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iPhone sales make up 59% of Apple's Q4 business

Graphic by Josh Centers

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Apple’s Q4 2018 Results Show Strong End to 2018, Despite Flat or Declining Unit Sales

Reporting on its fiscal 2018 fourth quarter financial results, Apple has announced net profits of $14.1 billion ($2.91 per diluted share) on revenues of $62.9 billion. The company’s revenues are up 20% compared to the year-ago quarter, with quarterly earnings per share up by 41% (see “Apple Posts Strong Q4 2017 Financial Results,” 2 November 2017).

The iPhone still dominates Apple's Q4 2018 revenues..A standout contributor to Apple’s spoils this quarter was its Services business segment, which brought the company $10 billion in revenues, an all-time record and a 17% increase year-over-year. Services revenues have increased steadily for the past few years and have become an increasingly important component of Apple’s income. Apple now claims over 330 million subscriptions across its entire ecosystem, with 30,000 third-party subscriptions in the App Store.

As good as Services revenues were, though, they weren’t Apple’s revenue leader. Predictably, iPhone sales brought Apple the biggest chunk of its quarterly income, achieving $37.2 billion in sales, compared to last year’s $28.8 billion, a 29% increase. This increase happened, notably, in the face of essentially flat iPhone unit sales. The most logical explanation is the higher selling prices of the iPhone X, XS, and XS Max. In other words, Apple is squeezing more from its existing customer base.

This pattern of higher revenues despite flat or declining unit sales continued with the Mac. Although Mac unit sales were down by 2% year-over-year (5.299 million units versus 5.386 million), Mac revenue was up by 3%, adding $7.41 billion to the company’s total revenue. This represents a quarterly record for Mac revenues.

The iPad was Apple’s only product segment that showed both declining unit sales and declining revenues year-over-year—6% fewer unit sales and 15% less revenue. This comparatively large revenue decline associated with a smaller unit sales decline likely represents a larger percentage of lower-cost iPads, such as the $329 iPad introduced earlier this year, in the sales mix. Despite Apple’s heavy investment in the iPad product line, its tablets simply aren’t moving well compared to the rest of the company’s offerings. But the iPad is still big business, bringing in over $4 billion last quarter, and it remains a fundamental component of Apple’s Everyone Can Code program, which now includes 5000 schools. Note, too, that these iPad revenue and sales numbers don’t reflect the 2018 iPad Pro since it was introduced after the quarter ended.

iPad sales have been on the decline for six years.CEO Tim Cook called Q4 a record quarter for the Apple Watch, but we still don’t know exactly what that means. However, Apple’s Other Products category—which includes the Apple Watch, Apple TV, HomePod, Beats electronics, accessories, and other stuff—had a 17% revenue increase year-over-year.

Apple continued to perform well internationally, with 61% of its sales coming from outside of the United States. Income from each of the company’s foreign market segments, from Europe to Greater China, was up, with Greater China’s $11.4 billion in revenues amounting to a 16% rise year-over-year.

Some conclusions we can take away from today’s announcements:

  • Apple’s flagship hardware products seem to have hit a unit sales wall. Apple has responded by raising prices to better capitalize on the existing customer base. But with unit sales flat or declining, can Apple continue to raise prices, especially with a growing trade war with China?
  • That said, the release of the new MacBook Air, Mac mini, and iPad Pro may significantly improve both unit sales and revenues for the Mac and iPad segments as customers satisfy pent-up demand for long-ignored products.
  • Services and Other Products remain strong areas of growth for Apple. In other words: expect more subscription services and accessories like the Apple Watch and HomePod.

Cook clearly believes that the iPad is the future of computing, but the market doesn’t seem to agree. There have been a few bright quarters—particularly Q4 2017—thanks to Apple’s heavy investment in the product, but the overall trend for several years has been a decline in iPad sales. If the new iPad Pro doesn’t turn things around, it may be time for Apple to admit that the iPad ultimately is not going to be the future of computing, but merely an adjunct to the Mac and iPhone. We’ll take another look at these numbers in Q1 2019—which encompasses the holiday season—to see what the overall trend may be.

Unfortunately, Apple announced during its quarterly investor call that it will no longer be sharing quarterly unit sales, and will in the future only report revenues. That will make establishing the health of a product more difficult, since revenue numbers, while essential, are just only one part of the equation.

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Comments About Apple’s Q4 2018 Results Show Strong End to 2018, Despite Flat or Declining Unit Sales

Notable Replies

  1. Apple is starting to strangle itself with higher prices and less unit sales. Sure the new iPhones look nice but the price just isn’t worth it for a lot of us that bought iPhones since their inception and are feed up with adding to Apple’s bottom line. Having the latest and greatest isn’t as appealing as it use to be. All we really need is a phone, not a bunch of apps that are turning more and more into the subscriptions.

  2. Thanks, Michael & Josh. I really enjoyed this brief article. It could have been just boring numbers or Apple spin regurgitated. Instead, it offered a balanced and critical interpretation of what is going on. Nice job!

