Here’s a surprise: The holiday quarter, with the new iPhones and AirPods and Services and such - turned out not too shabby for Apple. “…biggest quarter ever,” according to Apple CEO Tim Cook. In PR speak, Apple’s press release on earnings had the CEO saying:
We are thrilled to report Apple’s highest quarterly revenue ever, fueled by strong demand for our iPhone 11 and iPhone 11 Pro models, and all-time records for Services and Wearables…
Though he didn’t say so in the release, on the call Cook said the December-quarter set records not just for revenue, but also for earnings. Revenue for the quarter came in at $91.8 billion, “an increase of 9% from the year-ago quarter,” representing accelerating revenue growth for the third-consecutive quarter. Earnings Per Share came in at $4.99, up 19% from the same quarter a year ago and also representing an all-time record.
Geographically, the CEO says Apple set records in the Americas, Europe, and the rest of Asia Pacific, and saw Greater China return to growth. What was that driven by? iPhone, Wearables, and Services.
Diving into iPhone, revenue for Apple’s communicator came in at $56 billion, up 8% year-over-year. Growth came compliments of the entire line of iPhone 11, with a special shout out to the run-of-the-mill model. iPhone 11 was the best selling iPhone every week of the quarter, according to the CEO, though the three phones in the 11 line made up the top-three iPhones for the quarter. iPhone saw double-digit growth in many developed markets, such as the US, UK, France, Singapore, as well as in emerging markets such as Brazil, Mainland China, India, Thailand, and Turkey. Apple CFO Luca Maestri says customer satisfaction for the iPhone 11 line is clocking in at 98%. Meanwhile, of businesses planning to buy smartphones this quarter, 84% plan to go iPhone.
Turning to Services, Apple’s CEO said revenue reached $12.7 billion - an all-time record, up 17% versus the same quarter a year ago. That was thanks to double digit growth in all five of Apple’s geographic segments. Mad props to Cloud Services, Music, Payment Services, and the App Store Search Ad business - each of which set all-time quarterly records. December-quarter records were also set for the App Store and Apple Care. Cook then did a quick “greatest hits” run-through of Services stuff, noting first the record App Store spend on Day One - 2020. Customers spent $386 million in the App Store on New Year’s Day alone, up 20% from the same day a year earlier. Informative, though not numbers that turned up in the December-quarter, because 1 January fell in the March-quarter. For Apple Pay, revenue and transactions doubled year-over-year, with a run-rate of 15-billion transactions annually. And they’re stoked about Apple Card, which now lets people buy iPhones and pay for them over 24-months. Also, congrats to Apple News for drawing in 100 million readers, to Apple News+ for adding titles, to Apple Arcade for being awesome, to the Apple TV+ series “Little America” for being critically acclaimed, and to the show “The Morning Show” for being nominated for and/or winning several awards.
While Apple’s CEO didn’t focus on Subscriptions, CFO Maestri did. The company has 480 million paid subscriptions running through its system right now, up 120 million from this time last year. Apple had had a stated goal of 500 million by the end of this year. Instead, they think they’ll pass that this quarter, so they’ve upped the 2020 target. They’ve now set a goal of 600 million paid subscriptions by the end of the calendar year.
Apple’s gargantuan installed base will go a long way to helping that happen. Between Macs, iPads, iPhones, and more, Cook said the company currently has an active installed base of 1.5 billion devices.
Wearables saw the company setting records again, in almost every market it tracks across the globe. If it was standalone, the company’s Wearables segment would be the size of a Fortune 150 company. Apple Watch and AirPods were must have gifts over the holidays, particularly AirPods Pro, which people kind of can’t have because Apple can’t catch up with demand. Same goes for Apple Watch Series 3, Apple’s lowest priced chronometer. Apple Watch set an all-time record for the quarter, and it keeps growing. Over 75% of people who purchased an Apple Watch in the December-quarter were new to the device.
