MDJ 2020.01.29

Morsels from a Holiday Celebration

Apple Inc. made good on its promises of healthy holiday sales Tuesday, announcing results that, in the words of CFO Tim Cook, “set new all-time records in both revenue and earnings.” As warned yesterday (MDJ 2020.01.28), analysts that are hyper-focused on specific parts of the company’s business found nits to pick in the growth of Services revenue, but even the pessimists found little to glom onto in their attempts to cry doom.  Today we’ll look at the basic numbers and look at a few interesting items revealed during the post-release conference call.

The six colors of money

We’ll be using two main references today: the previously linked Apple results, and the complete transcript of Apple’s conference call prepared by (and with thanks to) Jason Snell and sixcolors.com, with links to the appropriate paragraphs.

There are only so many ways to point out that Apple had a great quarter, but that didn’t stop the company from trying:

  • “Quarterly revenue of $91.8 billion, an increase of 9 percent from the year-ago quarter and an all-time record”

  • “Quarterly earnings per diluted share of $4.99, up 19 percent, also an all-time record.”

  • “We are thrilled to report Apple’s highest quarterly revenue ever,” said Tim Cook in the earnings release, adding later “and all-time records for Services and Wearables.”  If you haven’t been following Apple’s finances in the past year or two, “Wearables” means the Apple Watch, AirPods, and Beats by Dre.

  • Cook continued, “Our active base of installed devices grew in each of our geographic segments and now has reached over 1.5 billion.”

  • Chief Financial Officer Luca Maestri, quoted in the same release, said the company’s “very strong business performance drove an all-time net income record of $22.2 billion and generated operating cash flow of $30.5 billion.”

And the fun doesn’t stop there. If you have a few minutes, you’ll get a solid picture of Apple’s current status by reading the prepared statements from Cook and Maestri that opened the conference call and lead the transcript. Some highlights from Cook, omitting exact repeats of the points above:

  • “Our fifth consecutive quarter of double-digit growth outside of iPhone, including a new all-time record for Services and another blowout quarter for Wearables.”

  • “Our active installed base [reached] a new all-time high for each of our main product categories and geographic segments.” Take a moment to digest that. At no time in Apple’s history have there ever been more people using iPhones, iPads, Apple Watch, AirPods—or Macs.

  • For the company’s much-touted Services sector, “Q1 revenue reached $12.7 billion, an all-time record, growing 17% year-over-year,” with “double-digit growth in all five of our geographic segments” and “new all-time records for multiple categories, including cloud services, music, payment services, and our App Store search ad business, as well as setting a December quarter record for the App Store and AppleCare.”

  • “2020 started off strong” for the App Store “with customers spending a new single-day record $386 million on New Year’s Day alone, a 20 percent increase over last year.”

  • Wearables “[set] an all-time record in virtually every market we track around the world,” said Cook, without discussing how many markets that might be. He added, “And this product category is now the size of a Fortune 150 company.”

  • Other than the bit about installed base, Cook had little to say about the Mac and iPad product lines.  You can read it here, and feel free to giggle at Cook’s mention of a “strong response” to the new Mac Pro.

You’ll find Luca Maestri’s financial overview starting here, but we need to correct something from yesterday (other than “how to count the number of weeks in a year,” which was already brought to our attention”): We misread last quarter’s transcript as saying that Apple expected to gain up to $1 billion in foreign currency exchange transactions.  Tuesday’s call made it clear that we had that backwards: the company was planning to be on the losing side of that exchange.  Maestri clarified it for us when he said, “Revenue for the quarter was $21.8 billion, up $7.5 billion or 9 percent from a year ago, in spite of a $1 billion headwind from foreign exchange.”

It's a small, virulent world

We’re not going to recap the entire investor call here, because you can do that at Six Colors and do it faster. But we listened live and went over the transcript with a highlighter, and there are some points we want to make.

First, manufacturing remains a bottleneck for Apple. We’re used to hearing phrases like “supply constraints” or “supply and demand are not in balance” from Apple execs, and they almost always mean that Apple can’t make products fast enough to sell them. This leaves money on the table in sales lost to customers who choose competing products, but it’s probably better than having cargo ships full of products no one will buy.

It continued to be a problem in Q1 as Cook said that the Wearables segment had unprecedented good results, “even as we face supply constraints for Apple Watch Series 3 and AirPods Pro.” Not the new Apple Watch Series 5 with the always-on display, or even 2018’s Series 4 with ECG and atrial fibrillation detection, but the Series 3 from 2017. Apple’s pricing move in September 2019 dropped the cost of a new entry-level Series 3 watch to $199, and customers clearly responded. Later on, Cook said, “I’m hopeful that the Series 3 will come into balance during this quarter. On AirPods Pro, I don’t have an estimate for that for you. I just can’t predict when at this point.

