29 APRIL 2022 - Good news behind and choppy seas ahead. That might be one way to describe Apple’s 2Q FY2022 earnings. The Company posted record March-quarter revenue of $97.3 billion on earnings per share of a buck-52. The $97 billion in revenue was up 9 percent from the same quarter a year earlier. That included March quarter revenue records for iPhone, Mac, and Wearables/Home and Accessories, as well as an all-time revenue record for the company’s Services segment. It also marked record March-quarter revenue for the Americas, Europe, and Greater China, according to Apple CFO Luca Maestri.

Bless the folks at CNBC for laying Apple’s reported numbers alongside Wall Street’s great expectations. Great in terms of size, not accuracy. As it often does, Apple beat the Street with most of its March-quarter numbers. According to CNBC:

Record March-quarter iPhone revenue of $50.6 billion beat the Street’s expectation of $47.9 billion

Record March-quarter Mac revenue of $10.4 billion beat Wall Street expectations of $9.25 billion

iPad revenue set no records - falling nearly two-percent year-on-year. That said, the $7.65 billion delivered on Apple’s tablet beat the Street’s expectation of $7.1 billion

While Wearables, Home and Accessories revenue of $8.8 billion did set a March-quarter record, it just missed Wall Street’s estimate of $9 billion

Services revenue crushed it, setting an all-time revenue record $19.8 billion. That barley squeaked by the Street’s expectation of $19.7 billion.

Gross margin came in at 43.7%, beating Wall Street’s expectation of 43.1%

And finally, March-quarter revenue of $97.3 billion beat consensus estimate of $93.9 billion

In Apple’s press release on the numbers, Apple CEO Tim Cook said:

This quarter’s record results are a testament to Apple’s relentless focus on innovation and our ability to create the best products and services in the world… We are delighted to see the strong customer response to our new products, as well as the progress we’re making to become carbon neutral across our supply chain and our products by 2030. We are committed, as ever, to being a force for good in the world — both in what we create and what we leave behind.

Of course, he said a lot more than that on the call. Let us get to that, shall we?

The Softer Side of Apple

After a short preamble trumpeting the many records set last quarter, Cook stopped to address two of the world’s biggest stories: Russia’s invasion of Ukraine, and the ongoing COVID pandemic.

Worth noting - he did not mention “Russia’s invasion.” Rather, he acknowledged “the humanitarian tragedy unfolding in Ukraine.” The CEO says Apple is supporting its team in the region, donating to humanitarian efforts, and donating gear “to support refugees arriving here in the United States.”

As for the pandemic, Cook says he and his are stoked to welcome workers back to the office in Europe and the U.S. - this as the company keeps and eye on “COVID-related disruptions in China.” In the meantime, Apple will keep doing what it does, “driving the innovations that can enrich people's lives.”

The Latest MacBook Pros - Image via Apple

Big Mac Attack

And there’s our transition into business, with the CEO highlighting the Mac and its transition to Apple Silicon - shout out to M1 Ultra. Interest/excitement around Apple Silicon helped push Mac revenue last quarter up 15% versus the same quarter a year earlier despite not having as many Macs to sell as people wanted to buy. CFO Maestri says the last seven-quarters have been the best seven-quarter ever for Mac. In the March-quarter, Apple saw a record number of upgraders - and yet half of last quarter’s Mac buyers were getting a Mac for the first time.

Imagine how well it would have done if they’d had enough of them?

iPhone

Moving on from the Mac, Apple’s CEO trumpeted the two new green iPhones, as well as iPhone SE. Cook says people who like smaller form factors love it, as do people buying iPhone for the first time. That said, it was apparently the iPhone 13 family that pushed iPhone revenue up 5% year-on-year, despite a tough compare. iPhone set records in both developed and emerging markets, according to CFO Maestri. Here in the states, the latest from 451 Research has customers satisfaction with the iPhone 13 line sitting at a practically unfathomable 99%. Such satisfaction led the iPhone active installed base to a new all-time high across all geographies, according to the CFO.

iPad

What can you say about iPad? They’re great when people can get them, which they’e having a hard time doing. CEO Cook says demand is there. Of course, supply is lagging - something Apple said would happen on the last earnings call. Revenue was down two-percent versus the same quarter a year ago, due to continued supply constraints. Like the rest of Apple’s hardware, iPad’s installed base hit a new all-time record in the March-quarter. And - just like the Mac, half the people buying iPad last quarter were walking away with their first iPad.

WHA?

The category Wearables, Home and Accessories saw revenue rise 12% year-on-year. That’s Apple Watch Series 7, Apple Watch SE, HomePod mini, and AirPods doing their respective things, and helping the category to March-quarter revenue records in both developed and emerging markets. Shoutout from the CFO to the Wearables segment of the segment. That part has doubled in size in the last three years, putting it on par with Fortune 100 companies. And it is growing by leaps and bounds. According to Maestri, two-thirds of people buying Apple Watch last quarter were new to the product.

Services

As mentioned earlier, Services set an all-time quarterly record for Apple. The $19.8 billion in revenue was up 17% from the same quarter a year earlier. That’s Apple TV+, Fitness+, and more. CFO Maestri says Services realized “March quarter records in every geographic segment and services category.” That included “all-time records for the App Store, Music, Cloud Services and Apple Care and March quarter records for video, advertising and payment services.”

