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Apple iPhone super cycle pronounced dead as handset market tumbles

Chief Executive Officer Tim Cook highlighted that Apple has 1.3 billion devices in use now, an increase of 30 per cent in two years.

By: Bloomberg | Published: February 3, 2018 10:22:27 am
Apple, iPhone X, Apple results, iPhone X super cycle, Apple Q1 2018, Apple earnings, Apple results, Apple Q1 results, Apple iPhone X sales, Tim Cook, Apple revenue The iPhone “super cycle” — a wave of upgrades and new customers that was supposed to wash over Apple Inc this year with the introduction of its model X — was pronounced dead on arrival.

The iPhone “super cycle” — a wave of upgrades and new customers that was supposed to wash over Apple Inc this year with the introduction of its model X — was pronounced dead on arrival. In Apple’s first earnings report since the launch of the pricey flagship smartphone, the company reported lower-than-expected handset sales from the holiday period. Chief Financial Officer Luca Maestri also forecast a decline in the average selling price of iPhones in the current quarter, suggesting the most-expensive models aren’t as popular.

The results are part of a broader malaise in the global smartphone industry. Shipments in the fourth quarter dropped 9 per cent, year over year, the biggest decline in history, according to Strategy Analytics. “The super cycle is dead,” Steven Milunovich, an analyst at UBS, wrote in a note to investors on Friday. Apple shares fell as much as 4.1 per cent Friday to $160.88, the biggest intraday decline in more than six months. The stock is down 4 per cent so far this year.

“The verdict is in: relative to expectations, the cycle is weak, and total iPhones sold are likely to be flat for the third straight year,” Toni Sacconaghi, an analyst at Sanford C. Bernstein, wrote in a note to investors. He downgraded the shares to market-perform and cut his price target to $170 from $195.

Smartphone doldrums are hurting other companies, too. Verizon Communications Inc, the largest US wireless carrier, has offered unlimited data plans to lure subscribers as a saturated and competitive market makes it more difficult to attract new customers. Qualcomm Inc, the largest mobile chipmaker, has seen orders from big customers tail off and is diversifying into other types of processors. The company is also holding out for faster 5G wireless networks and new phone features it hopes will revive growth in the sector.

Apple is adjusting by focusing on its huge installed base of devices and how to make more money from that — rather than selling a lot more phones each year, Milunovich added. Indeed, Chief Executive Officer Tim Cook highlighted late Thursday that Apple has 1.3 billion devices in use now, an increase of 30 per cent in two years. The company is trying to sell more services through these devices, along with more accessories and related gadgets. Apple services revenue jumped 18 per cent in the fourth quarter, while sales of other products, like the Watch and AirPods, jumped 36 per cent.

Milunovich and other analysts quizzed Apple executives on the slowing phone upgrade cycle, during a conference call late Thursday. “You have an installed base that’s 20 percent-plus higher, and a unit growth that’s relatively flat, which would suggest that your upgrade rate is going down, or your replacement cycle is elongating. And I’m wondering whether you agree with that,” asked Sacconaghi.

Cook advised against looking at 90 days of sales. “The far bigger thing is to look over a longer period of time and customer satisfaction and engagement and number of active devices are all a part of that.” Over longer periods, the smartphone market still looks weak, though. Global smartphone shipments slipped 0.1 percent in 2017, with iPhone shipments up 0.2 per cent, according to research firm IDC. Still, many Apple fans were undeterred by the recent results.

Apple’s ability to command a premium has “never been more clear,” Loup Ventures’ Gene Munster said in a note. The company did “stumble” with iPhones missing unit sales estimates, but he’s bullish on the “transition from their existing iPhone platform to an augmented reality-driven platform in the future.”

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