Apple: One Quarter Doesn't Make A Difference

| About: Apple Inc. (AAPL)

Summary

Can iPhone selling prices overcome multiple headwinds?

Is the upgrade program faring well?

iPad accessory sales can really mitigate unit sales declines.

On Tuesday afternoon, Apple (NASDAQ:AAPL) will release its fiscal first quarter results. While many will look at one data point or another to determine the company's success, it is important to remember that one quarter will not make or break the technology giant. While headline numbers may move the stock in the short term, it's the data behind those numbers that are key to Apple's long-term success.

When looking at the iPhone, my key item to watch is average selling prices, which topped $687 in the year ago period. Apple has tried to push users up the storage capacity ladder to boost selling prices by offering an inferior base model. International prices also have soared to combat the issue of currencies, while higher sales of older models (primarily the 6 line) would offset any gains. If too many customers were not buying the 6s line, then Apple needs to make sure that future refreshes contain significant upgrades. Otherwise, consumers will trade down to cheaper models. When you are selling roughly 225 million phones annually, a decline of about 1.5% in ASP (roughly $10) can impact yearly revenues by $2.25 billion, or about 1% of the company's annual total. With the iPhone being high margin, lower revenues mean lower gross profits and earnings per share as well.

I'll also be looking for data on how many iPhone customers have opted for the new upgrade program, which could reduce the length of the phone's replacement cycle. In the US, reducing the average replacement time by 25% could mean tens of millions of extra iPhone sales per year. If the plan has been successful, will it be expanded when Apple is expected to launch its smaller phone sometime in March?

The upgrade plan changes Apple's revenue stream from upfront payments to more of a subscription based model. For instance, the iPhone 6s starts for $649, or $32.45 per month with the upgrade plan. To think about the difference, think about Amazon's (NASDAQ:AMZN) Prime service where you pay an annual fee, vs. Netflix's (NASDAQ:NFLX) monthly charge. With the upgrade plan, Apple may be able to increase overall revenues, because the consumer that upgrades pays $390 over the first year, and then Apple can resell the device. On the flip side, someone who waits two years to upgrade would pay almost $780 for the phone. While Apple would recognize the revenues over a longer time period, you're talking about a $130 difference over two years, or roughly 20%.

This is a very important time for the iPad. Apple is looking to slow the tablet's sales decline, and the Pro model will help boost average selling prices. The Pencil and Smart Keyboard sell for a combined $268, roughly two-thirds the price of the base iPad mini. If the Pro drives accessories sales in a meaningful fashion, total iPad revenues won't nearly decline as much as unit sales do. Apple also needs to refresh the Air, and that could come in the next couple of months. I've suggested in the past that the company consider an iPad upgrade program, and this would especially be true if the iPhone plan works. Apple needs a strong secondary product moving forward to help out in times like this when the iPhone may not be doing extremely well.

I'd also like to hear how Apple Music is doing. We heard an early January report that Apple Music had topped 10 million subscribers. That would mean the service would generate at least $1 billion in annual revenues, so what's the sub number now? Again, the Music service helps transition Apple to more of a subscription company, allowing quarterly results to be a little more smoother. Keeping users in the Apple ecosystem and away from competitors like Spotify is one goal of Apple Music.

When Apple reports on Tuesday, everyone will focus on the headlines, which will move the stock for now. But for those looking at the long term, look at items like the iPhone upgrade plan. This is key to driving future iPhone sales, and a successful program could lead to a similar program for the iPad. For those looking for continued dividend raises and share buybacks, one quarterly report won't make a tremendous difference. The long-term story will.

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