An Argumentative Look at Apple Earnings

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I don’t want to argue, but I think I’m probably going to.

Actually, that’s not how I should start. I should start by saying (as Apple did in its press release) that  the company:

…posted a September quarter record revenue of $90.1 billion, up 8 percent year over year, and quarterly earnings per diluted share of $1.29, up 4 percent year over year. Annual revenue was $394.3 billion, up 8 percent year over year, and annual earnings per diluted share were $6.11, up 9 percent year over year.

Okay, Now Let’s Argue

Now we can go to the part where I don’t want to argue, but I’m probably gonna anyway. I read a Gizmodo (via Yahoo News) story after Apple’s earnings report Thursday night, that came under the headline, “Apple’s Record Revenues Soured by Worse Than Expected iPhone Sales.” 

I didn’t hear that on the call, but — of course — Apple does not say whether what it’s reporting beats analyst expectations. Sometimes they don’t even say whether they beat their own expectations. The only mention of expectations I remember from the call is when Apple CEO Tim Cook said that customer demand for iPhone last quarter was “strong and better than [Apple itself] anticipated that it would be.” As far as disappointment, the only mention of anything emotional I remember from the analyst side was the opposite. That’s when Citigroup analyst “Gentleman” Jim Suva offered congratulations for Apple’s team. 

Doesn’t sound like they missed his expectations. And yet, the Gizmodo piece says “Lower than expected iPhone sales (…), suggest there may be holes in the ship in need of patching.” 

But First, the Numbers Apple Reported

I’m skipping straight to the argument and I shouldn’t. It was a record quarter for Apple by many visible metrics. By geography, the company set September-quarter revenue records in the Americas, Europe, Greater China, and the rest of the Asia Pacific region. The company set September-quarter revenue records for iPhone and the Wearables/Home/Accessories category — a segment in which more than one analyst expected to see weakness. 

Let us lope through business segments — starting with iPhone. iPhone revenue came in at $42.6B. As mentioned before, that was a September-quarter record, up 10% versus the ~$38.9B Apple reported for the same quarter a year earlier. 

Shout out by Apple CFO Luca Maestri for iPhone strength in emerging markets like India, where the phone set “a new all-time revenue record,” as well as up-and-comers such as Indonesia, Mexico, Thailand, and Vietnam, all of which saw a doubling of iPhone business versus the same quarter a year earlier. Across the board, the quarter saw a record number of iPhone upgraders and double digit growth for switchers.

Sounds Like a Quarter ‘Soured by Worse Than Expected iPhone Sales…’

Moving to the Mac. Apple’s “according to Hoyle” computer saw revenue of $11.5B, up 25% versus the ~$9.2B for the same quarter a year earlier.  CFO Maestri said the rise was driven by three factors:

  • The launch of the M2-powered MacBook Air and MacBook Pro
  • Meeting demand that had carried over from the June-quarter
  • Being able to fill the channel, thanks to an improved supply position

As they say almost every time, the CFO said about half the people buying Macs last quarter were new to the platform. Adding a bit of color, Creative Strategies principal Ben Bajarin pointed out on Twitter that, “Based on Mac sales estimates, Apple added as many new Mac customers this quarter as the avg. quarterly number of Macs from a few years ago (4-5m).” 

The Only Weakness in the Numbers, the iPad

On now to iPad, which was Apple’s weakest link. Revenue for that came in at $7.2B, down 13% versus the $8.25B reported for the same quarter a year earlier. Foreign exchange headwinds and a bad compare were the culprits according to the CFO. Apple launched new iPads in the September-quarter of 2021, something they did not do last quarter. Despite the weakness, Apple’s tablet hit its highest installed base so far. And — once again — over half the people who bought an iPad last quarter were new to the category. 

One Area of Surprising Strength

Surprising strength seen in Apple’s Wearables/Home/Accessories category. The company reported revenue of $9.7B there, up 10% versus last year’s ~$8.8B and setting a September-quarter record. The numbers were no doubt helped by the range of new Apple Watch models introduced last quarter. Huge growth for the chronometer, with two-thirds of people buying an Apple Watch last quarter doing so for the first time. 

On now to Apple Services. Revenue for that segment hit ~$19.2B last quarter, up from the ~$18.3B reported for the same quarter a year earlier. Not huge growth, but growth in a time of macroeconomic headwinds, including less than favorable foreign exchange rates. 

While CFO Maestri noted “softness” in digital advertising and gaming, there were plenty of positives to point out. For starters, the growth of the hardware installed base “across each geographic segment and each major product category” lays a foundation for future Services growth. The company noted “increased customer engagement” with its Services. Both “transacting accounts and paid accounts grew double digits year over year,” according to Maestri, with “each setting a new all-time record.” The company now handles more than 900M paid subscriptions. That’s up 155 million in last 12-months, and double the number they had just three-years ago. 

A Division of Apple As Big as a Fortune 50 Business

Something that kind of knocked me sideways on Thursday: While trumpeting future growth potential for Apple’s Services segment, CFO Maestri said that that segment is “already the size of a Fortune 50 business.”

I kind of messed this up on Friday’s Daily Observations Podcast from The Mac Observer. See, I knew that a Fortune list comprised the top US companies in terms of — something. I could not remember whether it was revenue or earnings. According to Wikipedia:

The Fortune 500 is an annual list compiled and published by Fortune magazine that ranks 500 of the largest United States corporations by total revenue for their respective fiscal years. 

