The iPhone X Gave Apple a Record Quarter — and Apple Is Increasingly Doing What Wall Street Wants

All those reports about iPhone X production cuts look wrong.

Two months after going on sale, the iPhone X appears to have solved the biggest crisis Tim Cook has faced since becoming CEO.

On Apple's earnings call this morning, Cook and CFO Luca Maestri said "record" 19 times.

"We're thrilled to report the biggest quarter in Apple's history," Cook said.

The records include the numbers that matter most: revenue of $88.293 billion, and profit of $20 billion — $3 billion more than the combined profits of Google, Facebook, Amazon, and Alibaba, four of the largest tech companies in China and the US.

Cook also stressed that Apple did this in a fourth quarter of 2017 that was one week shorter than in previous years. Adjust for that and growth was faster still: average weekly revenue rose 21% from a year earlier.

All of it comes down to one new product, the iPhone X. The iPhone line brought in $61.576 billion, up 13% year over year. It sounds like the Apple growth story as it has always been told: build a product far better than the competition's, and sell it for more than the competition charges.

Cook used the numbers to knock down the earlier reports that the iPhone X was being cut back or even killed off. Apple's own guidance says iPhone revenue will keep growing at a double-digit percentage rate in the first quarter of 2018, pushing total company revenue up more than 15% — which means the iPhone X should keep selling well at least through the quarter.

The one number that didn't set a record was iPhone units. The iPhone X, packed with Apple's newest technology, and the discounted iPhone 7 and 8 still failed to get more people to buy a new phone: even with the holiday shopping season inside it, the fourth quarter's iPhone sales were 1% lower than a year earlier.

Set against the jump in revenue, though, Wall Street did not mind the weak unit sales at all. After the results, Apple's stock rose 3.4% and its market value grew by more than $28 billion — close to the entire market value of Weibo.

The iPhone X Got Every Buyer to Spend $178 More

iPhone revenue jumped because the price went up. The average selling price rose from $618 in the third quarter of last year to $796 — $178 more, and $100 above the previous all-time high.

Almost all of that is the iPhone X's doing.

"The iPhone X has far exceeded our expectations," Cook said on the call. "It's been our best-selling iPhone every week since it launched in November."

The iPhone 8's launch, by contrast, was close to a disaster; on channels like JD.com it briefly sold worse than the iPhone 7. Apple cut its price in a hurry, and during JD.com's Singles' Day sale it was discounted by more than 1,000 yuan — the first steep price cut in the iPhone's history.

The iPhone X's high price lifted Apple's revenue, but total iPhone units came in below the year before: 77.32 million in the last three months of the year, short of analysts' 80.2 million estimate.

1.3 billion

Active devices

Total Apple devices activated worldwide, as of January this year

On the call, Cook reached for a different number to answer the volume question: as of January, 1.3 billion Apple devices were active worldwide, counting iPhones, iPads, Apple TVs, and every other piece of Apple hardware. That is 30% more than the 1 billion of early 2016.

Contrary to What the Press Concluded From Supplier Sources, the iPhone X's Momentum Won't Fade Soon

Since late December, reports that iPhone X sales were about to fall off a cliff have kept coming. Taiwan's Economic Daily News, citing people in the island's supply chain, said Apple had cut its first-quarter iPhone X sales forecast from 50 million units to 30 million. Foxconn's Zhengzhou plant, the sole manufacturer of the iPhone X, was said to have stopped hiring.

In a January 20 report, KGI Securities analyst Ming-Chi Kuo said weak iPhone X demand had cut supplier orders, and that the current model would be discontinued as soon as a next-generation iPhone X arrived this fall — making this iPhone X the shortest-lived product in the iPhone's history.

Nikkei, for its part, has appeared at this same point in the calendar five years running to report that Apple was sharply cutting production plans for its new phone. Most of the time it has been wrong.

Apple's own guidance for the coming quarter calls for more growth: iPhone revenue up by a "double-digit" percentage, total revenue between $60 billion and $62 billion, which works out to more than 15% above the same period in 2017. Further price cuts on the iPhone 8 might add units, but that kind of revenue growth can only come from the iPhone X.

Apple's forecasts are not offhand guesses. They come out of repeated calculation against the latest sales data, and there is nothing to gain from inflating them — misleading the market now would send the stock down hard when the next results arrive, and would carry legal risk besides.

Leave Apple's own account aside, and the suppliers' public statements do not fully support the analysts either. Qualcomm said orders from one large customer would fall unexpectedly, and everyone outside assumed the customer was Apple. But Apple is in court with Qualcomm and has said plainly that it intends to depend on the chipmaker less.

The other piece of evidence the analysts cite is Broadcom's warning that its chip sales would show a decline "larger than seasonal." Broadcom supplies the iPhone's Bluetooth and Wi-Fi parts. It also supplies those chips to most of the PC industry, and in the final quarter of last year PC makers, worried that components would cost more this year, ordered early — by so much that the long-shrinking PC market actually turned back up. Buyer demand had not changed, so PC chip orders will fall again over the months ahead. Broadcom did not say how much of the effect the iPhone X accounted for.

