Apple Reports A Strong Q4 As iPhone Sales Shine

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Apple (NASDAQ:AAPL) released a strong set of fiscal Q4 numbers on October 21, beating market expectations on revenues and earnings. The results were largely driven by strong shipments of the company’s latest iPhone models, higher Mac sales and better revenues from the App Store. Quarterly revenues stood at $42.1 billion, growing by 12.3% year-over-year, while net income rose by about 13% to $8.5 billion. EPS grew to about $1.42 from around $1.18 last year, aided by the company’s stock repurchase program, which has helped to reduce its outstanding share count by around about 6% since last year. The company’s guidance for the holiday quarter was also overwhelmingly positive, with revenues expected to come in at between $63.5 billion and $66.5 billion and gross margins projected at between 37.5% and 38.5%. [1] In this note, we take a look at some of the key trends that drove the company’s flagship iPhone business.

Trefis has a $97 price estimate for Apple, which is about 3% below the current market price. We will be updating our price estimate and model for Apple to account for the earnings release.

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iPhone Shipments Soar, But Supply Constraints Persist: Apple shipped a total of 39.3 million iPhones though the quarter, marking a 16% increase over the prior year quarter. Underlying demand was even stronger, with sell-through rates growing by around 26% year-on-year. [2] Supply of the new handsets is being significantly outstripped by demand, and the company notes that it has an order backlog for both the iPhone 6 and 6 Plus. Channel inventory for the iPhone has fallen below the company’s typical target range of 4 to 6 weeks of sales on a look-ahead basis. It is difficult to gauge demand for Apple’s newest handset offerings,  given that initial sales of new iPhones are usually just a function of the manufacturing capacity and the supply that it has available initially. Nevertheless, we believe that demand for new the models should remain strong over the next few quarters, given the strong pent-up demand and the possibly advanced upgrade cycles that Apple could be witnessing, given its prior lack of a large-screen handset offering. That said, we think that it is unlikely that iPhone demand growth will follow a more secular trend, given the increasing saturation in the high-end of the smartphone market.

iPhone Does Well In China Despite iPhone 6 Delay : Apple saw iPhone sell-throughs in greater China rise by about 32% year-over-year during fiscal Q4, despite the fact that the launch of the new handsets was delayed into the current quarter. The numbers are likely to have been aided by the company’s launch on China Mobile (NYSE:CHL) earlier this year and by the increasing penetration of 4G networks across the country. China Mobile, which began its 4G rollout earlier this year, has seen its 4G user base rise to 40.9 million users as of September. The adoption of high-speed data services typically stokes demand for high-end handsets and Apple could be a big beneficiary of this trend, given that iPhones have accounted for a bulk of the phones sold in the $500+ price point in China. [3] While Chinese carriers have been cutting back on their handset subsidies of late, Apple downplayed the impact, noting that about 80% of its handsets sold in China did not have a traditional subsidy model applied on them. [2]

iPhone Average Selling Prices Rise: While the broader smartphone market has been contending with falling prices and margins owing to commoditization, Apple has actually succeeded in getting customers to pay more for their handsets. Average selling prices for the iPhone stood at $602 per unit, marking a $42 sequential increase. [4] Apple has priced the iPhone 6 Plus at a $100 premium compared to the iPhone 6 and has also made the higher-storage versions of its iPhone – which sell at a $100 and $200 premium to base models – more attractive to customers by doubling the NAND storage capacity. The full pricing impact of the new handsets is likely to be seen only during Q1 FY 2015, given that they hit stores only towards the end of the last quarter. Additionally, the company is likely to have resorted to discounting older or lower-spec iPhones such as the 4S and  5C through the last quarter to clear out inventory, and this could have possibly offset some of the positive impact of the new models. The new models could also help to improve margins going forward, since we estimate the incremental cost of the 6 Plus and the higher-capacity models are likely to be small in comparison to the ASP increase.

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Notes:
  1. Apple Q4 2014 Earnings Press Release []
  2. Apple’s (AAPL) CEO Tim Cook on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, October 2014 [] []
  3. Of the 27% of Chinese phones that cost >$500, 80% are Apples, Fortune, March 2014 []
  4. Q4 2014 Unaudited Summary Data, Apple []