Transacting accounts, paid accounts, and accounts with paid subscriptions all hit all-time highs last quarter in every area Apple tracks. Spotlight on Paid Subscriptions: Apple now has more than 825 million of those, up more than 165 million over the last year.

Apple Tower Theatre Los Angeles - Image: Ken Ray

And the Rest…

Apple’s CEO bragged on a couple of new stores opened over the last couple of months - one in the UAE and Apple’s third and largest store in South Korea. He also heralded the return of “Today at Apple” sessions at actual Apple stores here in the states. Cook also offered thanks to folks “working in Apple stores, customer care centers, channel partner stores and [in] Apple Care teams for bringing customers the best of Apple.” There was also a swing back to the softer side, with Cook highlighting Apple’s work toward a cleaner environment, a greener supply chain, a more inclusive workforce, and programs to help further skills, education, and opportunities for people who work for Apple, as well as people outside the company.

Addressing Apple in government and the enterprise, the company’s CFO highlighted a program piloted by Alaska Airlines, replacing traditional check-in kiosks with iPads. He also shouted out that Australian police force that’s kitted its cop cars with CarPlay. And he offered a quick plug for Apple Business Essentials.

Looking Ahead

As expected, Apple did not offer revenue guidance, “given the continued uncertainty around the world in the near-term,” according to the CFO. But, there’s always room for color.

A number of factors are likely to negatively impact the June-quarter, in the company’s estimation. Among them:

COVID shutdowns plus the ongoing chip shortage are making it hard to make supply and demand come together. That’s going to put a drag on the company somewhere between $4 billion and $8 billion - “substantially larger” than what Apple saw last quarter, according to Mr. Maestri.

COVID-related disruptions are also having some impact on customer demand in China.

Foreign exchange headwinds will likely hamper Apple’s growth

Killing sales in Russia will likely hamper Apple’s growth

Services will grow double-digits, though that growth will be slower than it was last quarter, due to the aforementioned issues.

Interesting to note: As far as return of capital, Evercore analyst Amit Daryanani and others got most of what they wanted. Daryanani had expected a dividend increase of 6-7% and at least $90B in additional buyback authorization. The $90B he got, though the dividend was only raised 5%. “Apple’s board of directors has declared a cash dividend of $0.23 per share of the Company’s common stock,” according to Apple, “payable on May 12, 2022 to shareholders of record as of the close of business on May 9, 2022.”

Are you there caller? I’m glad you waited…

Morgan Stanley analyst Katy Huberty had a macro question. She wanted the Apple executives’ thoughts on consumer spending, given the current market volatility, inflation concerns, and so on. How is that affecting or how will that affect consumers’ ability to buy what Apple’s selling? CEO Cook says it is something Apple’s keeping an eye on, though the bigger concern for the company right now is trying to meet demand with supply.

Evercore analyst Amit Daryanani had a couple of questions about the $4 billion to $8 billion headwind. Will that be sales deferred or sales destroyed? And can you say which products will be hardest hit?

Earlier in the call, CEO Cook had pointed out that the 4-to-8 range had to do with how long factories in China - particularly in the Shanghai corridor - will take to ramp back up to full production. Nearly all of those factories have restarted, which is cause for optimism as far as he’s concerned. To Daryanani’s question, most product categories will be affected. As to whether sales are deferred or destroyed - some and some. If a person needs a piece of hardware quickly, that sale could be lost. What that ratio will be - Apple has thoughts on it, but those are not thoughts the company was willing to share.

Citigroup analyst “Gentleman” Jim Suva wondered wether all of the disruption in the supply chain has Apple rethinking the supply chain. Like, when there are enough components to stockpile, will Apple stockpile? Or stick with just-in-time inventory?

“In this business,” said Cook, “you don’t want to hold a ton of inventory.” That said, he thinks Apple has managed moving through the madness of the past couple of years pretty well. Apple learns something new every day, and applies that learning to its business.

JP Morgan analyst Samik Chatterjee wondered where iPhone SE was strongest. Since Apple’s competitors probably wonder that as well, Apple’s CEO declined to answer. He did, however, sing a song of iPhone 13 strength.

BofA analyst Wamsi Mohan had a question that hasn’t been asked for a while. Despite returning capital to shareholders, Apple is still sitting on a ton of cash. Why not buy something big in the healthcare space or the fitness space or the content space?

CEO Cook says if Apple found the right big thing to buy it would buy that thing. Until then, they’ll keep buying small companies for the intellectual property and talent they bring to the Cupertino table.

More, More, More…

That was not all of the questions, nor all of the analysts. If you want to grok the fullness, the call is up to replay on Apple’s Investor site and will be for the next couple of weeks. It is now available as a podcast and will be for the next couple of weeks. And I have to blow a big Mac OS Ken kiss to Seeking Alpha for their transcript of Thursday’s call.

Demand is there, but choppy seas ahead. How does the Street like Apple’s acumen through June? We’ll check analyst reaction to Thursday’s call next week.