Apple's Latest Challenge: Topping Its Own Success

By Daisuke Wakabayashi 

As Apple Inc. prepares to introduce its latest iPhones next week, the company's biggest challenge is one of its making: how to top its own success.

Apple's bigger-screen iPhone 6 and iPhone 6 Plus, introduced a year ago, reignited sales growth for Apple's smartphone, propelled the company to record profits and solidified Apple's standing in China. Apple has been gaining share versus rivals, despite its more expensive offerings. IPhone unit sales grew more than 30% in each of the past three quarters, compared with a year earlier.

Now, comes the hard part. Such growth rates are "mathematically unsustainable," said Toni Sacconaghi, an analyst with Bernstein Research. He forecasts iPhone sales to grow 3% to 237.6 million units in the fiscal year starting October.

"It's highly debatable whether there will be any iPhone growth next year, " said Mr. Sacconaghi. "The market realities will catch up with Apple."

An Apple spokeswoman declined to comment.

One reason: The changes in the newest iPhones won't be as dramatic as last year, when Apple offered larger-screen models for the first time. Apple is expected to unveil the new phones at an event Sept. 9 in San Francisco.

Apple tends to release new iPhones in a "ticktock" cycle--an approach Intel Corp. also uses for its processors. In a "tick" year, Apple introduces a major design change, such as last year's bigger displays. In the following "tock" year, it refines the design and sometimes makes more significant changes to the software.

This is a tock year, when growth typically is more moderate. In the first full quarter after Apple introduced the iPhone 5S in September 2013, iPhone unit sales rose 7%--one of only two quarters since the iPhone's introduction in 2007 when growth fell below 10%.

The new iPhones will have the same screen sizes as last year's models, at 4.7 inches and 5.5 inches, according to people familiar with the matter. Those people said Apple plans to introduce a fourth color--a metallic pink--alongside gray, silver and gold.

The main improvements, according to the people familiar with the matter, are under-the-hood changes such as a faster processor and a sharper camera. They said the phones would feature Apple's Force Touch technology that can distinguish between a light tap and deep press, allowing users to control the device by how hard they push on the screen. That feature is incorporated in Apple's watch and the latest Mac computers.

The iPhone is Apple's most important product, accounting for nearly two-thirds of its revenue, and closely watched by investors.

The results of the past year set a high bar. IPhone revenue grew at its fastest rate in two years, at a time when the rest of the smartphone market was starting to slow.

Apple learned the price of missing outsize expectations in July, when it said fiscal third-quarter iPhone sales rose 35% from the prior year, short of some forecasts. Shares plunged, and are down about 14% since that announcement. On Wednesday, the stock rose 4.3% to $112.34 in 4 p.m. trading.

At the time, Apple Chief Executive Tim Cook said the iPhone still had ample room for growth. He said that only 27% of its customer base had upgraded to the iPhone 6 and 6 Plus, while many others were switching from Android phones.

"We think the phone has a lot of legs to it. I mean, many, many, many years," said Mr. Cook on a July conference call with analysts.

Some analysts agree. Carolina Milanesi of Kantar Worldpanel wrote in a report Wednesday that U.S. smartphone users replace their phones on average every 22 months, suggesting that the vast majority haven't yet considered the larger iPhone 6 or 6 Plus.

For the same reason, Patrick Moorhead, principal analyst at Moor Insights & Strategy, said many consumers will see even subtle improvements as significant because they are upgrading from older models such as the iPhone 5 or 5S.

"While the hype may not be as high, the sales opportunity is just as high," he said.

Write to Daisuke Wakabayashi at [e-mail]

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(END) Dow Jones Newswires

September 02, 2015 17:59 ET (21:59 GMT)

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