Apple Inc. (NASDAQ:AAPL) surprised investors with higher-than-expected iPhone sales numbers in its most recent earnings report, but exactly what was the main driver of that? There’s plenty of speculation about the catalysts for this upside on Wall Street, any many believe Apple saw strength in its least expensive iPhone 4S because of better competitive strength and the price elasticity offered by the low-end handset.

Apple Inc. AAPL

However, Bernstein analysts Toni Sacconaghi, Jr., Jonathan Cofsky and Eric C. Garfunkel disagree. In a report dated May 19, 2014, they set forth the main drivers they believe were actually behind Apple Inc. (NASDAQ:AAPL)’s iPhone upside. As is often the case with most of the Bernstein analysts we follow, they’ve created some excellent charts illustrating their ideas.

How Apple benefited from iPhone sales

The Bernstein team notes that Apple Inc. (NASDAQ:AAPL) management highlighted strength in emerging markets. Also there was a significant decline in average selling prices quarter over quarter. For these reasons, many analysts and investors believe better sales of the least expensive iPhone 4S drove the upside in iPhone sales. Some suggest that the lower price of the handset enabled Apple to get better competitive traction around the globe, particularly in emerging markets where consumers can’t afford to purchase high-end handsets.

Apple Inc. (NASDAQ:AAPL) reported sales of 43.7 million iPhones during the March quarter, compared to the consensus estimate of around 38 million. The company’s iPhone growth accelerated from 7% in the December quarter to 17% in the March quarter. Based on these numbers, the Bernstein analysts estimate that Apple gained about 250 basis points of market share year over year. To come up with this, they assume Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) sold 31.5 million high-end smartphones and that all other vendors saw flat growth in units year over year.

Why price elasticity may not have been Apple’s driver

The Bernstein analysts see three reasons not to believe that price elasticity was responsible for Apple Inc. (NASDAQ:AAPL)’s upside. First, they saw the overall year over year growth rates for the December and March quarters outside the U.S. seem similar when adjusting for major carrier additions and the early launch of the new iPhone in China during the December quarter.

Second, their pricing checks suggest that Apple Inc. (NASDAQ:AAPL)’s international iPhone prices are higher now than they were in July 2013. The analysts say that’s the last time Apple benefited from price elasticity in emerging markets. And third, they note that Apple said the year over year growth of various iPhone models, including the 5S, 5C and 4S, were similar, coming in at about 20% on a sell-through basis. The analysts note that this indicates that there was no dramatic mix shift toward the iPhone 4S, which would be expected if price elasticity was the main driver of the upside. They broke down average selling prices for the iPhone in July 2013 and May 2014.

Apple iPhone pricing

What did drive Apple’s iPhone upside?

The Bernstein team suggests two other catalysts that they believe were the true drivers behind Apple Inc. (NASDAQ:AAPL)’s upside. First, they say the U.S. market rebounded during the March quarter, coming back from a push-out in upgrade eligibility in December. Second, they say carrier additions played a bigger role in iPhone sales, including additions at prepaid carriers in emerging markets.

The analysts say the U.S. was a major headwind for Apple Inc. (NASDAQ:AAPL)’s iPhone sales during the December quarter. They note that AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) both changed their policies, bumping upgrade eligibility up from 20 months to 24 months. They note that total smartphone activations increased 9% during the March quarter but declined 17% during the December quarter. This means that the smartphone market in the U.S. was significantly stronger during the March quarter, thus benefiting Apple.

Apple US Smartphopne activation

Apple grows thanks to new carriers

The Bernstein analysts also note that Apple Inc. (NASDAQ:AAPL) benefited greatly from the addition of new carriers. They say while total iPhone sales fell about 14% between the December and March quarter, estimated additions from T-Mobile US Inc (NASDAQ:TMUS), China Mobile Ltd. (ADR) (NYSE:CHL) (HKG:0941) and NTT Docomo Inc (ADR) (NYSE:DCM) (TYO:9437) rose year over year, making a material difference in Apple’s growth rate.

In addition, Apple Inc. (NASDAQ:AAPL) noted a number of emerging markets in which it had great growth in both the December and March quarters. The company highlighted Brazil, India and Russia.

Apple iphone unit  growth

The analysts note it’s difficult to say price elasticity didn’t play a role in emerging markets like these. However, they also say that the three countries Apple Inc. (NASDAQ:AAPL) highlighted saw “meaningful” prepaid additions which, in aggregate, may have helped boost iPhone unit sales. The company again began selling the iPhone at two of Russia’s biggest carriers in October and then a third in January. Apple also added one new carrier each in India and Brazil.

What’s next for Apple?

They don’t think Apple Inc. (NASDAQ:AAPL)’s competitive position changed much between the December and March quarters after adjustments were made for carrier additions and the timing of the iPhone launch in China.

Apple iPhone Unit sales

They do see continued opportunities for Apple to use low pricing for the iPhone 5C and 4S to drive growth going forward. However, they note that Apple has already added every major carrier. As a result, they think iPhone growth will decelerate going forward.

Investors look ahead to new products

The Bernstein team continues to see Apple Inc. (NASDAQ:AAPL) as a “trading stock” and maintains their Outperform rating and $615 per share price target on the stock. The analysts believe the company’s strong buyback commitment will boost earnings and help keep shares from pulling back. In addition, they note that Apple stock tends to increase ahead of new product launches. They note that Apple stock outperformed the S&P 500 on both a one and two month basis ahead of the last 6 iPhone introductions.

They also say expectations for new products, namely, the iPhone 6 and the rumored smart watch, will continue to drive interest from investors, especially since they think Apple Inc. (NASDAQ:AAPL) seems to be under-owned by “many large-growth funds.”