In Q1 of 2017, iPhone shipments drove Apple’s revenue up by 3% year over year. But Apple sets expectations for a decline in Q2.
During Apple’s earnings report last night, CEO Tim Cook did not mention why Apple squeaked by with 3 percent revenue growth. Almost every product category he spoke about was predicated with the words “record setting.” But a closer look reveals, Cook’s praise might be overstated, and Apple’s quest to produce another iPhone-scale new product to reignite growth continues.
Radio Free Mobile’s Richard Windsor explained in an early-morning report from London what Cook did not. iPhone shipments at higher prices were driven by the defection of Samsung Galaxy Note customers due to the recall of the Note 7.
Windsor has a unique perspective earned from over a decade as a bulge-bracket financial analyst with Nomura Securities. He speaks and writes about financial forecasts, as well as market and company ecosystems that the product-driven tech news streams do not cover because this type of information is very hard to come by.
+ Also on Network World: Apple’s Q1: iPhone 7 slays in a record-setting $78.4 billion quarter +
The nine financial analysts from banks such as Goldman Sachs and JPMorgan who were granted one question during Apple’s quarterly conference calls do not release their reports except to clients who have millions of dollars under management. Reuters and Bloomberg might get a carefully crafted tidbit to avoid security regulators, but unless a reporter has a rich friend who shares the banks’ research, reporters do not have access to this perspective.
Windsor reports that the iPhone was the main driver. In particular, the large-screen iPhone Plus saw its biggest contribution to the revenue mix ever. About 78.3 million iPhones shipped at a greater average selling price (ASP) of $695 compared to the 76.3 million units shipped last year at an ASP of $688.
Samsung Note 7 users switch to iPhone 7 and Google Pixel
Adding two and two together—the increase in large-screen iPhone 7 Plus shipments and the increase in overall revenue mix—Windsor concludes that Apple’s report of a year-over-year quarterly revenue increase was due to the crossover of high-end Android users burned by the fiery Note 7, even though the switch forced them to repurchase iOS versions of all their Android apps.
An estimated 2.5 million Note 7 users were affected. Apple won an estimated 2 million with the iPhone, and Google gained about a half million with its Pixel. The Note 7 fiasco was a one-time windfall for Apple unlikely to repeat because Apple was late to the game with its first-generation large-screen iPhone 6 two and a half years ago, long after the large screen phablet form factor left the barn. By having only a 4-inch iPhone for too long, Apple missed the shift of high-end Android users to large-screen devices that began way back in 2007 with the 5-inch HTC Advantage.
Galaxy Note users are unique. They are visually thinking, high-end loyal consumers of the Note’s form factor and stylus who withstood the negative connotations of the word phablet when this form factor first emerged. It is unlikely these users will return because of the investment they made learning iOS and buying new iOS versions of their apps, even if Samsung produces a Note 8 so reliable that it could withstand the treads of a Sherman Tank. Though bad for Samsung, the effect is contained because Note users are more loyal to the form factor than the Samsung brand and the volume of Note form factor shipments is tiny compared to Samsung’s flagship Galaxy S7. Note and Galaxy S consumers operate in parallel, not together.
Windsor sums up the Note 7 Apple windfall with a note of irony, saying:
“Although Google has failed to win those users over to Pixel, it will still benefit as RFM research indicates that iOS users generate far more advertising revenues for Google than Android users in the same demographic groups.”
Base on Apple’s guidance in the second quarter, year-over-year revenues and shipments are expected to decline in the second quarter of 2017.
