Apple Dec. Quarter Preview: Stable iPhone, Focus On iPhone X, Services
Apple reports Dec-16 quarterly results on January 31st. We continue to be positive on the Apple story, given our thoughts on iPhone X and the features we expect to advance Apple’s lead in AR-enabled devices. We expect Apple’s Dec-16 quarter/Mar-17 guide to largely be a positive event based on our belief that Mar-17 guidance is inline with the Street and will imply iPhone unit growth of about 7% y/y, up from expected growth of 4% y/y in Dec-16. This would suggest the tail on the iPhone 7 is stronger than last year’s iPhone 6S. More importantly, Mar-17 guidance should give investors confidence that they can think forward to iPhone X in the fall, an OLED, AR-enabled phone, which should return iPhone to a more predictable 5-8% unit growth. See below for what to expect from iPhone X.
iPhone Dec-16 Units. For the Dec-16 quarter, we are expecting 78m iPhones, a 4% y/y increase. Based on our checks throughout the Dec-16 quarter, we believe iPhone reached supply demand equilibrium in the US the second week of December, much later than the iPhone 6S, which was at supply demand equilibrium late in October 2015. Outside the US, supply was near equilibrium. On Apple’s Sep-16 earnings call, Tim Cook suggested Dec-16 guidance assumes iPhone may not reach supply demand equilibrium in Dec-16, stating “I wouldn’t say [iPhone will be at equilibrium] at this point, because the underlying demand looks extremely strong on both products but particularly on the iPhone 7 Plus versus our forecast going into the product launch.” Since Dec-16 guidance did not factor iPhone at equilibrium, demand was “extremely strong”, and the iPhone did in fact reach equilibrium in the US and near equilibrium internationally, we now expect a stronger iPhone number than we had previously expected (77m in Dec-16).
iPhone Mar-17 Guidance, Comps Are Our Ally. We expect guidance for the Mar-17 quarter to imply iPhone units of 56-57m units, which would be up 9-11% y/y, compared to Street expectations of up around 7%. Apple does not guide for the iPhone, but we back into the iPhone guidance from the revenue guide and commentary around ASPs on the call. The rebound in the iPhone is partly attributed to features of the iPhone 7 Plus (e.g., portrait effect) and partly due to the easy comps. In Dec-15, iPhone unit growth was flat y/y, down 16% y/y in Mar-16, and down 15% y/y in Jun-16. These easy comps should allow the iPhone to grow in the 5-12% range going into the iPhone X launch, likely in Sept. 2017.
Services Momentum Continues. For Dec-16, we expect Services (~13% of revenue) to grow at 23-25% y/y, compared to 24% y/y in the Sep-16 quarter. On January 5th, Apple announced that App Store developers earned over $20B in 2016, up 40% y/y. Assuming a 30% revenue share implies App Store gross sales of $78M per day in 2016. Separately, Apple released New Years day App Store sales of $240M, above our $100M expectation. We estimate that the App Store accounts for more than 65% of Apple’s Services revenue. Given the significance of the App Store to Apple’s Services business coupled with this announcement, we believe Services revenue growth in 2017 may be closer to 20% y/y.
The 2016 App Store numbers and the New Year’s Day App Store sales underscore how quickly Apple is becoming a Services business. We previously shared our thoughts on Apple reinventing itself as a Services business here. In short: the transition to Services is important as new platforms like AR and VR emerge and transform Apple’s existing mobile device businesses.
Gross Margin. We expect Dec-16 gross margin of 39%, compared to guidance of 38-38.5%. There are two positives and one negative factor impacting margins. The two on the positive side are higher than expected demand for the iPhone 7 Plus with higher storage configurations and Services strength, which carries over 60% gross margins. Second, also increases our confidence on margin upside. These two positives are partially offset by iPhone hardware margin (dual cameras) which has been drifting lower.
Expectations For iPhone X. We expect iPhone X to feature:
- An OLED screen
- Wireless charging (a step they’ve already taken with Apple Watch)
- Dual lens camera systems on both the smaller- and larger-screen models
- A (possibly dedicated) processor capable of 3D modeling and real-time 3D image processing
- More sophisticated proximity sensors
- The iPhone X may be the iPhone model we’ve discussed that removes the home button, using haptic feed back for button presses on the display itself for home button functions. This would enable an edge-to-edge display for an iPhone without a bezel.
With iPhone X, we see Apple doubling down on AR and extending it’s lead among AR-capable devices. iPhone is already significantly ahead of Google’s Tango platform in terms of units shipped, and we expect it to remain out front for the foreseeable future, setting up Apple for long term success in an AR world.
Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.