Apple: Quarterly Numbers With A Perspective
by Jean-Louis Gassée
Apple’s latest quarterly numbers are good, Tim Cook and CFO Luca Maestri profess credible optimism…and yet Wall Street “punishes” Apple, sending shares down by more than 5%. Why?
This past Thursday, Apple released its latest July to September quarterly numbers and concluded its 2020 Fiscal Year. But for two connected exceptions, Greater China and iPhone sales, the Q4 numbers were solid and, in places, historic:
(You can find more Q4 details here, as well as a Seeking Alpha transcript of the Earnings Conference Call. And for the dedicated reader of SEC filings, you have Apple’s oven-fresh 10-K report for the 2020 Fiscal year.)
During the earnings conference call, Apple CEO Tim Cook and CFO Luca Maestri reassured analysts that the $7B decrease in iPhone sales compared to Q4 2019 was due to challenges caused by the pandemic. In past years, iPhones were announced and started shipping in September, thus contributing to Q4 revenue. This year, the pandemic disrupted Apple’s vaunted supply chain and the iPhone 12 and 12 Pro only began shipping last week. The extremities of this year’s line up, the mini and the Pro Max, won’t start shipping until mid-November.
Nonetheless, Cook and Maestri, who are known for their carefully weighed public utterances, both professed optimism about the current quarter, citing positive reviews of the iPhone 12 and 12 Pro. Cook was also upbeat about China:
“Greater China is the region that was most heavily impacted by the absence of the new iPhones during the September quarter, still we beat our internal expectations in the region, growing non-iPhone revenue strong double digits and iPhone customer demand grew mid-September.”
On an indisputably brighter note, Mac sales reached an historic high of $9B for the quarter. What makes this number particularly interesting is that Apple has made it clear that the Intel x86-based Mac will soon be superseded by new machines powered by faster, more efficient (and home-grown) Apple Silicon CPUs. Despite the promise of an improved product on the horizon, Mac sales grew 29% compared to Q4 2019. The new work-from-home environment doubtlessly contributed to the strong Mac number, as did the 93% Customer Satisfaction rating.
The iPad, whose revenue grew 46% for the quarter, has an even higher Customer Satisfaction rating: 95%. Apple doesn’t provide unit numbers for its devices, but if we assume an average price of $500, the $23.7B revenue for the iPad implies a unit volume of more than 47M for FY 2020.
How does this compare to the competition? Since Google’s Chromebook is often seen as an inexpensive iPad that’s well-suited to education and work-from-home uses, I expected to see at least a passing mention in Alphabet’s October 29th Earnings Call…but there was none. Turning to Statista, its 2020 Chromebook sales estimate for 2020 is 20M units — less than half of the iPad’s volume.
The hard to parse “Wearables, Home and Accessories” includes everything from HomePods, AirPods, and Watches, to iPhone cases and Watch bands. Revenue in this category exceeded the iPad, although we should note that the majority of Apple Watches sold in the quarter were to new users.
While I skipped last year’s Watch, a personal interest in the blood oxygen measurement led me to trade in my two-year-old device (a credit of $155) for this year’s model. My experience is limited, but the oximeter works quite well, and battery life seems to have improved. The trade-in-by-mail experience worked very smoothly, something I’ll keep in mind when the time comes to upgrade to the iPhone 12 Pro Max, which I covet for its promise of better photography.
The $14.5B revenue generated by the Services category almost matches the sum of Mac and iPad sales ($15.8B), and boasts a high 67% Gross Margin. Offered as an evolving array of Apple One bundles, the category is a hodgepodge of iCloud storage (that this user thinks needs improvement), Music (formerly iTunes, and its time-honored bugs), Apple Pay and Apple Card, games, News, TV series and movies, with Fitness content coming soon. Execs say that the Services subscriber number will reach 600M before the end of the year.
Some critics see the Services category as a form of rent-seeking, a way to exploit defenseless users detained in Apple’s Walled Garden. Even if I’m not completely sold on the array of services, I object to the attitude of the critics who posture intellectual superiority to the “poor”, ill-informed Apple users.
All in all, it’s been an impressive quarter and year, particularly in these challenging times. And yet, the day after Apple announced its solid numbers, AAPL shares plunged by more than 5%. Some say it’s the “buy on rumors, sell on news” effect; indeed, the stock did go up right before the earnings release and then fell immediately after.
Another interpretation is that a company doesn’t get credit for its results — what’s done is done — but gets rewarded (share price-wise) for what investors speculators think it will do. This is why earnings discussions (almost) always include guidance, a carefully worded forecast that offers no guaranties of future outcomes but guides analysts as they weigh the company’s future performance. Although Cook and Maestri offered no explicit revenue guidance, they took great pains to exude careful and credible optimism.
Given the company’s solid numbers and upbeat declarations, why is Wall Street down on Apple?
Horace Dediu, a uniquely skilled analyst, historian, and (sometimes) celebrant of the tech scene, offered this illuminating tweet:
None of these other companies had challenges comparable to the delay in Apple’s iPhone shipments. Facebook experiences no known seasonality; Amazon can look forward to a strong Holiday shopping season; Netflix is doing fine, as is Tesla, whose prospects were discussed last week. Something else is at work. Perhaps Wall Street doesn’t like the uncertainty stemming from the coming election and the potential turbulence surrounding it.
That’s a topic I don’t feel qualified to say much more about.
— JLG@mondaynote.com
