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 Apple surprises amid smartphone weakness

Last Tuesday Apple announced financial results for the second quarter of the fiscal year 2018. Apple’s financial year ends in September, which is why the March quarter is the second quarter.

The company posted quarterly revenue of $61 billion, or 16 percent better when compared to the same quarter of 2017. Earnings were up 30 percent over the same period. Both figures beat analysts’ expectations. Analyst’s expectations were subdued and continued dropping during the weeks preceding the results as suppliers around the globe repeatedly warned about smartphone weakness.

These played into fears that the iPhone, especially the flagship iPhone X was not selling well. Sales of the iPhone came at $52.2 million, in-line with market estimates of $52.3 million. The average selling price of the iPhone was $728, compared to expectations of $742.

This figure is still 10 percent above the $655 from a year ago, probably aided by sales of the $999 iPhone X.

According to Chief Executive Tim Cook, the iPhone X was the most popular smart phone model every week in the March quarter; the first time that the top of the line iPhone was the most sold unit. Q2 2018 results confirm that the iPhone is now a fully mature product.

However, Apple still can rely on a massive consumer base, unparalleled customer loyalty and the potential of increasing returns through satellite hardware and software products. Apple is also well positioned to increase revenue on other products. Services were up 31 percent year on year and wearables increased by 50 percent year on year.

While Apple has rarely been the first out of the blocks with new products, Apple products have consistently disrupted and revolutionised the status quo. China surprisingly was also a bright spot with healthy demand across products which resulted in 21 percent year on year growth.

The final bright spot continues to be cash flow and Apple’s decision to continue returning cash to shareholders. Apple has authorised a new $100 Billion share buyback and a 16 percent increase in dividend. The results overall were generally positive leaving the brewing trade war with China as the only major black spot going forward.

Quoting Tim Cook; “China only wins if the US wins and the US only wins if China wins, I am a big believer that the two countries together can both win and grow the pie, not just allocate it differently.” Anyone invested in equity markets cannot but agree. Going forward Apple is changing its tone towards the importance of its user base rather than unit sales.

This supports the industry trend that is shifting towards revenue generation from subscriptions and other services. Hardware, such as smartphones, has reached a stage whereby older generation products still have the firepower to keep up with modern flagships. Thus, it’s getting more difficult to come up with newer iterations of last year’s great product.

The industry answer to this dilemma is to develop halo services that shifts the revenue generation off selling hardware.

This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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