So, if Apple broke Services off into its own business, it would be the size of a Fortune 50 company, according to Apple execs. That’s bigger than Walt Disney, at 53 on this year’s Fortune 100. Bigger than HP at 55, bigger than Facebook at 57, bigger than Goldman Sachs at 62 (kind of funny, since Goldman Sachs is helping Apple grow its Services arm through Apple Card and the upcoming high-yield savings account option), bigger than Cisco Systems at 64, Best Buy at 74, Oracle at 81, American Airlines, Delta Airlines, United Continental Holdings… And Apple sees room for Services growth.

On the Horizon

Looking ahead — if you’re looking for financial guidance, you came to the wrong timeline. CFO Maestri did offer a bit of “don’t hold us to it” directional insight though. They think “total company year-over-year revenue performance” will slow this quarter versus the September-quarter. That’s thanks to a few factors, including:

  • Foreign exchange headwinds
  • Weakness for the Mac
  • And — while the Services segment is expected to grow, that growth will be hampered by foreign exchange headwinds, as well as a wobbly macro that’ll likely take a toll on digital advertising and gaming 

Let us circle back to the Mac. According to CFO Maestri, the Mac is in for a really tough compare this quarter. The December-quarter of ’21 “had the benefit of the launch and associated channel fill of [the then] newly redesigned MacBook Pro with M1.” Some have said they expect another laptop or two from Apple before year’s end, but Mr. Maestri says this quarter will present a tough compare for the Mac versus last year, when there was a new Mac. Additionally, in his opening remarks, Apple CEO Tim Cook said:

As we approach the holiday season with our product lineup set, I’d like to share my gratitude to our retail, AppleCare, and channel teams for the work they are doing to support customers.

Saying to the listening public that the product lineup is set makes me think nothing new hardware-wise for the rest of the year. Others may disagree and I would have no problem being wrong. 

Apple’s direction insights hang by a thread, by the way — hence the “don’t hold us to it” nature of the comments. According to the CFO, the directional insights are “based on the assumption that the macroeconomic outlook and COVID-related impacts to [Apple’s] business do not worsen from what [they] are projecting today for the current quarter.”

How are things in iPhone City? Maybe best not to ask. 

Weren’t We Supposed to Argue?

Going back to where we started, and revisiting argumentative me, Gizmodo was sort of starring as a mixed-messenger in a script of its own writing. While the headline said, “Apple’s Record Revenues Soured by Worse Than Expected iPhone Sales,” the article was pretty Apple positive. Still, I’d argue with the iPhone sales assertion because it lacks nuance. Yes, iPhone revenue came is at $42.6 billion. “That’s slightly less than the $43 billion analyst[s] expected according to The Wall Street Journal,” according to Gizmodo. What it leaves out is the amount of time people are still spending waiting for an iPhone 14 Pro or an iPhone 14 Pro Max. If Apple could’ve caught demand, it would’ve likely beaten the Street’s iPhone expectation — rather than just setting a September-quarter record. 

Apple did what they did despite a litany of global hardships. Outlined by CEO Cook, those didst (and do) include war in Eastern Europe, the persistence of COVID-19, climate disasters around the world, and an increasingly difficult economic environment. Fingers crossed, and into the end of the year we go.

Who’s Got a Question?

Let us now do a bit of the question and answer thing, starting with one from Credit Suisse analyst Shannon Cross. Asking a question that the Gizmodo starter seemed fine not asking, Cross wondered whether Apple could address issues of demand and pricing and other factors around the iPhone 14 line. 

Apple CEO Tim Cook said not really. See, demand for the top end of the line has been “strong and better than we anticipated that it would be.” Until they have ready availability, they can’t really say how the mix will be. What they can say is that iPhone accounted for three of top four smartphones in the UK and the US last quarter, as well as the top three smartphones in China, “the top six in Australia, four out of the top five in Germany, and the top two in Japan.” So… you know… that’s cool.

If I’m honest, I found a few non-answer answers a bit frustrating. Evercore analyst Amit Daryanani asked whether Apple could scale its digital ads businesses without sacrificing consumer privacy. Apple’s CEO said Apple would never sacrifice consumer privacy and, if you look at it, Apple’s digital ads business is small compared to others. Which doesn’t really answer the question.

Piper Sandler analyst Harsh Kumar asked about “inflation pressures and labor problems here in the U.S. and globally.” Could Apple’s CEO “talk about what steps can Apple take to mitigate those?” Maybe he could, though what he said instead was:

In terms of the people piece, we’re focused on taking care of our teams and offering them the best benefits and best compensation so that we can empower them to do the best work of their lives. And so that’s what we’re focused on in terms of our teams.

Which doesn’t really answer the question.

I was wrong about Suva being the only analyst to express emotion, by the way. Kumar also congratulated Apple execs on the company’s stellar performance. 

He hides his disappointment well.

More to Be Heard

There were plenty more questions and comments, though those were the ones that caught my ear. If you want to hear the whole thing for yourself, I would encourage you to do so. A replay of the call is up now on Apple’s Investor page, and will be for the next couple of weeks. It is also available as a podcast and should be for the next couple of weeks. And if you’re more of a reader — thanks and mad props to The Motley Fool for posting a transcript of the call. That should be up until the internet goes dark.

Scattered as that recap might have sounded — you should have heard my thinking right after the call. Oh wait! You can! Mac Observer Managing Editor Jeff Butts and I talked through some of the numbers and our thoughts around them on The Mac Observer’s Daily Observations Podcast.

One thought on “An Argumentative Look at Apple Earnings

  • Ken:

    These metrics certainly look terrible. It’s like when you visit your doctor, who tells you that your physical and laboratory exam was overall positive, but was soured by your cardiac performance being only 10% better than it was last year.

    Yep, sounds like Apple circling the drain here.

    Perhaps TC should see if the Board will support selling Apple to Elon Musk.

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