Was Apple's strong quarter built on iPhone upgrades?

The number of new customers Apple created last quarter is as important as its record-setting financial performance.

Credit: Image credit: Macworld/Serenity Caldwell

Customers upgrading from earlier versions of the iPhone may have fueled Apple's strong financial performance in the previous quarter. If Apple created many new iPhone customers, the growth would be accompanied by a spike in app revenues. But there wasn't one.

Media and app revenues were up just 9% compared to the same quarter last year. Total sales of media and software from iTunes were $2.6 billion, compared to $2.4 billion in the same quarter last year. Apple shipped 75 million iPhones, compared to 39 million during the same quarter last year. This produced a 90% increase in units and a 116% increase in revenues for Apple. The only users who don't need new apps are those who are upgrading, which would explain the disparity in app revenues versus iPhone revenues.

No doubt about it, Apple announced a breathtaking first quarter 2015 financial performance last night, setting a record for the largest net income reported by a public company, according to the Financial Times. The iPhone was the prima donna in this triumphant financial performance, and it really didn't have much of a supporting cast. The iPhone's momentum doesn't carry over to shaking up Android's market share of total connected devices, as the Gartner chart below predicts.   

012815 chart Gartner

Revenues from the iPhone accounted for 68% of Apple's quarterly revenues, according to GigaOM. Not surprising for the iPhone company, but surprising because this is 10 percentage points higher than the iPhone's previous high-tide level.

Apple CFO Luca Maestri clearly set Wall Street's expectations during the call:

"First of all, it's a 20% year-over-year growth that we're guiding at the top end of the range. So we obviously feel good about a 20% growth."

Last year, Apple shipped 169 million iPhones. Using Apple's guidance, Apple will ship about 200 million iPhones in 2015. Gartner predicts about 2 billion mainly Android smartphone devices to ship in 2015. Although Tim Cook twice referred to the potential revenues from Android users switching to iPhone during the call, a large number of those users won't switch. Switching to an iPhone means paying more for something that's the equivalent. Since Android 4.0, there hasn't been any functional difference between iOS and Android. Attracting large numbers of migrating users would eat Apple's opulent 40% gross margins.

In the coming year, Apple needs to deliver the iPhone 6s, 6s Plus, and an iPhone 7 to continue this financial juggernaut into 2016. It seems a death-defying feat. A frightening feat if this quarter's performance was just a pent-up upgrade phenomenon due to Apple at long last producing larger screens for its installed base.

But it is possible, if past performance is a predictor of future performance. According to Valley Wag editor-in-chief Dan Lyons:

"The last quarter when Jobs was officially the CEO of Apple was the holiday quarter of 2010. In that quarter Apple reported revenues of $26.7 billion and net profit of $6 billion.

That's right: Apple today is roughly three times its size when Cook took over."

Apple is the iPhone company. Given Cook's performance, no one should say he can't repeat it. It will be a difficult trick to repeat solely on iPhone upgrades, however.

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