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iPhone business continues to increase in value for Apple

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Apple depends on iPhone increase

Previously in this series, we explored how the success of the iPhone 6 and the iPhone Plus helped Apple (AAPL) exceed analysts’ estimates with regards to revenue and earnings per share. Apple sold a record 74.5 million iPhones in the quarter ending in December 2014, representing a growth of 46% over the same quarter last year. The iPhone’s year-over-year revenue growth rate was 57% in the December quarter.

More importantly, the iPhone segment now contributes more than two-thirds of Apple’s overall revenues. As the chart below shows, the iPhone contributed 68% to Apple’s revenues in fiscal 1Q15, up from 56% in fiscal 1Q14.

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iPhone’s growing contribution to Apple’s bottom line

With respect to contribution to revenues, 68% is a big number. However, the iPhone’s value to Apple becomes even more significant when we consider the contribution of its margins. According to Apple’s filings, the average selling price for an iPhone in fiscal 1Q15 was $687. According to a report from IHS Technology (IHS), the estimated building cost for the iPhone 6 and the iPhone Plus is between $200 and $263. Taking the midpoint of material cost, the gross margins for the iPhone 6 and the iPhone Plus was about 66%. Apple’s overall gross margins in fiscal 1Q15 was about 40%.

Clearly, the iPhone’s contribution toward Apple’s bottom line exceeds its revenue contribution of 68%. The iPhone’s success in the December quarter was the sole reason why Apple’s stock increased from $109 to about $120 just before the earnings announcement. If you are bullish about Apple’s stock, you could gain exposure of the Technology Select Sector SPDR ETF (XLK) and the PowerShares QQQ Trust, Series 1 ETF (QQQ), which have 16.1% and 13.5% weightage in Apple, respectively.

Looking ahead

However, this also indicates that Apple now depends hugely on the continued growth of its iPhone business, which is a risk in itself. As discussed in the previous article, Apple overtook Google’s (GOOG)(GOOGL) Android in the US smartphone operating system market in December. However, it will need to sustain this growth going forward.

Let’s analyze the prospects of Apple’s iPhone business in the next part of this series.

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