Though it has made a play for more cost-sensitive smartphone buyers with the iPhone SE, Apple (AAPL - Get Report) has more than stuck to its guns when it comes to maintaining premium pricing for its flagship phones. Not only has the company not cut prices as the ranks of cheaper Android phones with high-end specs swelled, it carried out a de facto $100 price in 2014 (via the iPhone 6 Plus) for those looking to upgrade to an iPhone with a 5.5-inch display.
The company doubled down on its strategy last September by baking a dual-lens camera into its newest 5.5-inch flagship -- the iPhone 7 Plus -- and by charging $20 more for it than for comparable iPhone 6 Plus and 6S Plus models. Its latest earnings reports shows that strategy paid off, and that, in turn, could augur well for sales of the much-rumored iPhone 8 this fall.
For its seasonally big fiscal first quarter (the December quarter), Apple reported revenue of $78.4 billion (up 3% annually) and earnings of $3.36 a share (up $0.08 annually), topping consensus analyst estimates of $77.4 billion and $3.23 a share. That's overshadowing light March quarter sales guidance -- revenue of $51.5 billion to $53.5 billion, below a $53.6 billion consensus -- and led shares to rise 5% on Wednesday to $127.75 (a new 52-week high).
Contributing to the the first quarter beat: 78.3 million iPhones were sold, up 5% annually and above expectations of 77 million. Also helping: The iPhones carried a $695 average selling price (ASP), up from $691 a year ago and better than a $687 consensus estimate.
The ASP growth came in spite of forex pressures and last March's iPhone SE launch, and had everything to do with strong uptake for the 7 Plus. With a $769 starting price, 7 Plus models cost $120 more than standard iPhone 7 models featuring the same amount of storage.
Moreover, both iPhone unit sales and ASPs would've likely been stronger if not for 7 Plus supply constraints that only ended in January. And unit sales growth would've been 8% (rather than the reported 5%) if not for lower channel inventory growth compared with a year ago. Apple ended the December quarter at the low end of its five-to-seven week iPhone channel inventory target range.
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Looking ahead, Apple is reportedly planning to launch an iPhone 8 with a 5.8-inch curved OLED display, all-glass body and wireless charging support (possibly for over-the-air charging) this fall. 4.7-inch and 5.5-inch iPhones with LCD displays are also reportedly prepped. If those reports pan out, it's a safe bet that Apple will charge a premium for OLED iPhone ($800-plus starting price?) relative to the LCD models. Its success at upselling consumers on the 7 Plus suggests it could do the same with the iPhone 8 in September.
There were several other positives within Apple's earnings, outside of its iPhone figures. Prominent among them: Mac revenue rose 7% to $7.2 billion, reversing the September quarter's 17% drop thanks to this fall's MacBook Pro refresh. Unit sales only grew 1%, but a $78 increase in ASP to $1,348 (sky-high by PC industry standards) allowed for stronger revenue growth.
Also: Apple's Services revenue grew 18% to $7.2 billion, aided by strong App Store sales (up 43% over the first 13 weeks of the quarter) and Apple Music's momentum. The company also noted iCloud storage AppleCare revenue grew, and that Apple Pay transaction volume rose more than 500% (no dollar value was given). And though Apple doesn't like to talk about them, traffic acquisition payments from Alphabet/Google (GOOGL - Get Report) -- related to Google's status as the default search engine on Apple's Safari browser -- likely helped as well, given Google's strong mobile search ad growth.
Services growth benefited from an extra week in the quarter, but this was more than offset by the $548 million year-ago boost provided by a Samsung lawsuit payment. CFO Luca Maestri mentioned on the earnings call Apple's installed base is still growing at a strong double-digit clip. Given iPhone, iPad and Mac unit growth are all lower, that could point to some pressure on upgrade rates. But together with the willingness of many existing iOS users to spend more on Apple services over time, it also provides more fuel for growing Services revenue. Apple is now aiming to double it over the next four years.
And Apple "Other Products" reporting segment, which covers the Apple Watch, Apple TV set-tops, iPods, headphones and accessories, saw revenue drop 8% to $4 billion. That's a much smaller drop than the prior quarter's 22%, and is partly the result of a record quarter for Apple Watch sales following the September launch of the Apple Watch Series 2. As is its custom, Apple declined to break out Watch shipments or revenue.
The iPad is once more a glaring weak spot. After stabilizing for a couple of quarters thanks to iPad Pro strength, iPad revenue fell 22% to $5.5 billion, with units dropping 19% to 13.1 million. CEO Tim Cook mentioned iPad growth was hurt by channel inventory swings, the year-ago launch of the 12.9-inch iPad Pro and a shortage issue with a supplier. But it's hard to dance around the fact the consumer tablet market remains pretty soft.
iPhone sales lit up in Apple's recent quarter
Greater China revenue was also light, dropping 12% to $16.2 billion. But Cook noted sales in mainland China were flat, and up 6% in constant currency; Hong Kong appears to be the major headwind here. Positive sales growth was posted Apple's four other reported regions, with Japan (up 20%) the standout.
Though not spectacular, Apple's results and guidance did put to rest recent fears that iPhone 7 demand was falling dramatically after a strong start, as well as about slumping Mac demand. And just as importantly, what the numbers say about the success of Apple's iPhone pricing strategy could have positive implications for both late-2017 sales and the long-term health of its smartphone franchise.
With Apple's shares having gone into earnings trading at just nine times next year's expected earnings after backing out net cash, that was more than good enough to propel shares higher.