Apple, Inc Earnings: Look Who's Buying the iPhone

Google Android is under attack.

Apr 26, 2014 at 2:00PM

As the smartphone market becomes increasingly saturated, many analysts have feared that Apple (NASDAQ:AAPL) would be unable to grow its iPhone sales in its second quarter. Nonetheless, Apple surprised investors with 17% year-over-year growth in iPhone unit sales last quarter, and management gave us a bit more information on who, exactly, are buying all these iPhones.

Google (NASDAQ:GOOGL) (NASDAQ:GOOG) investors, get prepared to cringe at some of these numbers. A lot of iPhone buyers are switching from Android.

What's more, Apple's iPhone 4s is successfully fulfilling its role as the "entry-level" option for iPhone purchasers and proved very popular last quarter in emerging markets. Apple also likely benefited in China from the partnership with China Mobile (NYSE:CHL).

Android switchers
During Apple's conference call, Tim Cook gave us some great insight into the number of people switching from Android to iPhone. Some 62% of people who bought the 4s switched from Android, while 60% of the people buying the 5c came from Android as well. Cook neglected to give a number for the 5s, however, which could indicate that the number might not be as strong for that model.

Investors shouldn't get too excited -- or too worried, in the case of Google. Although the numbers show Apple is able to attract new customers from Android, Apple didn't have much competition last quarter. Several new flagship phones were released this month and could hamper Apple's conversion metric the next time it reports. We'll see if Cook is as eager to share those numbers on the next conference call.

Where are all the previous iPhone purchasers?
Numbers this high for Android switchers raise a couple questions for Apple, however. First, is its brand loyalty as strong as originally thought? iPhone sales climbed 17%, but a huge portion of iPhone purchasers were Android buyers. What happened to all the previous iPhone purchasers?

The explanation could be found in the second question: Are upgrade cycles getting longer? Perhaps iPhone purchasers are holding onto their phones longer due to changes in the telecom industry. This would have a negative effect on iPhone sales, as owners aren't as compelled to buy a new phone.

Cook addressed a question on the latter issue during the conference call, and basically said it's too early to tell. He did point out that the upgrade cycle for some subscribers may increase due to changes, "because there are some areas where customers can pay a bit more in the beginning and have the ability to essentially upgrade each year."

Cook was also keen to point out that this has a major effect only on U.S. consumers, and the U.S. represents only about 30% of Apple's revenue.

Entry level dominance
If you want a low-end smartphone, Android is pretty much your only option. Apple's lack of a low-end smartphone has allowed Google to dominate the global market, especially emerging markets where disposable income is generally lower.

Apple did very well in the emerging markets last quarter, led by China. iPhone sales grew 28% in China during the quarter, while IDC forecast 20% growth for the year. As a result, Apple likely gained share in a market where analysts believe it can't compete without a low-price option.

China Mobile helped a bit, adding a few million iPhone sales during the quarter. The largest wireless provider is hoping to regain share of the Chinese market that it lost when its competitors started offering the iPhone. While the company is using the iPhone to promote its 4G network, the 3G iPhone 4s proved its worth this quarter.

Management attributed its strong performance in China and emerging markets -- as well as the $41 decline in average selling price -- to the 4s. The data show that the 4s appeals as an entry-level smartphone -- just as Apple intended. About 23% of iPhone 4s purchasers were first-time smartphone buyers. Comparatively, only about 9% of 5c purchases were from first-time smartphone buyers.

A look ahead
The high number of Android switchers and the growing number of 4s sales as entry-level smartphones gives credence to the idea that Apple will gain global share from Android in the long term. The trend is already evident in the United States, as more people switch from Android to Apple than vice versa. Apple's share of the smartphone market jumped 240 basis points, year over year, for the three-month period ending in February.

The same appears to be happening in China on the back of the deal with China Mobile, but Apple will have the pleasure of relying on that basis only for three more quarters. In the broader emerging markets, the entry-level option from Apple is finally attracting low-end Android purchasers. That's what will drive iPhone sales going forward.

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Adam Levy owns shares of Apple. The Motley Fool recommends Apple and Google (C shares). The Motley Fool owns shares of Apple, China Mobile, and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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