From a note to clients by analyst Katy Huberty that landed on my desktop Friday:
Weak Greater China iPhone sales largely to blame for Apple’s first negative pre-announcement in 15 years… Our analysis of shipment data suggests that for the broader China smartphone market, replacement cycles have lengthened materially in the past two years, and even more so for Apple. In early December, we lowered FY19 iPhone shipments by 13M (or 6%) – from 213M to 200M – baking in a 6 month longer replacement cycle in China. But the combination of an even weaker China and continued replacement cycle lengthening in developed markets that are digesting lower subsidies and cheaper battery upgrades lead us to take FY19 iPhone units down by another 20M, to 180.25M or -17% Y/Y.
China installed base data suggests healthier trends and implies weak shipments are more macro than competitive in nature. The larger than market decline in iPhone units will likely contribute to investor concerns that Apple may be losing share. However, our data suggests Apple took considerable share of China’s smartphone user base through November (Exhibit 3) suggesting shipment share losses tie more to the faster replacement rates for Android devices than user defections from Apple…
Platform story alive and well. Even after raising our FY19 wearables estimate by 3% in December, Apple beat our non-iPhone revenue forecast by 540bps – growing 19% Y/Y vs. our estimated 13% Y/Y. In particular, Services was slightly ahead of our 27% Y/Y growth forecast, Wearables grew nearly 50%, and iPad grew double-digits, ahead of our -4% Y/Y forecast. As more Apple users buy multiple products and services, loyalty rates increase materially, helping expand the installed base even when shipments decline – a dynamic not fully appreciated by investors.
Maintains Overweight rating, lowers price target to $211 from $236.
Two exhibits: Note that the iPhone’s installed base in China actually overtook Huawei’s in November.
My take: The curve of the iPhone’s installed base in China (dashed green line in Exhibit 3) was a surprise to me.