Mac and iPad generated $7.2 billion and $6 billion respectively. Both of those numbers were down, though CFO Maestri said the comparison was tough, thanks to a slew of new products introduced in the 2018 December-quarter. Apple’s CEO said he’s especially happy about the Mac right now, thanks to the 16” MacBook Pro as well as the Mac Pro and Pro Display XDR, both of which were launched last quarter. Also, props to the peeps making music on Mac, particularly this week’s Grammy Winners, making their music with Logic Pro X. As for iPad, Cook said the fondle-slab saw growth in key emerging markets like Mexico, India, Turkey, Poland, Thailand, Malaysia, the Philippines, and Vietnam. For both iPad and Mac, CFO Maestri said half of buyers buying last quarter were still new to the devices. For iPad, general consumer satisfaction stands at 93%, while business satisfaction stands at 92%.
Cook took time to recognize the work of Apple’s Retail and Online teams. “Thanks in part to a doubling of iPhone trade-ins versus last year,” the CEO says, “retail and online stores set an all-time record, and delivered strong, double-digit growth in iPhone.” Also, new stores… special things happening in all of them… Town Hall stuff.
Then, there are the things Apple says it’s doing to make the world a better place. That includes things like the all-new Everyone Can Code curriculum - introduced last November. Then there’s Apple’s new Research App - the latest in the company’s “ongoing effort to put the future of health in the hands of every user,” according to the CEO. That was also introduced in November. There’s Apple’s pledge to put $2.5 billion toward fighting the affordable housing crisis in California. And finally, there’s the help Apple has pledged for relief of the coronavirus outbreak in China.
Looking at the current quarter, Apple guided for:
revenue between $63.0 billion and $67.0 billion
gross margin between 38.0 percent and 39.0 percent
operating expenses between $9.6 billion and $9.7 billion
other income/(expense) of $250 million
tax rate of approximately 16.5 percent
Does that revenue guidance seem wide to you? Didn’t to me until CFO Maestri attributed the $4 billion range to uncertainty around the coronavirus. So, I guess it is a wide range, except it’s really not. A piece from Business Insider had an incredibly descriptive headline, “Apple blamed China's coronavirus for a ‘wider-than-usual’ $4 billion range in its revenue forecast. But the weird thing is, a $4 billion range is not actually unusual for Apple.” Kind of wordy for a headline, but I’m grateful since the article itself was behind a paywall and I couldn’t get to it. Instead, I looked at the last five earnings reports, including yesterday’s, and found that that headline is correct. For three of the last five reports - yesterday’s, 1QFY2020, and 2QFY2019, Apple offered revenue guidance with a $4 billion range in revenue projection.
“Weird,” as the Business Insider headline said.
Let’s Go to the Phones!
With prepared remarks out of the way, it was time for questions and answers from the financial folk. We’ll start with what may have been the most important question of the call. Shannon Cross of Cross Research had questions about China. Specifically, how were things in China before the coronavirus outbreak, and how are they looking now?
Pre-virus, Apple’s CEO said things were looking sweet. During the December-quarter, Apple saw double-digit iPhone growth in Mainland China, double-digit growth in Services, and strong double-digit growth in Wearables. iPhone 11 is doing particularly well, trade-in programs have been well received, and more new customers are coming to the fold. Cook says about three-quarters of people who bought a Mac in China last quarter were new to the machine, while two-thirds of consumers in China buying an iPad were new to it, too. Three of the region’s top-four selling smartphones were iPhones last quarter. So, yeah. It was a good time.
Turning to now, Cook again expressed the company’s concerns for all affected and again pledged financial help for the recovery. Apple is working close with its partners in affected areas, it’s limiting travel to those areas… outside of that, it’s still gathering data and monitoring the situation.
Focusing on the supply chain, while Apple does have some suppliers in Wuhan, it also has alternate sources for the things it gets from that area. Thing is, it’s hard to know how things are going for its supply sources outside of Wuhan. The impact is less clear at this time. China has extended the Lunar New Year holiday to 10 February. Once suppliers go to re-open, Apple should have a better read on the situation.
Finally, customer demand and sales may be affected. Apple has closed one of its stores and reduced hours at stores that are still open. Those stores are getting regular deep cleaning, and the company is taking the temp (literally) of employees. Channel partners, meanwhile, have closed a number of stores, and - not surprisingly - retail traffic has been down over recent days.
