iPhone Sales: Future Rumors, Incremental Upgrades Combine to Hurt Unit Sales

iPhone sales fell slightly shy of expectations when Apple's (AAPL -0.35%) reported earnings earlier this month. In this segment from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and senior tech specialist Evan Niu, CFA, discuss how Apple's most important product performed last quarter.

A full transcript follows the video.

This video was recorded on May 5, 2017.

Dylan Lewis: Apple reported what looks like a pretty decent quarter. Revenue for the second fiscal quarter totaled $52.9 billion. EPS came in at $2.10 a share. The company sold 50.8 million iPhones. You look at what estimates were and what people were expecting, just under expectations with revenue, they actually beat on EPS and missed a little bit on iPhone unit sales. What did you make of this quarter?

Evan Niu: I think, as far as those headline numbers, it was pretty much in line with expectations. Plus or minus a little bit on some of the metrics, but no big surprises one way or the other. In terms of iPhone sales, I don't think investors were too shocked one way or the other. Of course, anytime you hear iPhone sales less than expected, the stock sells off automatically because people always freak out about the iPhone. But, Apple is so big at this point that it's really hard to put up a big earnings beat anymore these days.

Lewis: We touched on units there. Thankfully the iPhone ASPs were up -- average selling price. They hit $655, which is up from $642 a year ago. It seemed like that was really thanks to a stronger mix, people buying at the higher price points for the different form factors they offer. You have that going on, which helps them make up the revenue for that segment. Do you have anything on why they might have missed on the unit side, anything related to future products releases or something like that?

Niu: [CEO] Tim Cook talk to little bit of that, there does seem to be an impact on all the rumors. Of course, iPhone rumors are always there every day. But, I think this year's cycle, the expectations are so high and there's so many rumors that it's a particularly intense cycle, the speculation that's going on -- people are waiting. Plus, if you think about it, this is the first time they've ever used the same iPhone design for the third year in a row, so the design is getting a little long in the tooth. This original design was unveiled in 2014. Of course, people like new things. I think those two factors are probably hurting unit sales a little bit, because people are waiting. Even for me personally, I didn't buy the iPhone 7 because I didn't think it was that great, which is the first time I hadn't upgraded in eight years. If even me, who's one of the biggest Apple fans out there, doesn't buy it, you have to wonder who else isn't buying it. So, people are really waiting for the next one. Of course, I'm very excited to get the next one, whatever it is. But yeah, I think there are a couple things that are holding back. Like you mentioned, ASPs were up, which was nice. The 7 Plus was finally in supply demand balance. Last quarter, they misgauged how much to produce and where demand would be focused. It turns out it's really heavily skewed toward the 7 Plus, and they didn't really plan very well, and they admitted that. It was up year over year, but down a little bit sequential. Last quarter, ASPs for iPhone was $695, almost $700, so a little bit of a sequential down tick there, but nothing too concerning, because the point being, people are still loving that big 7 Plus, and that thing is super expensive, so that's helping drive their selling prices overall.

Lewis: And also to get into the mind of consumers here a little bit, you talked about how the form factor didn't really change all that much year to year. They made one major overhaul, which was the change to the headphone jack. So, you're asking people to make a major change in how they consume content, or maybe switch over and do use the adapter there, and a lot of people might have said, "The updates to the phone itself aren't compelling enough for me to make that change."

Niu: Right. I didn't think there were any big headline features last year. Even the prior year, with the success, the big feature was 3D Touch, which, I think over time was underwhelming. In the past few years I've actually used it, it's not a feature you use every day. It's kind of nice, but it's not a game-changing interface thing, and I think it's kind of underwhelming. So, last year, there wasn't any big feature that was like, "I have to have this phone." I think the dual-camera system was probably the biggest selling point, but that's only on the 7 Plus. For people like, for example, myself, I don't like gigantic phones, and the 5.5 inch screen I think it's just too big. I would like to have that dual camera system, but I'm not willing to go up to the bigger phone that also costs more just to get that camera. As far as the regular 7 goes, there wasn't any huge upgrade that made people go out and say, "I need to get this phone right now," whereas hopefully the next one -- of course, there's a million rumors right now -- it sounds like the next one will be a pretty big upgrade. It'll be the 10th-generation phone, it'll be a pretty big milestone and you can bet that Apple will make a pretty big deal about it, both in terms of marketing and also all the features they're going to try to stuff in there.