Technology

iPhone X: Nomura Sees ‘Signs Of Trouble’, Services Business Comes To Rescue

Apple iPhone X Piper Jaffray Nomura
Image Source: Apple.com (screenshot)

Wall Street analysts have been painting a gloomy picture of the iPhone X sales for months. Most analysts have reduced their estimates for 2018 iPhone sales due to lukewarm demand for the iPhone X. Back in January, KGI Securities analyst Ming-Chi Kuo told investors that Apple had asked its suppliers to cut iPhone X production by as much as 50%. Now analysts at Nomura have reminded clients that the iPhone X sales were “flagging.”

Apple CEO Tim Cook told investors during a conference call that the anniversary iPhone sales “surpassed our expectations.” It helped Apple post record revenues during the holiday quarter and increase the iPhone’s average selling price (ASP) to $796. Cook claimed the iPhone X had outsold the iPhone 8 and 8 Plus in every week since its launch. However, its sales have fallen dramatically in the current quarter.

The iPhone X is Apple’s first smartphone to sport a 5.8-inch bezel-less OLED display with a top cutout. It has a TrueDepth camera system that supports Face ID and Animoji features. Though the notch was a design compromise, the iPhone X has inspired dozens of Android vendors to launch phones with similar top cutouts. Google has also added native support for the notch in its Android P operating system.

Nomura Instinet analyst Jeffrey Kvaal wrote in a research note (via Business Insider) that Apple would report iPhone sales below expectations this year as consumers are unwilling to buy expensive smartphones. Supply chain checks suggest “little improvement in iPhone demand in 2018,” said Kvaal. There are also “further signs of trouble” in the premium segment. Nomura believes price is the key factor hurting the premium smartphone sales.

Nomura pointed out that AT&T’s buy one, get one (BOGO) promotion for the iPhone X didn’t receive a good response, and the carrier had to retract it after two weeks. Reports from South Korea also suggest that pre-orders for Samsung’s Galaxy S9 have been 30% lower than the Galaxy S8. It’s a clear indication that the smartphone ASPs have been “bumping up against their upper limit.” The market will “no longer tolerate rising ASPs.”

Nomura analysts have lowered their iPhone X sales forecast for the January-March quarter from 13-18 million units to 8-12 million units. For the fiscal year 2018, the research firm reduced their total iPhone sales estimate from 226 million to 221 million units. Nomura has a Neutral rating on the stock with $175 price target.

Meanwhile, Longbow Research analysts Shawn Harrison and Gausia Chowdhury told clients that the iPhone X “didn’t sell well” during the holiday season. The January-March quarter orders have also been lower than expected. Though the higher price of the iPhone X was able to offset the poor sales during December quarter, the average selling price is expected to come down in the March quarter due to poor iPhone X sales.

Wall Street analysts believe that consumers are holding on to their current iPhones for longer. If used carefully, the iPhone 7 and 7 Plus could last up to four years. And the iOS experience is largely the same on most iPhone models. A large number of people looking to upgrade seem to be opting for refurbished iPhones. Jeffrey Kvaal added that the average upgrade rate to the “new” iPhones in December 2017 quarter was just 7.6%, down from 10.8%, 8.8%, and 8.4% in the prior three years.

A survey conducted by Piper Jaffray tried to look into why existing iPhone users didn’t upgrade to the iPhone X. Piper Jaffray surveyed 1,500 existing iPhone users who didn’t upgrade to the 2017 flagship models. About 44% participants said they didn’t upgrade because they were happy with their current iPhones. Another 31% told Piper Jaffray that the iPhone X was too expensive for them. About 7% people didn’t upgrade because the iPhone X’s 5.8-inch display wasn’t large enough for them. The remaining 17% said they didn’t upgrade “for another reason.”

While the iPhone X sales have been disappointing, Apple’s services business is booming. RBC Capital Markets analyst Amit Daryanani told clients that the services business could offset the weak demand for the iPhone X. Daryanani expects services revenue to jump 20% this year, driven by the growth in iOS install base and increased monetization of the install base.

Apple aims to increase its services revenue to $50 billion by 2020, which looks achievable, says Daryanani. The combined revenue from Apple Music, App Store, iTunes, Apple Pay, iCloud, AppleCare, and licensing is around $30 billion.

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