Apple (NASDAQ: AAPL) finally unveiled its long-awaited iPhone X, with a hefty price tag and a release date that's a bit later than many investors were anticipating.
In this Industry Focus: Tech podcast segment, host Dylan Lewis and senior tech specialist Evan Niu look at how Apple's release of the iPhone 8 and X will affect the company's bottom line and average selling price, how the delays in the iPhone X shipments will impact the next few quarters (and why investors shouldn't be too worried about them), what numbers investors should watch, what the iPhone X will mean for Apple's margins, and more.
A full transcript follows the video.
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This video was recorded on Sept. 15, 2017.
Dylan Lewis: And looking at some of these product release dates, I think you can only naturally go to, how is this going to impact Apple's financials? It seems like the phone might be in people's hands a little bit earlier than they actually are going to be. And the company reported pretty interesting guidance coming into next quarter. I believe it was something to the tune of 4-10% year over year growth that they would be looking at for the fiscal fourth quarter. I think a lot of people took that to mean that the newest iPhone model would ship during that period. It doesn't seem like that's going to happen.
Evan Niu: Right, the guidance was really strong last month. We talked about this before when we did the earnings show, but it really suggested that the iPhone X would launch on time, because they were forecasting $49-52 billion in sales, which, at the high end would represent an all-time record for the September quarter. So, that's a very bullish outlook, and you and I talked about it, it made it sound like the 10 would be on time. And here we are, and they say that the 10 is going to be delayed until November. So, my theory is -- we just talked about the Finisar delays -- my theory is that when Apple issued guidance on Aug. 1st, these delays weren't there, so they were expecting a timely launch for the iPhone X. But things change within a matter of weeks. I think these delays came after that guidance. In my mind, I think Apple was caught off-guard by these delays, it thought it was going to be on time, issued the really strong guidance. It turns out the things were delayed. So, I think investors should be very cognizant that there's a real risk here that they're going to miss their guidance on this fiscal fourth quarter, which closes in a couple of weeks now. Because I don't know how they're going to hit that level of guidance on just the iPhone 8 and 8 Plus, which in my mind are not that great of updates.
Lewis: And that sounds bad, and I think that's the kind of thing that creates some volatility with the company's short-term. But in my view, these types of issues really just mean that phones are going to ship at different times. I don't think it's something that's going to really meaningfully impact total volume. It's just that we're going to see a pretty strong fiscal Q1 for them with the product actually shipping in the beginning of November. And I think you're going to see a pretty strong fiscal Q2, which is the calendar Q1 of 2018, because a lot of that demand is going to bleed into that quarter.
Niu: I definitely agree. On one hand, while there's a risk that they might miss on Q4, like we talked about, Apple customers are very loyal. They're willing to wait. And if it's just a matter of shifting the sale from one quarter to the next, and it's not a lost sale, that person isn't going out and buying a Samsung or an Android, it's really a short-term nature, just shifting it from one quarter to the next, it doesn't impact the long-term story. It's just kind of a quarterly bump in the road. Which, if anything, if the stock reacts negatively, it might be an opportunity to add more or buy back in. I don't think these sales are going anywhere, they're just being shifted a little bit. Ultimately, even if there is some risk there, I think it's pretty modest in the long-term. It's really just a short-term risk.
Lewis: Two other numbers that I think, looking at these products, you can start to wonder which way they might move, is the average selling price, which is one of the core numbers we look up for the iPhone segment, given that it makes up such a large portion of Apple's revenue. And you see that sticker price of $999 for the base model, with the larger storage it's obviously going to cost more. I think it's reasonable to say, once these start shipping, iPhone ASPs are probably going to go up.
Niu: Yeah, I would definitely expect that. I do think they're going to hit new records in terms of this metric. They did lower the price of the cheapest iPhone SE from $400 to $350. But the product is still the same, so it's not like it's going to be a huge sales driver. And with them bumping up the prices on this 8, 8 Plus, and 10, at the highest, 10 goes to $1150 for a 256 gig for an iPhone X. $1150 is like the price of a Mac, which is kind of crazy. So, yeah, I am going to expect to see some pretty nice gains on the average selling prices. It's probably going to break around $700. Right now, the current record is $695. I think we have some opportunity for some upside, between $700-750.
Lewis: And with that price hike, I think it's also natural to wonder what might happen to margins. Apple has this tendency for a device maker to make unusually high margins. Looking at a $1,000 phone, I don't know that they're going to be meaningfully improving their margins, because so much is going into the iPhone X to power it with all this new functionality that we've been talking about.
Niu: Right. Generally speaking, any time Apple introduces these new products, any brand new products you have starts at the height of the cost curve in terms of your R&D costs that you've capitalized and including into their manufacturing expenses, because when you have these new products, you usually have a new manufacturing processes and manufacturing infrastructure. It's a huge upfront cost, and before that can be spread out over time, when you're at the beginning of a new product line, your costs are really high. That's before we even get into the actual component costs, which as you touched on are also going up. The OLED panel itself, display panels are usually the most expensive component of any product, and in this case, the OLED panel is estimated at $120-130, compared to last year's LCD panels, which were about $50. So, we're talking about a pretty big increase in panel cost, $70-75. To put that into perspective, last year's iPhone 7 build materials, a third-party estimate was about $220 for the component costs. So, if we're coming off of a base of $220, used to be what these things cost, and now just one component alone increases that by $75, that's a huge increase. And Apple has its own margin profile to maintain, they want to add their margin on top, so that's where you get these big price increases. As far as the TrueDepth cameras, those VCSEL sensors are pretty cheap, they're about $5 worth of content in these phones, those are the estimates I've been reading. So, those aren't huge cost drivers, but I think the flip side is, a lot of that is very software intensive, they have to invest very heavily on the software engineering side to make this feature work, which adds to their overall costs.