Apple hints at lackluster holiday as iPhone sales disappoint

Apple iPhone sales appear to have run into a brick wall -- but customers are paying more for the phones they buy.

Shara Tibken Former managing editor
Shara Tibken was a managing editor at CNET News, overseeing a team covering tech policy, EU tech, mobile and the digital divide. She previously covered mobile as a senior reporter at CNET and also wrote for Dow Jones Newswires and The Wall Street Journal. Shara is a native Midwesterner who still prefers "pop" over "soda."
Shara Tibken
7 min read
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Apple may be grappling with a case of iPhone fatigue -- but it's still getting people to shell out more money for the phones they do buy. 

The Cupertino, California, company on Thursday said it didn't sell as many iPhones as analysts expected, and it projected lackluster revenue results for the December quarter. Apple also said it would no longer detail unit sales of its major devices, a reversal from its strategy since first introducing the products.

Apple shares dropped about 4 percent on the results and then declined further -- more than 7 percent -- during the company's earnings call after Apple said it would change its reporting structure. On Friday morning, shares were down 6.4 percent to around $207.90. 

Apple on Thursday said it sold 46.9 million iPhones in the fiscal fourth quarter that ended Sept. 29, about flat with the 46.7 million sold last year. Analysts expected Apple to sell 47.6 million iPhones, according to Bernstein analyst Toni Sacconaghi. 

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While units were about flat, revenue from iPhones jumped 29 percent to $37.2 billion as people seek out Apple's pricier devices like its new $999 iPhone XS and $1,099 XS Max. The average selling price (ASP) for the iPhone soared to $793 from $618 a year ago. Analysts overall expected Apple's fourth-quarter ASP to total $741, according to Bernstein's Sacconaghi. 

RIP iPhone unit sales data

In a surprising move, Apple said it would no longer detail unit sales for its iPhones, iPads and Macs, starting with the December quarter. It likely reflects the fact that Apple's unit sales have been flat and even falling in some periods while its revenue has been rising due to higher device pricing.

"As demonstrated by our financial performance in recent years, the number of units sold in any 90-day period is not necessarily representative of the underlying strength of our business," Financial Chief Luca Maestri said Thursday during a call with analysts. "Furthermore, our unit of sale is less relevant for us today than it was in the past, given the breadth of our portfolio and the wider sales price dispersion within any given product line."

The last question of Apple's earnings call addressed the company's plans to no longer detail unit sales. Citigroup analyst Jim Suva noted that "some people may fear that this now means that the iPhone units are going to start going negative year-over-year because it's easy to talk about great things and not show the details of things that aren't so great."

Maestri reiterated his earlier reasoning for no longer breaking out unit sales, while Apple CEO Tim Cook said that Apple's installed base is growing by the double digits on a percentage basis. 

"This is a little bit like if you go to the market and you push your cart up to the cashier and she says, or he says, 'How many units do you have in there?'" Cook said. "It doesn't matter a lot how many units there are in there in terms of the overall value of what's in the cart."

Higher prices are here to stay

Apple iPhone unit sales may not be growing, but its strategy to boost prices is working. The iPhone ASP has been above $700 since Apple launched the iPhone X. The even pricier XS Max, the first iteration of such a device, has proven popular with Apple fans and likely helped boost Apple's ASP to an all-time high.

The iPhone XS Max behemoth shown from every angle

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Still, Apple said that for the first fiscal quarter, the first full period with iPhone XS and XS Max sales, it should report revenue of $89 billion to $93 billion. Analysts polled by Yahoo Finance projected $92.9 billion. Last year, Apple's first-quarter sales totaled $88.3 billion. 

The forecast indicates that Apple's newest phones may not be flying off the shelves for the holiday season. Apple's selling a lot of devices, but it's not quite as many as anticipated. Apple's new, cheaper iPhone XR, which went on sale last week for $749, also will start contributing to sales in the first quarter, something that will likely lower overall ASPs. 

Forrester analyst Julie Ask noted that to grow revenue going forward, Apple has to find more customers, which is difficult because most growth comes from less-developed economies like Nigeria and India, and sell more devices like smartwatches and smart speakers. 

"All of these are trending well, but there is no 'it' device that will replace the smartphone," Ask said. Apple also could keep raising prices, she added. "They tend to be successful here with more affluent customers," she said.  

Maestri noted that something impacting Apple's first-quarter forecast is "the launch timing of the new iPhones this year is essentially in reverse order versus last year." Last year, it introduced its iPhone 8 and 8 Plus in September but didn't sell the pricier iPhone X until November. This year, its more expensive phones went on sale in September while its cheaper device didn't arrive until late October. 

