In Verizon's (VZ +0.73%) second-quarter 2018 report issued on July 24, wireless equipment sales were up by double digits, driven almost entirely by higher phone pricing. That was the case a few months ago in the first quarter as well, and the numbers foreshadowed a great corresponding report from Apple (AAPL +0.17%). Though the second quarter of the year is typically a sleepy one for hardware sales, Verizon's positive news could be indicating another successful campaign out of Cupertino, California.
A prelude to something great?
During the first quarter of the year, Verizon reported a 22.1% year-over-year increase in wireless equipment sales. The big boost came from a combination of new phone activations and higher-priced phones. Shortly thereafter, Apple reported its corresponding quarter, which showed a 3% increase in iPhones sold, but a 14% increase in revenue because of the higher-priced iPhone X.
Something similar could be at work in quarter two. While Verizon reported a decrease in activation volumes by a few hundred thousand from a year ago, equipment revenues were still up 6.8% due to higher smartphone pricing. That could be a preview of another year-over-year increase in Apple's iPhone business, specifically with the premium iPhone X.
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Let me explain...
Through Apple's two quarters ended March 31, 2018, iPhone units sold were essentially flat from a year ago. Revenue from the tech giant's bread-and-butter business was up double digits anyway because the iPhone X has a starting price of $999. That's over 40% higher than the iPhone 8 (starting at $699) and 25% higher than the iPhone 8 Plus (starting at $799). That's a much bigger increase in pricing than any other manufacturer has attempted in the last year. Despite the big jump, though, Apple said the X has been its best-selling phone since its release.
So how do we know it's the X that's accounting for Verizon's boost in equipment sales? According to technology-industry analytics firm Counterpoint Research, Apple's share of the U.S. smartphone industry was 45% and 38% in the last two quarters. That has eaten away at Samsung's (NASDAQOTH: SSNLF) share, which held second place at 20% and 26% in the last two quarters. Samsung's Galaxy S9 and S9 Plus have both increased in price about 10% from last year's models, but have not sold as well so far.
That leaves the Apple phones and their gobbling of market share as the primary factor behind Verizon's success. Let's assume Apple takes 40% of smartphone market share in the second quarter, in-line with the last two quarters since the X being released. I'll also assume 25% of iPhones sold were the X (see the following paragraph); and a 35% higher average price for the X over last year's models. Multiplying those three percentages together (0.40 x 0.25 x 0.35) would yield an annual equipment revenue increase of 3.5% for Verizon. The balance of its higher equipment sales could be chalked up to the iPhone 8, 8 Plus, and other manufacturer handsets that had more modest price increases from a year ago.
Granted, analysts from research group CIRP recently predicted that the iPhone 8 Plus will be the best-selling model in the second quarter, with the iPhone X in second place. That was the guesswork in the first quarter, too, which Apple debunked on its earnings call. Whichever version takes the title as the most popular iPhone, though, it would appear the X is still resonating with consumers, driving up average selling prices for smartphones and equating to higher revenue for Apple.
Bear in mind all of this is my own speculation and guesswork; we'll have to wait for actual numbers when Apple reports on July 31. Nevertheless, Verizon's report provides important insight for Apple investors to digest. Though the iPhone business has slowed down in recent years, pricing power on hardware has helped the company deliver steadily rising revenue and profits. That has translated into more cash available to Apple to invest in new services and a new share-repurchase program, one of the driving forces behind the stock's climb as of late.
