The iPhone 7 Plus Will Be Key to Driving iPhone Selling Prices Next Quarter

Apple (NASDAQ: AAPL)experienced a temporary dip in iPhone average selling prices (ASPs) over the summer, largely because of the introduction of the $400 iPhone SE. Heading into the holiday quarter, Apple expects ASPs to jump back, and fulfilling iPhone 7 Plus demand will be the key.

In this clip from Industry Focus: Tech, Motley Fool analysts Dylan Lewis and Evan Niu, CFA, discuss why the iPhone 7 Plus is so important and why it got a $20 price bump.

A full transcript follows the video.

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This podcast was recorded on Oct. 28, 2016.

Dylan Lewis: Let's talk a little bit about what they reportedin terms of numbers. Maybe we'll get intosome of the product discussion a little bit later on -- $46.8 billion inrevenue on the top line,more or less in line with expectations, down from $51.5 billion a year ago. But that is to be expected, we knew that was coming, no surprises there. Earnings per share at $1.67,which was actually slightly abovewhat expectations were. The twobig numbers that people immediatelyfocus on,it seems like Apple delivereda pretty solid quarter.

Evan Niu:Yeah.I think it was right on target. I don't think there were really any big upsides and downside surprises. The way I look at it,this is the most boring quarter of all the seasons,because it's right before theiPhone launched. You get a couple weeksof the new iPhone sales, but generally speaking, Q3 is justnot a super exciting time for consumer electronics companies.

Lewis:Youmentioned the iPhone. We might as well head instraight into the discussion on thatproduct. The company sold 45.5 million iPhones at an average selling price, ASP, of $619. That amounts to about $28 billion in revenue, good for about 60% of Apple's top line. We've seen that trend down a little bit. I think it'sstabilized in the high 50s, low 60s. It isn't quite the two-thirds amount it used to be.

Niu:Yeah. On a trailing-12-month basis, it's still about 63%. It's still pretty far up there. One thing I did notice that was interesting was Apple did notdisclose this whole thing about installed base-related purchasesthat they've been doing for the past three quarters. As we talked about before, there's this effort --in my opinion -- to shift attention away from unit sales. Butthey didn't do that this time, which is weird,like, are they not trying to do that anymore?

Lewis:Yeah, any time youintroduce a new metric, especially a non-GAAP metric, you'reshifting attention somewhere. And for them togo silent on that makes you wonderexactly what's going on there.

Niu:Yeah,it's a weird change of tune. I've been keeping track of this number, and I wasexpecting to plug it into my sheet,and they just didn't have it.

Lewis:One number I thinka lot of people have to be pretty optimistic about is the general trend with ASP. I said $619, that's up from theprevious quarter, and it seems like there's some more upside there.

Niu:Right. Themain thing to remember is that the reason why it was down over the summer wasbecause of the iPhone SE launch, which starts at $400, which was the lowest price point thatApple has ever sold an iPhone directly, even if you factor inhow they bring these older models down by price point every year. The lowest they'd ever gone before was, a three-year-old iPhone would go for $450. Then they came out with the SE, which starts at $400. It was apretty aggressive play to get smaller phones and first-time adopters,with a lower entry price. That put a meaningful impact on ASPs, which was $595 last quarter, which was the lowest it's been in about two years. They did say on the phone, they expect ASPs to climb back up to where they were lastDecember quarter, which, for reference, was $691. So,I think we should start to see that number start to push$700 again, particularly if they can meet iPhone 7 Plus demand, whichthey're having a hard time doing, because the iPhoneisso expensive, they can increase that price by $20compared to last year. The 7 Plus will really push ASPs up, I think.

Lewis:Andpart of the justification with thatincremental $20 on the price point was the camera. That was the major selling point,and that's how management pointed to that decision.

Niu:Yeah. Theyspecifically said it was the camera. They were asked about it, and they were like, "We put a ton ofInnovation into the dual-camera system." I do think that isvery specifically what's the reason for that $20.

Dylan Lewis owns shares of Apple. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.