Apple’s Earnings and the iPhone Upgrade Cycle
I think Dr. Drang nails it. We might be seeing “peak iPhone”. But it could just be a statistical blip, caused in large part by the iPhone 6’s exceptional popularity, along with other factors like the economy in China and currency exchange rates.
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In chart form, you can see what an anomaly last year was with the iPhone 6. But given that you can almost draw a straight line connecting the other four points in the chart, I’m not willing to call it a peak yet. But even if we see a return to growth, it might take several years before we see another Q2 with over 60 million units sold.
To that end I stand by my takeaway last quarter that the iPhone is likely to return to growth with the iPhone 7, but I must admit Cook’s focus on slow upgrades is worrisome: a big reason why I argued last fall that the iPhone will be fine was Cook’s insistence that iPhone 6 upgrades were not out of the ordinary, but given that Cook now says the opposite leads to the question of just how long people will now hold onto their good-enough iPhones with their big-enough screens.
“We’re thrilled with the response that we’ve seen on [iPhone SE]. It is clear that there is a demand there even much beyond what we thought. That is really why we have the constraint that we have.”
I find it a little alarming that Apple was taken by surprise on this.
Apple’s Services revenue line increased 20 percent over the year-ago quarter, showing the power of Apple’s installed base of a billion devices to generate money for the company outside of hardware sales.
As I was typing up the many statements of Tim Cook during yesterday’s quarterly financial call, one in particular—about Apple Music—caught my attention […] Even at the time it stood out to me—hence the added emphasis. It seemed like an odd thing for the usually cautious Cook to say.
Apple is pushing the services category as a burgeoning part of its business with current and future growth potential. Focusing on and expanding services is a fascinating proposition as generally I’ve considered Apple as a company that sells hardware and bundles services for free. To me, these comments on the earnings call indicate Cook wants to develop services further in a serious way.
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There’s nothing wrong with diversification per se but it is a change to how the company used to operate. Around the launch of iPad mini, there’s an obvious breakpoint in company strategy where they expanded from a couple of flagships to a myriad of variants in each category. The days of Apple’s products ‘all fitting on one table’ are long gone. If services do grow significantly, the metaphor really breaks down as its products would be intangibles.
See also: Paid App Store Search.
Creating value for shareholders by developing great products and services that enrich people’s lives will always be our top priority and the key factor driving our investment and capital allocation decisions.
I get that it’s an earnings call and extremely fragile shareholders want reassurance, but I wish this was phrased differently. What I hope Cook means by this is that Apple’s top priority is to create really great stuff and provide exemplary services that they hope people will buy and love, thereby assuaging trepidatious hedge fund billionaires.
But the way it’s phrased here is that shareholders come first, and Apple’s entire R&D strategy revolves around them. I sincerely hope this is just poorly articulated, because if it’s taken at face value, it’s deeply concerning.
Update (2016-05-03): Jean-Louis Gassée:
I read Apple as a personal computing company. It wins or loses through the experience it delivers to its customers. Once upon a time, revenue came mostly from its personal computers, small, medium and large. Software and services had one and only one purpose: pushing up personal computers’ volumes and margins. Hardware, software, and services coalesced into what we now call an ecosystem. Over time, as a result of the size of the installed base of Apple devices, Services became substantial, the number 2 revenue category — but, for reasons just discussed, it shouldn’t be run as a separate division.
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There’s no way out of the dilemma. There is no way to get the sharp focus of divisional organizations and the cooperation and malleability of a functional structure. We can only hope that the toxic waste of success wont let mediocrity and obesity to set in.
Here’s an interesting fact: the iPod never generated more than $4 billion in revenue in a quarter, including holiday quarters. The iPad generated more revenue for Apple last quarter than the iPod ever did, even in its heyday.
Update (2016-05-04): Shira Ovide (via John Gruber):
Here’s what Cook didn’t say: 1) Apple has been misjudging its own business, and that makes it tough to believe what executives say; and 2) The company failed to prepare investors for an inevitable slowdown in growth -- even if that slowdown proves temporary. If one duty of public company executives is to underpromise and overdeliver, Apple has flopped in that job.
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At the time, Apple executives had one-third of the quarter under their belt. And yet, Cook was wrong and Sacconaghi was right.
Update (2016-05-09): See also: The Talk Show.