  3. Thanks! I also made a video afterward that explores the numbers and makes some predictions.

  4. iweir

        November 2
    

    Apple is starting to strangle it’s self with higher prices and less unit sales. Sure the new iPhones look nice but the price just isn’t worth it for a lot of us that bought iPhones since their inception and are feed up with adding to Apple’s bottom line.

    Unfortunately, Apple exists to make money for its shareholders, the people who own the company. The bottom line is what matters to them. The price hike strategy has been extremely successful, and iPhone revenues were up about 30%. Most of the company’s revenues have been coming from iPhones for some time now.

    Having the latest and greatest isn’t as appealing as it use to be. All we really need is a phone, not a bunch of apps that are turning more and more into the subscriptions.

    Apple has made it quite clear that they build iPhones to last. In the last announcement they made it quite clear that iPhones tend to be active in the wild for years longer than their competitors. Over $700 for the XR isn’t cheap, but Apple’s lowest price iPhone is getting great reviews and from what I’ve read, seems to pack more punch than similarly priced Androids.

    And the growth in Apple’s services revenue continues to exceed expectations, so there are clearly hundreds of millions, if not billions, of people who are paying for them. Services also contribute greatly to locking people into the Apple ecosystem.

    The recently announced US tariffs will drastically affect Apple, as well as many of their competitors, and they will be effective soon. Selling prices will be affected, probably across the board. Apple’s rapidly growing revenue from services will likely become increasingly important to earnings going forward as they are born in the USA.

    Expensive iPhones and services are continuing to be very successful for Apple.

  5. blm

    Unfortunately, Apple exists to make money for its shareholders, the people who own the company. The bottom line is what matters to them.

    Agreed. And judging by today’s price action, shareholders aren’t happy.

  6. To be sure, today’s stock price actions are largely a reaction to Apple’s forecasts for next quarter, not the last quarter’s results, and Apple has historically been conservative in its forecasts.

  7. Shareholders are VERY HAPPY that Apple’s pricing strategy is once again delivering record dividends. They are unhappy with revenue guidance for the next quarter, which reflects the impact of the new tariffs. But Apple has a history of exceeding guidance.

  8. Thanks for the link to that video, Josh. I’m usually not too big on video blogs, but I really liked your analysis.

    I like how you contrast the good news for investors with the declining sales as an indicator for “what is the computer of the future?”. Like you, I’m more pessimistic when it comes to iPad than I am for the Mac. Also, like you, I believe there’s not a whole lot of wiggle room on the Mac. You can’t increase selling price forever to compensate for lack of unit increase (or even unit decrease as we just saw).

    I think you make a good point with free iCloud storage, but I still hope you’re not right on that one. :slight_smile:

  9. My predictions are often pessimistic, so I’m happy to be proven wrong. :slight_smile:

  10. The problem is that increasing prices and decreasing sales eventually reach a turning point where the higher prices do not compensate for the loss of sales due to the higher prices.

  11. If and when it looks like this would become a trend, I’ll Apple won’t raise hardware prices as much. And when the 25% taxes take effect, it will affect Apple and other hardware manufacturers; the other companies would have to raise prices as well. The looming increases might be why Apple has upped its development spending to grow service options.

  12. I would be willing to believe that sales could pick up again (or at least not drop) if Apple keeps Macs updated and attractive. I’m quite certain their recent drop in Mac sales is related to their lackluster Mac efforts. Leaving product lines to just wither (same price while the specs become more and more outdated) will certainly do that for you eventually.

    If they stay committed I wouldn’t be surprised to see that trend change. The real question to me then becomes if Apple really has smartened up or if this was a one-off and they eventually let some lines again become totally uninteresting.

  13. Simon

        November 5
    

    davidmorrisonann:
    The problem is that increasing prices and decreasing sales eventually reach a turning point where the higher prices do not compensate for the loss of sales due to the higher prices.

    I would be willing to believe that sales could pick up again (or at least not drop) if Apple keeps Macs updated and attractive. I’m quite certain their recent drop in Mac sales is related to their lackluster Mac efforts. Leaving product lines to just wither (same price while the specs become more and more outdated) will certainly do that for you eventually.

    They definitely will keep updating Mac hardware and software, but not with the frequently back in the “just about every year” days. People just don’t upgrade computers nearly as often as they used to, PCs or Macs. Data storage is moving into the cloud more and more for the past few years. Apple has made a point of stressing that Macs are built to last, and they just announced they have lengthened the time they will support older models by a few years. Clock speeds, camera improvements, slight upturns in battery life, etc., are no longer reasons to dump a perfectly good Mac for a new one, so consumer and businesses replacement cycles are getting longer.

    People are spending more and more personal and business time, as well as money, on mobile phones and tablets, which are rapidly becoming more capable, versatile and speedier. Autonomous vehicles, VR and AR, and services promise much faster growth in the near term, and demand for mobile innovation grows, I think we can expect to see more new product introductions on this end. But Macs still are, and will be, a linchpins of the Apple ecosystem. But don’t expect mind boggling Mac upgrades for every model every year.

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