Apple’s Cook acknowledges ‘pause in purchases on the iPhone’

apple phone (Pixabay)
Apple continues to sell millions of iPhones every quarter.

Apple CEO Tim Cook conceded that there has been a “pause” in sales of the company’s iPhone.

“We’re seeing what we believe to be a pause in purchases on iPhone, which we believe are due to the earlier and much more frequent reports about future iPhone,” Cook said during Apple’s quarterly conference call with investors. “And so that part is clearly going on and it could be what’s behind the data. I don’t know. But we are seeing that.”

Cook was responding to a question about a 451 Research report showing a nine-year low in the measurement of shoppers’ intent to purchase the iPhone. Apple is widely expected to release a new phone in the fall that sports a high-end screen and camera.

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Cook’s comments appear related to recent commentary from AT&T on sales of smartphones, at least in the United States. The carrier’s CFO said last week that AT&T continues to sell fewer phones since customers are holding on to their phones for longer periods of time, largely because the carrier is selling phones through equipment installment plans (in which customers see the full cost of their phones and pay them off through monthly installments) rather than subsidies (in which carriers essentially hide the full cost of the phone and recoup phone costs through monthly service fees).

“I would suggest to you I think it is a more permanent change in the environment because of the change in who pays for it,” AT&T CFO John Stephens said during the carrier’s earnings conference call this week, according to a Seeking Alpha transcript of the event. “I clearly believe it is a permanent change from where we were in the subsidy model, and I believe that the upgrade rates will be down on a permanent basis.”

"Time will tell whether this is the case or if there is a fundamental change in upgrade cycles (as AT&T indicated), which won’t be clear until Q4," the analysts at Wells Fargo wrote in a note to investors following the release of Apple's earnings.

In its quarterly financial report, Apple announced that iPhone shipments were down on a quarter-over-quarter basis, as well as year over year. Apple sold 50 million iPhones in its most recent quarter, down from the 78 million it sold in its previous quarter and the 51 million it sold in the same quarter a year ago. Apple’s iPhone sales typically slow in the months leading up to its annual release of a new iPhone in the fall.

Indeed, some analysts believe the current pause in iPhone buying will create even more demand for Apple's new iPhone. "We expect the new product cycle to further accelerate revenue growth into the high single digits in 2018 and EPS into the low teens, with help from a $40 billion annual share repurchase program," wrote BTIG analyst Walter Piecyk in a note to investors following the release of Apple's earnings. As a result, Piecyk said, "we increased our price target to $184 from $165 as Apple returns to double-digit EPS growth and is poised for further acceleration in growth in 2018."

Not surprisingly though, Apple executives also said iPhone average selling prices are increasing. Specifically, the company noted that its iPhone ASPs grew to $655 in the quarter, up from $640, which the company attributed to increased sales of its more expensive iPhone 7 Plus gadget.

In fact, Cook said Apple managed to balance its supply of iPhone 7 Plus devices with customer demand only during its most recent quarter, because the company was surprised by the strong demand for the device. “You can bet that we’re brushing up our [financial] models,” Cook said of the unexpectedly strong demand for the large-screen phone.

Apple Watch, AirPods and other businesses

As for Apple’s other devices, the company’s iPad shipments also continued to decline. But Apple’s CFO said sales of the company’s new Apple Watch “nearly doubled year over year,” though the company did not provide sales figures for the product. Apple also said that sales of its new AirPods and its Beats headphones grew, making the company’s “wearable” devices the size of a Fortune 500 company.

As in previous quarters, Cook touted the company’s services business. “We’re thrilled with the strong momentum of our Services business, with our highest revenue ever for a 13-week quarter,” he said in Apple’s release. As Recode noted, Apple’s Services revenue grew about $1 billion versus the year-ago quarter.

Jackdaw Research analyst Jan Dawson pointed out that, during the past five years, the iPhone has grown from roughly a half of Apple’s total revenues to around two-thirds, while the company’s Services business grew from 8% to 12% of its overall revenues. Apple’s Services business primarily comprises its App Store sale of games and other digital goodies.

Separately, Apple executives briefly addressed the company’s ongoing patent-licensing dispute with Qualcomm. Specifically, Cook noted that Apple is withholding patent licensing payments to Qualcomm because of the issue. “You can’t pay something when there’s a dispute about the amount,” he explained.

“There hasn’t been a meeting of the minds there,” he said, adding that Qualcomm is attempting to charge Apple royalties based on the total value of the iPhone, which he said doesn’t make sense because Qualcomm only supplies the device’s silicon and Apple builds much of the rest of the phone. Of course, Qualcomm continues to argue for higher royalty payments.

Interestingly, Cook also briefly addressed Apple’s role in the U.S. economy. “Apple is a company that could only have been created in America,” he said, noting that the company supports more than 2 million jobs in the country, and that it spent $50 billion in the last fiscal year with American suppliers, developers and partners.

Cook’s statements are likely in response to the Trump administration’s interest in generating new jobs—and President Trump’s attempts to publicly call out companies on the topic.

Overall, Apple reported revenue of $52.9 billion, up slightly from the $50.6 billion Apple reported in the same quarter a year ago. The Wall Street Journal noted that figure largely matched investor expectations.

For the coming quarter, Apple said it expects revenue between $43.5 billion and $45.5 billion and a gross margin between 37.5% and 38.5%.

Article updated May 3 with analyst commentary.

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