(Amusingly, at our place, searching Google for “apple watch series 3 price” pulls up a featured snippet from CNET that says “At $199, the Apple Watch Series 3 is now the bargain to beat” just above a headline that says “Don’t buy the discounted Apple Watch Series 3…yet.”  The caveat was that there might be further price reductions for the holidays. Other than occasional retailer-specific specials, there were not.)

Manufacturing is likely to be even tougher for Apple in the current quarter ending in March 2020. Apple gave Q2 guidance to expect revenue between $63 billion and $67 billion. That $4 billion range is twice as wide as Apple’s usual guidance because the company does not yet know how the headline-grabbing outbreak of coronavirus in China will affect business.

Apple manufactures most of its products in China, and most of the parts for those products come from China no matter where final assembly takes place. Apple has taken a number of steps that Cook outlined when asked (beyond Apple’s normal habit of providing humanitarian assistance where needed), but they’re important enough to summarize here:

  • Apple has limited travel to China (or perhaps to the Wuhan area, this was not clear) to business-critical situations as of last week

  • Apple has suppliers in the Wuhan area but has alternate supplies for all of them. Cook said, “We’re obviously working on mitigation plans to make up any expected production loss.”

  • Presumably, those mitigation plans involve other Chinese factories outside the Wuhan area, but that presents a new set of problems. Cook explained, “With respect to supply sources outside the Wuhan area, the impact is less clear at this time. The reopening of those factories after Chinese New Year has been moved from the end of [January] to February 10th, depending upon the supplier location.”

  • Apple has closed one retail store in China, and Cook says “a number of channel partners have also closed their storefronts,” with many of the stores that remain open operating on reduced hours.

  • For extra retail safety, Cook said Apple is “frequently deep-cleaning our stores as well as conducting temperature checks for employees.”

  • Finally, Cook noted that retail stores outside the Wuhan area have seen reduced traffic in just the past few days.

That’s just what Apple knows now.  If the outbreak gets larger or more confusing before it gets better, uncertainty could easily multiply. No one’s talking about delaying new products at this point (as far as anyone outside the company knows), but we’d have to say it remains a possibility for any tech company until world health officials can make more progress against this mutated coronavirus.

Jots and tittles

We’ll close out today with things that caught our eye that we didn’t see mentioned much elsewhere.

  • While Luca Maestri noted that both Mac and iPad have reached their largest installed base ever, he added that iPad gets customer satisfaction ratings of 93 percent from consumers and 92 percent from businesses. Among both groups, 78% of those planning to purchase tablets this quarter plan to purchase iPads. Instructively, he provided no similar numbers for Mac purchasers. Perhaps respondents were trying to use butterfly keyboards.

  • Apple held $99 billion in net case at the end of Q1 and maintains a goal of eventually operating neutral to net cash. Maestri also revealed that in next quarter’s conference call, Apple will discuss the next phase of its plans to return more of its hoarded cash to shareholders. He said the company returned “nearly $25 billion” to shareholders in Q1 through share buybacks and dividends and their equivalents.

  • When analyst Amit Daryanani of Evercore noted that Apple’s Q2 gross margin guidance was “essentially flat,” Maestri quickly pointed out that the guidance of 38 percent to 39 percent is “significantly higher on a year-over-year basis.”

  • Similarly, Raymond James analyst Chris Caso asked why Apple’s operating expenses have been growing faster than revenue for “largely over the last three years or so.”  Maestri disputed that assertion, but not before saying “our expense-to-revenue ration is incredibly competitive relative to other companies in our sector.” We wouldn’t say it was a sore spot, but it was clearly a point Maestri was prepared to address.

  • Finally for today, JP Morgan analyst Sumit Chatterjee was surely not the only person to notice that Apple did not post year-over-year growth in Japan, instead seeing a 10 percent decline. Unlike others, Chatterjee asked about it. Maestri said regulations were primarily the problem:  “It was primarily due to iPhone performance, which was challenged because there were some regulatory changes that took effect on the first of October. … [E]ssentially, the Japanese regulators decoupled the mobile phone pricing from the two-year contracts and they’re capping the maximum amount of carrier discounts that can be made.” You can read more about these changes from Japan Times.


We know we didn’t touch much on the Services segment today, but we will in a future issue. We just wanted to cover the good results and provide a bit more color on some of the underreported news from the conference call.  If you have any questions or suggestions, please let us know!