Editor’s note: Analysis: While the iPhone is the core of Apple’s future initiatives, Apple’s latest earnings show that the initiatives the company put in place to monetize nearly every aspect of the iPhone user experience helped restore revenue growth, says Technology Business Research Analyst Jack Narcotta.
HAMPTON, N.H. – While the iPhone is the core of Apple’s future initiatives, Apple’s FY1Q17/CY4Q16 earnings show that the initiatives the company put in place to monetize nearly every aspect of the iPhone user experience helped restore revenue growth.
After three consecutive quarters of year-to-year revenue declines and posting its first annual revenue decline since 2001 for FY2016, stronger-than-expected demand for the iPhone 7 and new MacBooks pushed Apple’s overall, iPhone and Mac PC revenues to new heights in 4Q16, and its Services segment took perhaps its most significant step toward cementing itself alongside the iPhone as an important revenue driver and brand evangelist.
Overall revenue climbed 3.3% year-to-year to $78.4 billion in CY4Q16, a record for Apple in any quarter, buoyed by double-digit revenue growth in its Services segment, a resurgent iPhone business, a surprise revenue rebound in its Mac PC business and, per Apple, record Watch unit shipments and revenue. Revenue gains in these product segments easily offset iPad segment revenue decline. Apple’s revenue streams may not be as diverse as those of its competitors, but its seemingly limitless brand strength allows it to keep current iPhone and Mac PC customers loyal, attract Android users into the iOS ecosystem, and monetize user engagement with iOS apps, downloadable media and streaming content.
Based on Apple’s guidance for its CY1Q17/FY2Q17 earnings, TBR estimates Apple’s overall revenue will climb 3.8% year-to-year to $52.5 billion, driven largely by demand in the U.S. and Europe for the iPhone 7 Plus from new customers but also by an uptick in iTunes and App Store usage from existing customers. While repeating prior growth will be impossible for Apple given the scale it achieved as well as stronger competition from aggressive and agile Android OEMs in China, its bets on products and services tethered to the iPhone paid off, paving the way for what TBR estimates will be modest, single-digit revenue growth for Apple through 2017.
Revenue declines in 2016 kick started Apple’s efforts to feature Services in its long-term financial strategy
As longer iPhone life cycles extend the one- to two-year upgrade cycle that drove most of Apple’s prior growth, the company is pursuing growth in markets adjacent to the iPhone, highlighting a greater emphasis on building a new image. Even with Apple’s iPhone 8 rumored to launch in late 2017, TBR believes the company will continue to focus its ample human and financial resources on enhancing multidevice, iOS-anchored initiatives that drive iPhone revenue, customer loyalty and retention.
Evidence for this shift is apparent as Apple is bolstering its capabilities as a provider of consumer streaming media and payment services, and CEO Tim Cook is emphatic in his optimism for this segment: On 4Q16’s earnings call he stated he intends to leverage Apple’s growing installed base to double Services segment revenue in the next four years, making Apple’s Services segment a $60 billion-plus segment annually. TBR believes this is achievable, given Apple’s prowess monetizing iPhone user engagement, and its ongoing efforts to acquire new content, improve its streaming media capabilities and expand deployments of iPhone-centric technology such as Pay.
The company’s Services segment revenue climbed 18.4% year-to-year to $7.2 billion, the segment’s highest-ever quarterly revenue, because of Apple’s commitment to greater monetization of iPhone user engagement. Music, App Store, and iTunes sales and marketing efforts, increasingly tailored to regional consumer dynamics – particularly in emerging markets – helped Apple attract users to its ecosystem of iPhone-attached services, all of which offer lucrative profits and high margins.
Momentum for the iPhone returned after the first quarter of availability of the iPhone 7
Cook stated on the earnings call that Apple enjoyed more existing iPhone users upgrading and new customers switching from Android than ever before, suggesting iPhone upgrades, widely perceived to be incremental if not boring, have done little to squelch demand for Apple’s flagship device, particularly the larger iPhone 7 Plus model. While the rumored released of the iPhone 8 risks slowing some of the momentum generated by the 7, TBR believes consumers will view the 8 like the “S” models that were introduced as higher-performance iPhones, and aid in encouraging users of older models to upgrade to newer devices.
Despite ongoing challenges in China’s consumer market and stronger competition globally in the premium segment, especially from Google, Huawei and Samsung, demand for the iPhone 7 Plus helped Apple post record iPhone revenue, unit shipments and average selling prices (ASPs) in 4Q16. iPhone segment revenue returned to growth in 4Q16, rising 5.3% year-to-year to $54.4 billion, iPhone units shipments climbed 4.7% to 78.3 million, and iPhone ASP inched up $4 to $695.
Consumer PC market dynamics helped restore Mac revenue growth
The Mac segment benefitted from higher-than-expected demand for the new MacBook, despite Apple’s removal of several industry-standard USB and HDMI connectivity ports and the curious addition of quirky TouchBar functionality. Premium PCs have emerged as the primary battleground in the global PC market, with Dell Technologies and HP Inc. capitalizing on stronger consumer demand for premium notebook PCs, and leveraging wider footprints in this segment to fuel revenue and profit turnarounds in their respective PC businesses.
Apple’s Mac segment return to growth is emblematic of this shift in the PC market. TBR expects Apple will still grapple with many of the challenges that afflicted its Mac business in the prior year, but consumers’ sentiment shifting to favor premium devices reduces some of the urgency to resolve those problems in the short term.
In CY4Q16 Mac revenue climbed 7.4% year-to-year to $7.2 billion, a record for Apple in any quarter. Unit shipments rose an incremental 1.2% from CY4Q15 to 5.3 million; Mac ASP increased $78 year-to-year, or 6.1%, to $1,348, the highest Mac ASP since CY1Q14.