Ahead of Apple's (NASDAQ: AAPL) Feb. 1 earnings report, both The Wall Street Journal and Nikkei Asian Review were out with reports claiming that Apple had slashed its iPhone X production plans for the first calendar quarter of 2018 by about 50% thanks to weaker-than-expected demand for the device.
Although Apple reported better-than-expected revenue for its first quarter of its fiscal year 2018, the company's outlook for the second fiscal quarter of the year came in significantly below Wall Street's expectations.
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Falling short of analyst expectations is not enough evidence to say that the iPhone X is performing worse than Apple anticipated -- analysts estimates are notoriously unreliable.
However, if we dig deeper into statements made by Apple CFO Luca Maestri, it becomes painfully obvious that iPhone X demand didn't sustain as Apple seemed to expect.
Assembling the pieces
Maestri, in a rare move, provided specific guidance for Apple's iPhone business for the second quarter of 2018, saying that management expects iPhone revenue to grow by at least 10% year over year. He also explained that the company anticipates year over year iPhone sell-through growth in Q2 to be up compared to what it was during Apple's most recently reported quarter.
That doesn't sound too bad, right?
Unfortunately, Maestri said that Apple expects to reduce the channel inventory levels of the company's latest iPhone models (iPhone 8, iPhone 8 Plus, and iPhone X) in the current quarter.
That decision, which Maestri explained as a typical move with iPhones, will lead to a quarter-over-quarter decline in iPhone average selling prices during the Q2 2018 because the new iPhones are expected to make up a smaller portion of shipments than they did during the previous quarter, which also included the holiday sales season.
Another thing that's important to observe: Maestri said that because Apple's newest iPhone models carry higher average selling prices than previous models, the sequential decline in average selling prices (and therefore revenue) is more pronounced than usual.
So, what conclusions can we draw from this commentary?
The bigger picture
The key to understanding what's going on here is remembering that the iPhone X didn't begin selling to customers until Nov. 2, about a month and a half after Apple began selling the iPhone 8 and iPhone 8 Plus.
It's natural to expect that sales of the iPhone 8 and iPhone 8 Plus would fall off during Apple's second fiscal quarter -- they have been available to customers for an entire quarter and it's reasonable to expect demand to fall off after the initial surge.
The problem is the iPhone X was available for only about two-thirds of Apple's most recent fiscal quarter and it doesn't seem that any demand for it was pushed out to the following quarter. What this suggests is that customer enthusiasm for the iPhone X fizzled out more quickly than it traditionally has for new models in previous product cycles.
Additionally, the expected sequential decline in iPhone revenue isn't just in line with where it was in previous years -- it's expected to be worse. Since the iPhone 8 and iPhone 8 Plus are priced roughly in-line with their predecessors, it would seem that the iPhone X is seeing the largest quarter-over-quarter shipment reduction since it's the model with the unusually high price tag.
It's unlikely that Apple expected demand for the iPhone X to fade after just two-thirds of a quarter, especially given how much the company seems to believe in the value of the features that it added to the iPhone X.
Which means it's time to face reality: Apple likely thought that the iPhone X would have more staying power in the market than it's ultimately proving to have, but when it became clear that wasn't the case, the company cut back production.
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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.