The Small, Yet Significant Trends From Apple’s Q2 Results

by Trefis Team
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Apple (NASDAQ:AAPL) published its Q2 2018 results on Tuesday, reporting a better than expected set of numbers that were driven by robust growth in the Chinese market (where revenues were up 21%), expanding iPhone sales and a soaring Services business. In this note, we take a look at a few of the more subtle, yet significant trends from the earnings release and what it could mean for Apple over the long run.

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iPhone X Was Best-Selling Device, But Appears To Be On Decline

Apple indicated that the $1,000 iPhone X was its best-selling smartphone, with more customers purchasing the device than the company’s other iPhones every week in the March quarter. However, it appears that the sales mix of the device is tapering off, as Apple’s ASPs for the quarter declined to $728 from about $796 over the holiday quarter when it was launched. This indicates that customers are veering towards less pricey legacy models and the company’s lower-tier iPhone 8 product line.

Services Business Continues To Outperform 

Apple’s Services business grew by 31% year-over-year to $9.2 billion, driven by the App Store, iCloud storage and a growing number of subscriptions on the company’s platforms for which it earns a commission. Apple said that it had a total of over 270 million paid subscriptions across Apple-branded services and third-party services, marking an increase of over 100 million on a year-over-year. Apple’s online storage service iCloud also saw revenues rise by over 50% year-over-year to an all-time high. The growth of these subscription and storage based services help Apple reinforce switching costs around its ecosystem, leading to better customer loyalty for devices such as the iPhone.

Gross Margins Are Seeing Pressure

Apple’s gross margins continued to face some pressure, declining by about 60 bps year-over-year to 38.3%. This was likely due to higher component prices on the company’s new smartphones and stubbornly high pricing for memory products such as DRAM. The company has projected a fiscal third-quarter gross margin of between 38% and 38.5%. There are multiple factors that could impact gross margins in the future. Firstly, as Services are expected to outgrow Apple’s hardware businesses in the long run, it could be accretive to Apple’s gross margins. Moreover, there is a possibility that component prices could soften, on account of saturating smartphone sales and higher supply for some components such as NAND memory.

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