Apple Inc.’s iPhone sales completed a year of declines in a Wednesday earnings report, but the drop may have been much worse if it were not for a seemingly booming trade-in program.
Apple executives said in a conference call Wednesday that trade-in volume quintupled from the year before in the fiscal fourth quarter, after divulging the same level of growth in July. While iPhone revenue still declined 10.3% from the year before — the fourth consecutive quarter of declines — it came in ahead of expectations and helped Apple top its own sales forecast.
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Apple’s trade-in offer allows customers to sell an older iPhone back to Apple and use the proceeds to get a new iPhone cheaper, a must for many consumers after Apple jacked up their prices two years ago. An increase in trade-in activity suggests more upgrades are happening, which Apple must encourage to keep iPhone revenue steady and avoid down periods.
One of the biggest factors in the current boom in trade-ins is likely from China, where Apple established the program in Apple retail stores this year while also adjusting its pricing. The effects were seen immediately: In the first half of the fiscal year, Apple’s sales in greater China fell 24.5%, but that decline was cut to 3.2% in the second half of the fiscal year after the trade-in program and pricing changes were fully implemented.
“The things that we’ve done from a pricing and monthly payments point of view and trade-in, getting the trade-in program up and running, all of these things have moved the dial,” Chief Executive Tim Cook said in response to a question about Apple’s performance in China on Wednesday’s conference call.
After lowering some prices with the new iPhone 11 family of smartphones, which seem to be popular, the confluence could lead to a huge round of upgrades in China despite tariff fears. Wedbush analyst Daniel Ives told MarketWatch that trade-ins overall have grown to 15% to 20% of upgrade activity from 5% to 7% a year ago. In China, he believes there are 60 million to 70 million iPhones that could stand an upgrade, and iPhone demand is tracking 15% to 20% higher than expectations.
“For Apple, the No. 1 focus is putting a fence around their install base, and what you’re seeing with the trade-ins is that it’s driving significant upgrade opportunity,” Ives said in a brief phone interview Wednesday afternoon, adding that “pricing was just pure genius in China.”
The concern with the trade-in program has been a potential decline in Apple’s obese margins on the iPhone, and gross margin did decline to 37.81% in the just-completed fiscal year from 38.37% the year before. Apple will take the slight decline in iPhone gross margin in exchange for greater revenue, however, especially with a growing services business that has even fatter margins.
“The bears were hanging their hat on margins, but now when you look at these numbers, the bears are going into hibernation,” said Ives, who has an outperform ratings and $265 price target on Apple stock.
Apple’s revenue and profit declined in the 2019 fiscal year, but not by as much as expected before Wednesday’s fourth-quarter numbers. To turn that trajectory around, with Apple’s services revenue hitting records and continued growth from wearables such as Airpods and Apple Watch, the company really just needs to maintain iPhone revenue while not destroying profit margins. Judging by Wednesday’s results, trade-ins have Apple on the path to accomplishing that.