All of that said, execs have done their best to build all of this into their guidance for the current quarter. Hence the totally abnormal/normal $4 billion range in revenue expectations.
Morgan Stanley analyst Katie Huberty noted a modest slowdown in Services growth, from 18% in the September-quarter to 17% in the December-quarter. She wanted to know what slowed down, and Luca Maestri didn’t want to answer. Instead, he pointed out that the 17% growth for the December-quarter was better than the 16% growth for FY2019. He also noted all-time records for a number of Apple’s Services categories.
Her second question, she wasted on questions about 5G. In fairness, she phrased it in such a way that Apple could have answered. Taking it as a given that Apple will introduce a 5G iPhone at some point, she wanted to know what Apple’s CEO saw as the demand driver or killer app for the wireless protocol. Cook said it’s early innings for 5G, he couldn’t be prouder of Apple’s product line-up, and he wasn’t going to talk about future products at this time.
Maybe it wasn’t a wasted question when Huberty asked it. I mean, somebody had to. When Cowen & Co. analyst Krish Sankar burned his, though… well… it felt like burning it. Looking at the overall smartphone market, he said he wondered whether Cook could talk about 5G phones (which are or will be more expensive), budget phones, and how the two will evolve. The interesting part of Cook’s response was the one where he said something along the lines of 5G deployment looks different worldwide than it might here. Otherwise, he wasn’t talking about future products and certainly wasn’t talking about the price of handsets that aren’t even announced.
Cook also crushed a favorite idea of BofA analyst Wamsi Mohan. For a while now, he’s had this notion that Apple could make a ton of money selling ads through Apple TV+ without sacrificing user privacy. Putting the question to Cook, the CEO agreed that there are ways to sell ads without sacrificing user privacy, but it’s not gonna happen through the video streaming service. Cook says what the customer wants is an ad-free product. Keeping ads off of Apple TV+ is not about any Apple aversion to ads, but about giving customers what they want.
Jefferies analyst Kyle McNealy had a really interesting question, especially if you’re a certain kind of nerd. Pointing out that new spectrum is being opened not just for 5G but for even more 4G coverage, his firm is seeing handset upgrades. Are carriers or will carriers offer greater incentives to get people to upgrade their phones? Cook thinks carriers are incentivizing new devices, partly to get consumers to pay for the investments they’re making, and partly to battle the usual, carrier-to-carrier churn.
Next, McNealy wanted to know about supply/demand balance in Wearables, particularly - when will Apple achieve it? Cook says balance should be reached this quarter for Apple Watch Series 3. As for AirPods Pro, Apple’s working hard to reach it, but he just can’t say when it’ll happen.
Mike Olson of Piper Sandler - you heard me… While we may be living in an alternate timeline, this has nothing to do with that. Piper Jaffray merged with another financial firm. So, as of this month, it’s now called Piper Sandler. Anyway, Superman’s pal’s cousin wanted to know why Tim Cook is so high on augmented reality. What will be AR’s entry into the lives of the average consumer? Cook says he gets so excited because he sees it coming from all sides - consumer and business. That’s the reason it’ll pervade, in his estimation.
Tom Forte of DA Davidson wondered whether Apple was using subscriptions or critical acclaim to gage the success of Apple TV+. CEO Cook said success was being judged primarily on the number of subscribers. That said, the product itself is about telling stories. Do that well, and some will be critically acclaimed.
Tune In, Trun On
There were more Qs and As, but why should I have all the fun? If you want to hear the call for yourself, you still can. Apple has made the call available as a podcast. A replay is also available on the company’s Investor site. If you’re interested though, don’t delay. It’ll only be available to stream or download for a couple of weeks.
Apple on an Upswing
Wall Street spent Tuesday not freaking out about the coronavirus. While markets were across-the-board red on Monday, they were green as could be on Tuesday. That included Apple, which was up $8.74, ending the day at $317.69. Then came the earnings call, followed by an after-hours boost. Shares went up another $4.86 after hours, ending extended trading at $322.55.
