Apple Q2 Numbers. With A Twist. Or Two.
by Jean-Louis Gassée
Today we focus on Apple’s latest quarterly numbers and the market’s reaction, and we compare Mac and iPad performance to Microsoft’s Surface devices.
On April 28, Apple released its progress report for the first half of its fiscal year (Apple’s FY begins in October). The bottom line numbers are impressive:
Total quarterly revenue of close to $90B is an all-time record, 54% more than the same quarter last year; operating income more than doubled (+119%); the $201B revenue across the previous six months is close to the $220B achieved for the entire 2020 fiscal year.
The remarkable numbers are the result of strong product performance: +66% for iPhones, +70% for Macs (an all-time $9.1B revenue record), and an even stronger +79% for iPads. In the earnings call, in which CEO Tim Cook and CFO Luca Maestri answer — or try not to answer — analysts’ questions, Maestri tells us that “around half of the customers purchasing Mac and iPad during the quarter [were] new to that product”. In other words, it’s not just the faithful buying more product, those numbers show a pattern of market conquest.
Given these numbers, stock analysts upgraded their AAPL price targets to an average of $162 per share. Even the one lone doubter moved his target from $83 to $130…
Good numbers, upgraded targets…and AAPL immediately dropped. This led frustrated observers to complain: No Good Quarter Goes Unpunished! How can the share price fall when the numbers are so good?
It’s not an unnatural twist of fate. Traders — not to be confused with long-term investors — disregard the immediate numbers and focus on the future. In Apple’s case, they listen to what Apple execs have to say. In the earnings call Luca Maestri volunteered this guidance [as always, edits and emphasis mine]:
We expect our June quarter revenue to grow strong double digits year-over-year. However, we believe that the sequential revenue decline from the March quarter to the June quarter will be greater than in prior years for two reasons. First, keep in mind that due to the later launch timing and strong demand, iPhone only achieved supply-demand balance during the March quarter. This will cause a steeper sequential decline than usual. Second, we believe supply constraints will have a revenue impact of $3 billion to $4 billion in the June quarter.
An analyst on the call asked how steep a fall one should expect. Maestri declined to elaborate. The $3B to $4B revenue impact due to parts shortages is unambiguous. He offered that the June quarter would show ”revenue growth in strong double digits” but may not be as rosy as the first half of FY2021, but it’s far from bleak. Nothing strange, here: traders’ cautious outlook merely mirroring Apple management’s.
Now, for a more interesting twist, let’s look at Microsoft and compare them to Apple's. Overall, the company’s performance for the March quarter was good. I’ve extracted two highlights from the company’s slide presentation [The“CC” notation means ”Constant Currency”, a correction aimed at removing the effect of favorable currency fluctuation that we can ignore]:
At 50% growth Microsoft’s cloud business surpasses Amazon Web Services' 32%. But the Surface numbers are a feeble +12%. Compared to the Mac and iPad, 12% is remarkably low growth. The lower growth of the Surface business might have been, in part, caused by the closing of Microsoft stores, a decision circularly caused by the low volume of devices, a negative feedback loop that must raise questions about the future of Surface devices.
Two Surface devices, the Surface Duo and the Surface Neo, appear to have problems of their own.
The Duo device is a dual-screen hinged machine that runs both Android apps and the Microsoft Office 365 suite. This is an ambitious product, the brainchild of the company’s Chief Product Officer Panos Panay (whose Wikipedia bio is the sparsest I’ve ever seen for such an important and long-serving executive). Unfortunately, Surface Duo reviews have been less than enthusiastic. As an example, The Verge review starts with “Microsoft Surface Duo Review: Double Troubles”, continues with “All the right ideas — but spoiled by buggy software and a bad camera” and concludes with a recommendation against buying it. Other reviews are similarly tepid. In real life, it doesn’t appear to be flying off the shelves. My local Best Buy doesn’t have one, and the Microsoft Online store offers it deep down at the 21st position on its page.
Then we have the Surface Neo, also a dual screen hinged device, horizontally this time. Announced early October 2019 with the Duo, to the (rote) ominous accents of “… and it could be bad news for Apple”, the Neo was supposed to run Windows 10X, a special dual-screen version of Windows 10, processor unspecified.
Now, we learn that Windows 10X is postponed sine die, officially to focus resources on the betterment of Windows 10.
Microsoft originally positioned its Surface devices effort as “design points”, incarnating ideas that the rest of the PC industry would then follow. In that sense, it’s been successful with its hybrid PC/tablet machines. Companies such as Dell, HP, Lenovo, and others offer hybrid devices as part of their product lines. Every other Surface effort has either failed to matter, or to materialize
One has to wonder about the future of Microsoft devices, especially at a time when, with the ARM-powered Surface Pro X, the company id supposed to take the lead in the PC world’s transition from x86 to ARM.
— JLG@mondaynote.com