Meanwhile Foxconn, which assembles iPhones for Apple, raised its output 50% in December, and Lumentum, which supplies the core Face ID components for the iPhone X, grew as well.

Apple has far too many suppliers; picking a few of their numbers can produce an entirely wrong conclusion even when each number is accurate. Reading iPhone sales through the supply chain has come out wrong in past years, and this time looks no different.

As for why these reports keep appearing, a line Fred Wilson, the New York venture capitalist who has long been bearish on Apple, once used against himself fits the moment: "I say Apple is going to fail every year. Eventually I'll be right."

The Good News in the Other Product Lines Is Tied to the iPhone Too

The new iPad Pro came out in June 2017, far enough back that fourth-quarter iPad sales did not grow as fast as third-quarter sales — up just 1% year over year.

Average price tells the rest: the iPad slipped from $467 last quarter to $445. When the iPad Pro first arrived, Apple was trying to use a bigger, more expensive iPad to turn the product into a productivity device instead of an optional living-room toy.

A falling average price means the cheap New iPad is selling more units, which means the repositioning still hasn't happened, and that Apple hasn't brought itself to give up the low-price iPad market — easier to sell into, and nothing to do with productivity.

The Mac is further still from its last new release. Unit sales fell 5% and the average price rose to $1,349, below the $1,391 of the first quarter of 2017, right after the new MacBook Pro went on sale.

The MacBook Pro got a small update last year that gave buyers more configurations to choose from. The entry-level model without a Touch Bar, for instance, now offers 8GB or 16GB of memory and up to 1TB of storage, widening its price range to 10,888–20,488 yuan. Even the entry-level MacBook Pro can be sold for more.

That may be why Cook said 60% of the Macs sold went to first-time Mac owners, a share that reached 90% in China.

Besides the iPhone, the businesses still growing are the Apple Watch, iPhone accessories, and software services.

"Other products," the category that includes the Apple Watch and AirPods, brought in $5.489 billion this quarter. That is far behind the iPhone, but it is an all-time high, holding the previous quarter's 36% growth rate.

Cook called it "the best quarter ever for Apple Watch," with the watch alone growing more than 50%. Wearables are now the second-largest contributor to Apple's revenue growth after the iPhone. The other bright spot remains services — the App Store and Apple Music — at $8.5 billion, up 18% from a year earlier, though down from the 22% and 34% growth of the two quarters before.

The two fastest-growing businesses outside the iPhone can both be read as iPhone accessories. Only iPhone owners can use an Apple Watch. AirPods work with Android phones, but their main customers are plainly iPhone owners too. And the App Store is essentially an iPhone business; the iPad and the Mac barely register.

Cook Told Wall Street a Story It Likes to Hear, and Now Both Sides Are Happy

Apple's record quarter more or less sums up like this: the better but more expensive iPhone X brought Apple no new users, but it got existing Apple users to hand over more money.

Apple's attempts at a cheap iPhone, from the 5c to the SE, led nowhere. And an iPhone at a conventional price could not set itself far enough apart, so Apple turned to more expensive technology to create the difference.

Tens of millions of people willing to pay that much for an iPhone X does show how far ahead of its rivals Apple is on product — but the lead was bought with a higher product cost.

The iPhone has cost more than its competitors since the day it was born, and it keeps getting more expensive. That a higher price dampens the willingness to buy is one of the most basic rules of a free market. Judging by the current numbers, iPhone unit sales have indeed fallen again.

Wall Street, meanwhile, reacted extremely well. iPhone units came in nearly 3 million below the average analyst estimate, but because revenue surged — and will keep rising next quarter — Apple's stock surged with it, adding more than $28 billion in market value at a stroke.

When Apple now talks about the coming quarter, it does not mention whether it will sell more iPhones; it talks about double-digit percentage revenue growth. Apple's story has gone from making more money by selling more and better phones to making more money by selling more expensive ones.

Cook is getting better and better at telling Wall Street the story it likes to hear. Beyond the iPhone's high price, Apple also announced a new plan to return money to investors. With the tax overhaul, Apple is bringing most of its overseas cash home. From here, it will spend nearly all of its current $163 billion in net cash on buybacks, dividends, stock compensation, investments, and acquisitions.

Apple didn't say on this call how long it would take to spend that money, so there is no telling whether it amounts to much more than before. But it has handed out plenty over the past five years.

In several interviews around the iPhone X's launch, Apple executives insisted that the phone was expensive not because Apple wanted to make more money, but because the technology inside it could not be sold for less.

That may well be true. But as this success story has unfolded, Wall Street has come to expect revenue from Apple ahead of units. When Apple can build the next generation of the phone more cheaply, will it really give up the iPhone X's price range?

There was a time when Apple gave no thought at all to its investors: no dividends, no buybacks. It could win users with a better product and force every entrenched power that stood against it into line — carriers, suppliers, software developers. Wall Street was no exception.

Now Wall Street may be satisfied, but the number of users who have switched to another platform, or stretched out how often they upgrade, because of the higher "Apple tax," has genuinely grown.

On the call, talking about the record numbers, Cook said: "These results are a reflection of the strength of our products, the loyalty of our customers, and the power of our ecosystem."

Loyalty runs both ways.

Cover image from Pixabay