"Obviously, this resulted in a more pronounced ASP growth in Q4 of '18 and obviously a tougher compare for Q1," Maestri said. "So I think it's important to keep that in mind as you look at the revenue guidance that we provided."

Cook, meanwhile, said there's no indication so far that customers held off on buying the iPhone XS and XS Max in favor of purchasing the iPhone XR. 

Rising iPhone sales prices

Apple, which became the US' first trillion-dollar company in August, has been soaring over the past few years. That's largely due to its popular iPhones and all the services that run on them, from iTunes to the App Store. Overall smartphone growth has been slowing, but customers keep scooping up iPhones and paying even more for them than before.

But there were signs that enthusiasm for this year's lineup has waned. Neither the $999 XS nor $1,099 XS Max offered a big upgrade over the previous year's iPhone X, and the usual big lines at Apple stores during launch day failed to materialize. 

The devices hit the market in September. Last month, Apple started selling its lower-priced iPhone XR, which starts at $749. That device looks cheap compared to its siblings, but it's actually a jump from the previous mainstream Apple iPhone pricing. Sales from the iPhone XR don't figure into these results. 

In 2016, the iPhone 7 started at $649. The following year, Apple boosted the starting price by $50 for the iPhone 8. Then in 2017, Apple introduced its flashy, redesigned iPhone X at $999, a price that shocked some people when it was unveiled. This year, if you want Apple's latest and greatest iPhone, the larger screen iPhone XS Max, you'll shell out up to $1,449 for 512GB of storage.

"Apple's pricing strategy has been successful in moving customers up the price curve," USB analyst Timothy Arcuri noted. 

Soaring services

Because so many people have iPhones, Apple's services business -- which includes the App Store, Apple Music and iCloud -- has been growing dramatically over the past several quarters. It's seen as one of the company's major growth areas in the future.

In the fourth quarter, revenue from services operations jumped 17 percent from the previous year to $9.98 billion, an all-time high. But the pace slowed a bit from the past two quarters when services revenue jumped over 30 percent year over year.  

Apple plans to double its fiscal 2016 services revenue of $24 billion by 2020. Last year, its services business totaled $30 billion, making it the size of a Fortune 100 company. This year, services revenue climbed to $37.2 billion.

Struggling iPads and Macs

Apple on Tuesday introduced new iPads and Macs to get people excited about its bigger devices again. Its new MacBook Air with a Retina Display starts at $1,199, $200 more than the previous version of the laptop. And the new iPad Pros start at $799 for the 11-inch model and $999 for the 12.9-inch. The previous iPad Pros cost $649 for the 10.5-inch version and $799 for the 12.9-inch model.

The devices hit the market Nov. 7, which means they're not included in this quarter's results and will contribute only a couple of months of sales to the first quarter.

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Before introducing those devices, Apple hadn't made huge changes to its laptops and tablets in years. In 2016, it redesigned its MacBooks for the first time in four years, adding a new Touch Bar and a butterfly keyboard -- features that have caused a lot of complaints and even lawsuits. And the iPad Pro tablets had gotten new screen sizes but no new major capabilities since they first hit the market in late 2015. In March, Apple introduced an inexpensive iPad, at $329, for schools and students, which has helped its iPad sales.

In the fourth quarter, Apple sold 9.7 million iPads, down 6.1 percent from the previous year. Revenue from the tablets dipped 15 percent to $4.09 billion.

It sold 5.3 million Macs, down 1.6 percent from the previous year. Revenue from the computers rose, though, by 3.4 percent to $7.4 billion.

Revenue from Apple's "other products," which includes AirPods and the Apple Watch, jumped 31 percent to $4.2 billion. 

Apple's total revenue for the fourth quarter climbed 20 percent to $62.9 billion. Wall Street anticipated total sales of $61.6 billion.

The company also reported its net income rose to $14.1 billion, or $2.91 a share, from $10.7 billion, or $2.07 a share, a year earlier. Analysts expected per-share earnings of $2.78, according to a poll by Yahoo Finance.

First published Nov. 1 at 1:42 p.m. PT
Update at 2 p.m. PT with additional details.
Updates at 2:34 p.m. PT, 2:55 p.m. PT and 3:30 p.m. PT with comments from conference call and analyst comment.
Update Nov. 2 at 7:50 a.m. PT: Added Apple's Friday morning stock movement.

Correction: An earlier version of this story misstated the number of Macs sold. The correct number is 5.3 million Macs.

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