Smartphones return to growth, but only Samsung and Huawei benefit

Apple’s quarterly results showed its continuing transition to being a services-led company, as growth in the smartphone market slows. This will bring it into conflict with Amazon and Google even more directly than in the mobile space, though the latest area where the search giant is taking on Apple is actually in a hardware category, wearables.

Here, Google is to pay $2.1bn for Fitbit, a veteran of the tracker and smartwatch markets. Fitbit’s Versa family of watches has been squeezed this year by the growth of Apple Watch, but it has robust technology, which may be the foundation of a future Google Pixel Watch.  Although plenty of watch makers use Google software, the search firm has not produced its own hardware, but may want a product on which it can showcase all its capabilities, as it does with the Pixel smartphone and Chromebook. It could also tap into Fitbit’s operating system and its engineering team to improve its own Wear OS, fitness tracking abilities, and user interface.

That could set it head-to-head with Apple, which has been marketing its own smartwatch aggressively as the Christmas shopping run-up starts. Apple needs new sources of revenue as it remains over-reliant on the iPhone, which has falling market share in a segment with slow to non-existent growth. That may be reversed, temporarily at least, when 5G iPhones make their debut next year, but for now, the 5G early movers – Samsung and Huawei – are snapping up any growth that exists in this sector.

According to the latest quarterly figures from Strategy Analytics, smartphone shipments did return to growth in the third quarter, after two years of decline. The quarter saw 366m smartphones shipped worldwide, up 2% year-on-year, but only Samsung and Huawei enjoyed their own shipments uptick – up 8% for the Korean market leader ad 29% for the Chinese runner-up (which could be on track to overtake Samsung in the coming quarters, having doubled its global share over the past three years).

Huawei’s growth has been largely at the expense of more minor players like Sony, HTC and Alcatel, though it has also overtaken Apple and several other Chinese players such as ZTE and Xiaomi.

“Samsung shipped 78.2m smartphones worldwide in Q3 2019, jumping 8% annually from 72.3m units in Q3 2018,” said Neil Mawston of Strategy Analytics. “Samsung has lifted its global smartphone marketshare from 20% to 21% in the past year. Strong sales of the premium Galaxy Note 10 and mass market A Series models boosted Samsung’s smartphone shipments and profit during the quarter.”

He said that Huawei “once again surprised everyone and grew its global smartphone shipments by an impressive 29% … to 66.7m in Q3 2019.” Its market share has risen from 14% a year ago to 18% despite some western operators steering clear of its new 5G models because of the bar on it using Google services on its Android platform. Those uncertainties meant that the Chinese vendor actually saw its shipments fall by about 4m units outside China, but this was offset by an increase of 16.5m units in China itself.

plausibility. But even if we assume the numbers are legit, Huawei must have made some pretty exceptional business moves to pull them off and we have to question how sustainable they are.

Apple, in third place, shipped 45.6m units in the quarter, down from 46.9m in Q3 2018. It was followed in the league table by three Chinese vendors – Xiaomi, Oppo and Vivo.

That fall in shipments translates into revenue pressures, of course. Announcing its fourth fiscal quarter and full year results, Apple said revenues were up for the quarter (ended September) but down for the full year. Services revenues reached a record of $12.5bn but this was not enough to prevent iPhone decline dragging total sales figures downwards in the year.

“We concluded a groundbreaking fiscal 2019 with our highest Q4 revenue ever, fueled by accelerating growth from services, wearables and iPad,” said CEO Tim Cook in a statement. He also heralded the arrival of the new TV offering, Apple TV+, which came a couple of days after the results announcement.

The growth is in content and services, from music to payments – Apple Pay’s transaction volume reportedly overtook that of PayPal in the quarter, while Apple is tying its various offerings together to create a new generation of its traditional walled garden – tied by a common user interface, security credentials and billing, but focused on cloud, streaming and transactions, not just apps and downloads. For instance, Apple is now offering interest-free financing of new iPhones through its own credit card, taking handset financing business away from the operators, and looking more Amazon-like in its bid to control every aspect of a user’s spending and leisure.

Overall, Apple reported revenue of $64bn for the quarter, up 2% year-on-year, and earnings per diluted share of $3.03, up 4%. About 60% of revenue came from outside the USA, with Europe and Greater China being the biggest international regions, though revenues in all three of the big regions was down year-on-year in the quarter. For the year, revenues were down to $260.1bn, from $265.6bn a year earlier, and while Americas sales were up, those in Europe fell, and there was a sharp drop in Greater China, from $51.9bn in 2018 to $43.7bn this year.

In the quarter, iPhone sales were down from $36.75bn to $33.4bn, despite three new models, but there was growth in iPad, wearables and services.

For its fiscal 2020 first quarter, Apple projects revenue of $85.5bn to $89.5bn, gross margin of 37.5% to 38.5%, and operating expenses between $9.6bn and $9.8bn.

Over at Google, the company contributed $7bn, or $10.12 per share, in earnings to its parent group, Alphabet. Its third quarter sales were up 20% to $40.5bn. However, Wall Street analysts said that earnings were short of the $8.7bn expected and were down on the year-ago figure because of increased capex in headquarters and cloud data centers. And its workforce has increased from 94,318 to 114,096 over the past year.

“I am extremely pleased with the progress we made across the board in the third quarter, from our recent advancements in search and quantum computing to our strong revenue growth driven by mobile search, YouTube and Cloud,” said Google CEO Sundar Pichai in a statement.