AAPL: iPhone 6 Upgrades Setting up a Difficult Compare

  • Using data disclosed by Apple during its 2FQ 15 earnings release and call, it’s possible to triangulate iPhone mix and penetration of sales to existing users: with an average ASP of $659, we estimate iPhone 6/6 Plus represent 60-65% of unit sales
  • Out of an installed base of 450M iPhones, about 90M upgraded to iPhone 6 representing some 86% of iPhone 6/6 Plus units sold since September 2014
  • High-end iPhone 6 sales are largely upgrades, while the older 5C/5S handsets are likely driving sales in emerging markets and China – As this dynamic continues, the company is setting itself up for difficult compares going forward

Apple’s stellar 2FQ 15 saw iPhone unit sales up 40% YoY and iPhone revenue up 55% to $40.2B. Despite declining iPad sales and nearly flat Mac revenues, the company’s strong result was overwhelmingly driven by the iPhone. The iPhone 6/6 Plus had a great degree of pent up demand prior to launch for their large screens and represent the bulk of sales. With some nuggets of information divulged by CEO Tim Cook and CFO Luca Maestri, it’s possible to triangulate iPhone sales and upgrade mix. It seems clear the higher end of iPhone sales are driven by customer upgrades whereas the lower end is driven by emerging markets such as China.

Using ASP as a guide to estimate mix, we believe iPhone 6/6 Plus represented 65-70% of sales in the December quarter driven by a strong wave of upgrades. The iPhone ASP was down sequentially this quarter and we believe it made up 60-65% of iPhone sales mix during the quarter ended in March. Our analysis also took into account pricing in European markets, which were somewhat lower than the US given Euro weakness. iPhone prices ex-VAT are currently about -4.1% lower in Europe than the US in dollar terms. The iPhone 5C notably sells at an -18% discount in Europe ex-VAT, suggesting mix of iPhone 6 may be higher. While Europe accounts for 21% of Apple’s sales, FX headwinds were muted elsewhere as the Yen/Dollar has been flat YTD and the Chinese Yuan is pegged to the dollar. Those markets collectively make up 36% of sales.

Cook noted iPhone upgrades made up a low-to-mid teens percentage of the iPhone installed base at the end of the December quarter. That same figure is up to 20% at the end of March, suggesting some 31.5M users upgraded to the iPhone 6 using an installed base of 450M. Applying our estimate of iPhone 6 sold using our ASP calculation, the quarter saw 79% of iPhone 6 sales go to upgrades versus new users. With a higher mix of iPhone 6 last quarter as well as some 4FQ14 sales, we believe the mix of iPhone 6 sold to users upgrading is about 86%.

The high rate of upgrades driving the higher end of iPhone sales is worrisome as it sets up the company for a difficult compare come the fall when the next iPhone will have a tough act to follow. With several years of pent up demand for big screen iPhones, users got their wish and bought the iPhone 6 en masse making it very well the best selling handset of all time. There is no obvious feature demanded by consumers for the next iteration and likely changes will be incremental, e.g. a faster A9 processor, better camera, slightly modified bezel, updated LTE chipsets, etc. It is also difficult to imagine a majority of the installed base opting for the latest handset as iPhone users tend to keep their phones longer and there is a well developed secondary market for used previous generation devices for those that can’t or won’t pay full sticker. The company will continue to beat YoY sales numbers for the next two quarters, but the tough compare will come in December.

Please see our published research page for the full note.

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