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August 1, 2018

High value iPhones boost Apple Q3 earnings – should it be a cause for concern?

By MarketLine

Apple’s Q3 financial results exceeded Wall Street’s expectations thanks to increased selling prices of iPhone models. However, sales volumes were below projections and this should be a cause for concern in the longer term.

Apple yesterday announced strong results for the third quarter of its financial year as revenue soared 17% year-on-year to a record $53.3bn, beating analyst projections of $52.3bn. Every region except Japan registered double digit growth and shares rose by almost 3% in after hours trading.

iPhone sales drive Apple Q3 earnings results

The company’s strong performance is largely attributable to the ongoing success of its iPhone line of smartphones. In Q3, the average selling price of an iPhone was $724, above analyst expectations of $694. While this has helped catapult Apple to great results, it also risks becoming the foundation of future problems.

The increase in average selling price has contributed to a fall in sales volumes as more consumers find themselves ‘priced out’. The company announced that it sold 41.3 million iPhones in the quarter, up only 1% from last year and below Wall Street’s expectations (41.8 million).

So far, Apple has successfully been able to make its iPhone products so appealing to consumers that they are prepared, if necessary, to break the bank to get one.

Contract prices have soared and terms extended so that carriers are not subsidizing such handsets to an unsustainable degree. However with newer models such as the iPhone X retailing at over $1,000, affordability is becoming a factor, particularly as credit checks are now being introduced on some phone contracts.

Reaching tipping point

Slowing shipment volumes suggest that we are close to reaching a tipping point and Apple must now make a decision on how it proceeds.

The company prides itself on its ’must have’ status and the fact that it does not need to discount to shift devices. The company has achieved this status by designing visually attractive products packed full of technological innovations, but which remain incredibly user-friendly at the same time.

Despite potential long-term risks, Apple will undoubtedly want to continue with its premium pricing strategy. However, as new technology is typically costly, Apple will need to decide whether it continues to increase selling prices and risk losing a growing number of customers who are simply unable to afford the iPhone, or whether it is prepared to absorb some of the cost and accept lower profit margins.

If it pursues the former, Apple may well lose customers to manufacturers of cheaper phones.

MarketLine forecasts the global mobile phone market will grow 4.8% in volume terms and 2.4% in value terms in 2018, meaning consumers are showing a preference for lower priced handsets.

This will work against Apple and its premium pricing strategy and will open the door for arch rival Samsung, which is present across the smartphone price spectrum.

 

 

 

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This analysis considers only announced and completed artificial intelligence deals from the GlobalData financial deals database and excludes all terminated and rumoured deals. Country and industry are defined according to the headquarters and dominant industry of the target firm. The term ‘acquisition’ refers to both completed deals and those in the bidding stage.

GlobalData tracks real-time data concerning all merger and acquisition, private equity/venture capital and asset transaction activity around the world from thousands of company websites and other reliable sources.

More in-depth reports and analysis on all reported deals are available for subscribers to GlobalData’s deals database.

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