It seems that the saturated smartphone market along with regulations and restrictions in emerging markets have pushled Apple Inc. (NASDAQ:AAPL) against the wall in the rapidly evolving tech industry. However, the smartphone juggernaut is trying to overcome these challenges despite lower margins and decline in the average selling price (ASP) of iPhones.
The tech giant reported that the iPhone ASPs dropped from $662 in the third quarter of fiscal year 2015 (3QFY15) to $595 in the third quarter this year (3QFY16). The company launched the base model of iPhone SE 16GB for $399 in March, which faced criticism for causing the slump in ASPs.
While Apple hoped to tap into emerging markets with a more affordable iOS device, consumers in the target segments actually felt it was pricey even though it meant lower margin for Apple. That said, iPhone SE further expands the iOS ecosystem.
The tech giant recorded $42.4 billion in sales for the third quarter which topped analysts’ consensus expectations of $42.09 billion and implied a 14.5% year over year (YoY) decline. AAPL shares rose by as much as 7.9% Wednesday morning following Apple’s earnings release on Tuesday evening. This is the largest intraday jump for the stock since January 2015, and makes Apple stock the third-largest gainer on the S&P500 Index.
The iPhone SE was designed to attract new clients to the iOS ecosystem; a strategy that seems to be paying off as sales have grown since the smartphone’s launch in March. Contrary to the Street’s fears, gross margins showed only a modest YoY decline in the third quarter, coming in at 38% this year, compared to 39.7% during the same quarter of last year.
Apple’s iPhone stagnation comes as its Chinese rival, Huawei Technologies Co. gains ground in the global smartphone market. It is also embattled with Samsung Electronics Co. Huawei’s head of consumer products Richard Yu states that it would ship 140 million smartphones this year which reflects 30% YoY increase.
Moreover, according to Apple Insider, CFO Luca Maestri states that the company was unable to meet iPhone SE’s demand throughout the quarter, as the response was unfathomed. However, he adds that the company has now stored enough in capacity to cater demand in the next quarter.
On the other hand, preparations for iPhone 7 reduced cash reserves to $232 billion; lower than the level in March. Meanwhile Research and Development (R&D) spending has also increased to $2.6 billion which is significantly more than in the same quarter of the previous year. However, the tapered profitability is not likely to extend beyond the end of fiscal year 2016 (FY16) as the long-awaited iPhone 7 shall be unveiled in September, and sales should make up for the cash and R&D expenses for Apple.
It is safe to assume that the latest flagship model will contribute to Apple’s top-line growth, as each iPhone upgrade in the past has conventionally spurred sales growth with profit margins closer to 40%. Moreover, it will also regain the ASPs for Apple, with the new model targeted primarily to the developed markets.
Emerging Markets
However, the competition and the decline of 7.1 million units in the sale of iPhone units on a YoY basis do not pose a grave threat to the iPhone-manufacturer as CEO Tim Cook stated that the demand seems to be better than the numbers as the company reduced supply of smartphones by more than four million units in the retail channels. He is also cited to have said that the sales in China increase right after an upgraded iPhone is revealed. With the iPhone 7 launch nearby and the SE units already stocked up to cater the demand, it seems that the company has planned to spread its ecosystem in the emerging economies.
Moreover, Apple has shifted its focus toward India as it hopes to tap the market. The sales grew by 51% in the first nine months in the 1.2 billion population in the emerging markets. Mr. Cook visited the country in May in an attempt to establish relationship with the local manufacturers of smartphones and seek approval to open local retail stores. Consequently the company laid the foundations of a 4,000 employee office in Hyderabad to develop the mapping products.
Earlier, according to the Indian telecommunications ministry official, the company’s request in India to import and sell refurbished iPhones was rejected. The local rivals initiated an effort to prevent the penetration of the iOS operating system in the market as it threatened the Make-in-India program which encourages local manufacturing. However, the launch of iPhone SE indicates that the iOS ecosystem is bound to expand one way or the other.
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