Note for new readers: I stick to calendar quarters in analyzing earnings, because it makes cross-company comparisons easier. As such, all references to “Q3 2014″ refer to the quarter ending September 2014, not Apple’s fiscal Q3 2014. Once again, this post is part of a series on major tech companies’ earnings (this is the second for the current round of earnings; analysis of Q1 2014 earnings can be found here, and for Q2 2014 can be found here).
iPad plus Mac is the number to watch
Lots of attention was paid by both Apple and commentators this quarter to both the iPad and Mac numbers, but the key is increasingly to look at the combined results of these two segments, both in unit shipment and revenue terms. For a while there, as the Mac started to shrink, iPad growth offset that decline, but the two have now switched places. Nonetheless, year on year, the two combined continue to operate within a very narrow range:
ASPs continue to tell an interesting story
Given the near demise of the iPod, and the declining average selling price (ASP) of the iPad, the iPhone and Mac are actually the best two products for Apple to be selling. Interestingly, they’re also the two products which are most likely to experience substitutional effects with the iPad. Note the ASP trends in the chart below, which shows trailing 4-quarter ASPs to smooth the quarter-to-quarter fluctuations:
The iPhone ASP continues to hold up remarkably well, staying within $10 of $600 for the last five quarters, though rather lower than the $640 or so it regularly hit earlier. With the launch of the iPhone 6 Plus it’s likely that ASPs will trend somewhat higher over the next couple of quarters, and this quarter’s ASP was $42 higher than last quarter’s, partly for that reason.
Who’s buying iPads?
I’ve done some analysis previously on iPad replacement cycles and theorized that we’re due for faster sales over the next few quarters as the many iPads sold 2-4 years ago become due for upgrades. I thought I’d revisit some of those numbers in the context of what we heard today to answer the question of who’s buying iPads. Tim Cook has now given several data points as to the percentage of iPad buyers who were first time buyers, and it’s interesting to look at what that data signifies. Using that data, I’ve put together estimates of the breakdown between new buyers and upgrade buyers of iPads, as shown below:
If these numbers are correct, they appear to show two trends:
- The number of people buying upgrades to existing iPads is rising slowly in a cyclical pattern, as would be expected with a growing installed base (I’ll come back to this below)
- The number of people buying new iPads has been extremely cyclical too, but appears to have slowed somewhat over recent quarters. Though the Q4 peak last year was higher than the one the year before, every quarter since has been off the year-earlier quarter by some margin. Though Tim Cook rightly points out that the market isn’t saturated, the number of new buyers does seem to be falling somewhat.
Let’s look at that upgrade number in the context of the installed base (the caveat here is that we’re working with two sets of estimated data now). My guess is that the percentage of the existing iPad base that upgrades in any given quarter is around 3%, with a higher number in Q4, both because it’s a big buying quarter anyway and because as a result it’s the anniversary of many earlier purchases. I think the rate in those quarters likely spikes to around 4.5%. On that basis, as the base continues to grow by a few million every quarter, if the upgrade rate holds steady, the number of iPads sold to existing owners will continue to grow steadily too. The big question then becomes whether Apple can turn around the new buyers number with the new iPads it launched last week, and the lower prices on older iPads. I suspect it will and we’ll see a really big fourth quarter, perhaps the first in a year that’s higher than the year-ago quarter.
Apple Watch buried among Other Products
One of the more interesting tidbits on the earnings call was not a financial data point in its own right, but an indicator of future reporting changes. Namely, that the Apple Watch will be reported under Other Products along with both the existing Accessories business (including Beats) and the iPod business, which was formerly reported separately but is becoming so small as to be no longer worthwhile reporting in its own right. It’s worth looking at the history of other Apple products here for a precedent:
- The iPod launched in October 2001, and in the next earnings release Apple reported the number of shipments, but didn’t break the product out in its Data Summary with its Mac shipment and revenue data until two years after launch, in October 2003. The company continued to provide occasional iPod shipment numbers in the interim, however.
- The iPhone and iPad both received immediate status as segments in their own right immediately after launch, with a full revenue and shipment breakdown (though in both cases muddied by the fact that other related revenue was lumped in with device sales revenue for a time).
What does it signify that Apple won’t report Apple Watch shipments and revenue in full detail from the outset? I think two things:
- Apple is exhibiting caution ahead of what is in some ways its most unpredictable new product category in many years, since the iPod. Apple as a company has many times more customers today than it did then, but the Apple Watch is as big a departure from its current product line as the iPod was in its time, and it’s inherently difficult to predict how many it will sell. As such, the lack of reporting in the short term may reflect an abundance of caution about breaking out a nascent category.
- Apple’s leadership alluded to this on the earnings call, but the Apple Watch will also have a far more diverse set of price points than any of its other products, ranging from $349 to several thousand dollars, and as such the average selling price will be a huge clue as to which models are selling in a way that it has never been for the iPhone, iPad or even the Mac. As such, Apple is keeping this commercially sensitive data out of competitors’ hands, at least for the time being.
However, all that said, within two years of the launch of the iPod Apple was providing a detailed breakout of both shipments and revenues, and I’d very much expect that if the Apple Watch sells at all well we’ll get (a) ad-hoc reporting of key metrics such as shipments right from the start as with the iPod and (b) a full breakout at such a time as the Apple Watch becomes significant enough as a revenue generator to warrant its own segment. With an ASP that’s likely to be in the same ballpark as the iPad or higher, it will only have to sell a few million to become material to Apple’s earnings overall, and I would expect that to happen within the first few quarters. It will be hard for Apple to keep these numbers buried out of sight for very long.
I’ll likely do another post or two this week as I continue digging through the numbers, so that’s it for now.