900 Million iPhones

Apple’s Fiscal Q1 2019 was one of the better calls I’ve listened to in a long time. Partly, because CEO Tim Cook gave an elaborate and well structured roughly 18-minute commentary that should help get investors thinking more structurally about Apple’s business and less about metrics that don’t matter. But one highly elusive number, one many of us have always wanted was given on the call. That number was 900 million.

900 million iPhones are out there in the wild as a part of Apple’s 1.4 billion active devices installed base. I say this number has always been desired because that number approximately represents the true unique user base of Apple customers. It’s safe to assume that the iPhone is the one device the majority of their 1.4 billion user base has and therefore represents the true unique customer number. This is significant because this is the number of humans Apple has for developers, and service providers to reach. Essentially, 900 million people make up the foundation of what makes the Apple ecosystem so attractive and so fundamentally strong.

Managing For The Long Term
I appreciated Tim Cook’s repeated commentary that they manage Apple for the long-term. Similarly, I analyze Apple in the long-term! Taking a long view on Apple is the wisest way to understand the company. That being said, it seems pretty easy to think about Apple’s long-term business prospects on the back of several fundamental points Apple management keeps reminding everyone.

  • The installed base is growing. Apple’s installed base continues to grow, and that creates the foundation of their upside. Interestingly, the effort to make devices last longer, by doing things like better software support on legacy hardware, custom silicon, battery replacement, etc., doesn’t just keep customers happy but lets that device is turned in and sold at a discount to another customer. The brilliance here is how those devices can live so long and thus have multiple owners and in return grow Apple’s installed base. I don’t know of another tech company for whom this same dynamic exists for at scale.
  • Customer Satisfaction and Loyalty Remain at All-Time Highs. The continued reminder that Apple customer satisfaction and user loyalty not only lead the industry but remain at all-time highs is relevant to the installed base number. Apple is stating their large and growing customer base is not going anywhere. They will continue to buy Apple hardware, even if not as frequently, and they will continue to spend money in the Apple ecosystem.
  • Engaged in the Ecosystem. Lastly, and these points all build on each other for the narrative, is Apple repeatedly shares statistics that demonstrate how engaged their customers are in the software and services ecosystem. Apple Music as 50m subscribers. Apple is actively facilitating 360m subscriptions between third and first party subscription options. Apple News has 85m monthly active readers. Apple Pay drove 1.8 billion transactions 2x the volume of a year ago.

Those are the points Apple is trying to drive and all their disclosures, both old and new, are focused on shaping this narrative with the metrics that tell the story the best.

A Few Other Key Points to Note

  • China may surprise in March Quarter. Some quick feedback from investors I saw was the feeling that Apple is guiding intentionally cautious for the March quarter. Which is smart because China is a big variable right now. However, singles day in November set new records, so there is some hope Chinese New Year keeps with that trend, and the pent up demand there for iPhones helps Apple in China around this generally very strong holiday season in China. This is something I’ll be watching for with friendlies I talk to looking at the China market.
  • End of subsidies and the rise of new purchase plans. Apple’s management emphasized the subsidies ending in many developed markets did impact sales. This has been going on in the US for some time, but US carriers also offer payment plans where many other countries do not. This is a reason why Apple is moving aggressively to bring their iPhone trade-in program and payment plans to as many countries possible as fast as possible is critical for them to stabilize annual iPhone sales.
  • ~900 million iPhones. I wanted to emphasize this number again because additional Apple commentary highlights of that 900 million installed base, 75 million came in the last 12 months alone. Doing some rough math on this given new customer rates I’ve seen by quarter suggests that Apple is adding around ~36-40 million new iPhone customers every year.
  • Apple’s base seems hungry for new services. With the consistent growth in Apple first-party services, it seems their bullishness for the services business is driven by a hunger for new services by their customer base. This bodes well for a video service, news service, and any other kind of service Apple is looking to release over the next few years. Apple’s services business will likely pass Facebook’s at some point in the next few years.
  • Non iPhone business growth ALMOST off-set the iPhone decline. Apple’s revenue decline was only 5%. Which given all that is happening and the challenge of China (Apple’s second largest market) being responsible for all the iPhone decline is quite remarkable. The growth of other businesses nearly off-set the decline in the iPhone business. Which means, once the iPhone business stabilizes, we should see an overall return to growth of Apple’s business as a whole. I’ve been a big advocate to pay attention to top line revenue growth not just the growth of decline of a single business. Looking at top-line revenue growth and growth potential is the more important metric.

I remain convinced stability will come to the iPhone business by the end of 2019. Given the business fundamentals and dynamics of Apple’s other businesses where there is still a long road to growth, like services and wearables, it seems logical Apple’s steady business growth is likely. Apple may not be the hyper-growth company they once were, perhaps they are a value stock, but either way, I don’t think Apple has peaked, even though iPhone has peaked.

I’ve written many times before, and Apple is now on new ground. The cash machine they rode for over a decade to become one of the most profitable companies in business history is no longer the growth machine for their future. Apple may still have some tricks up their sleeve, as their culture of innovation are the roots the Apple Tree is sustained upon, and they run deep. We may still see the next iPhone like growth lever for Apple, or we may not. Regardless, Apple remains a very healthy company with a healthy and vibrant user base to continue to fuel their future.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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