survey. That suggested consumers are still eager to snap up Apple’s latest models, which bodes well for future product launches.
“The iPhone 7 is our most popular model,” Chief Executive Officer Tim Cook said in a conference call with analysts. “We saw especially strong demand for iPhone 7 Plus, which was a higher portion of the new product mix than we’ve ever seen with Plus models in the past.”
Since the iPhone 7 Plus base price is $20 more than its predecessor, that boosted the average selling price and offset the impact of some people still buying the older 6S Plus and the cheaper iPhone SE.
Sales in the three months through March will be $51.5 billion to $53.5 billion, the Cupertino, California-based company said in a statement. The average estimate of analysts in a Bloomberg survey was $53.8 billion. Apple expects a gross profit margin of 38 percent to 39 percent in the period, while analysts forecast 38.7 percent.
“The takeaway is that the top end of their guidance is close to where the street is at,” said Gene Munster, a longtime Apple analyst and head of VC firm Loup Partners. “The demand for the 7 Plus was strong when they reported the September quarter and that strength carried on into December.”