Apple fell hard after reporting earnings Tuesday afternoon.
While the company beat expectations for revenue and earnings, iPhone sales were softer than expected, leading to stock falling over 7% in after hours trading.
Here are all the big numbers:
- Revenue: $US49.6 billion, up 33% annually, versus analyst expectations of $US49.4 billion
- EPS: $US1.85, up 45% versus analyst expectations of $US1.81
- iPhone units: 47.5 million, up 35%, versus analyst expectations of 48.8 million (the whisper number was 50 million)
- iPad units: 10.9 million, down 18%, versus analyst expectations of 10.9 million
- Mac units: 4.8 million versus 4.9 million
- Cash: $US203 billion
- Revenue guidance: $US49 billion-$US51 billion versus $US51.06 billion
Overall, the numbers are good. But, analysts were getting all geeked up for a monster iPhone number, which didn’t happen.
On the call, CEO Tim Cook explained, in part, why iPhone sales were below analyst expectations.
He said the company had 600,000 fewer iPhones in channel inventory. If those phones had been in the channel, then Apple would not have missed on iPhone units as badly. It would have also led to an extra $US396 million in revenue, since the average selling price of the iPhone is $US660.
Why did Apple have lower channel inventory? Just because. Cook said the company tries to avoid having unnecessary inventory when possible. If he wanted to smash expectations, he would have shipped the extra 600,00 units, but he doesn’t run the company to the 90 day drumbeat of earnings expectations, he said on the call.
Even with 600,000 extra iPhone sales, Apple would have missed expectations.
Despite iPhone sales coming in short of expectations, it was still a strong quarter, with sales up 35% year over year.
On the call, Cook was optimistic about the future of the iPhone. He said Apple had its highest switcher rate from Android ever. He also said that only 27% of the people that owned iPhones before the iPhone 6 launched had upgraded to the iPhone 6 or iPhone 6+. The iPhone has loyalty rates above 86%, which means there’s lots of room for growth from upgraders.
Also, sales in China were up 87%, CFO Luca Maestri said on the call.
The other thing of note from the call was information on the Apple Watch. Apple didn’t provide any specific numbers, but it did say that sales were above internal expectations. It said the watch sold better in its first 9 weeks than the iPad sold in its first 9 weeks.
The watch was reported as part of the “other” category, but it says the watch was more than 100% of the annual growth in the “other” category. It says iPod, and other accessories dragged down growth in that category.
Overall, it was another good quarter from Apple, despite the fact that investors decided to sell.
Below are tables, charts, and our live blog of the call.
LIVE BLOG OF THE EARNINGS CALL
5:01: Music… but we should get the folks talking soon enough.
5:02: OK, starting! Boiler plate stuff. Heads up: We’re going to have forward looking statements.
5:03: Tim Cook: We’re proud to report record Q3 earnings. Revenues were up 33%, fastest growth rate in 3 years. Achieved despite reducing channel inventories, despite challenging FX environment. We beat our guidance by $US1 billion thanks to topping internal expectations for iPhone, iPad, Mac, and Watch.
5:04: Talking iPhones … Gained share in all geographic segments for the iPhone. Highest switcher rate for Android that we’ve ever measured.
5:05: Record quarter for Mac, unit growth of 9% in a market that contracted by 12%.
Generated a new record for services. App Store best ever with revenue up 24%.
Results from China up 112%, iPhone up 87%. Impressive since IDC says China is up 5%. Mac sales were also up 33%. Ecosystem impressive. App store revenue more than doubled.
5:06: Major highlight was Apple Watch. Started taking preorders on 4/10 demand exceeded supply. We delayed availability in our own stores to fill those orders. In just past few days we’ve been able to catch up with demand. Feedback is incredibly positive. We are happy with customer satisfaction and usage.
5:07: Our market research shows 94% wear it regularly if not every day. Twitter, WeChat, Line are seeing most usage among 3rd party apps. We believe possibilities are enormous. Doctors are putting Apple Watch to work in improving people’s lives.
5:10: Talking about upcoming features for new iOS and OS X software releases.
5:11: Talking about Apple Music: An incredible streaming service, pioneering radio station, good way to connect musicians and fans. Millions and millions of people are testing it out. Millions of people are tuning in to listen to Beats 1. All adds up to a renewed sense of excitement around music.
5:14: After talking about Apple Pay, thanks employees, partners, etc. Says they’re hard at work at their pipeline of new products.
5:15: Luca Maestri, CFO, takes over. Growth driven by iPhone, Apple Watch, Mac and App Store sales. We have a challenging FX environment.
5:16: Emerging markets were $US18 billion, up 79%.
Gross margin better than expected thanks to iPhone sales.
Cash flow from operations was $US15 billion, a new record.
5:17: Talking about iPhone. iPhone sales up 85% in China and India. iPhone ASP $US660, increase of $US99 y/y despite FX impact. At the low end of 5-7 weeks of channel inventory.
5:18: Talking Mac. Gained significant market share. Mac driven by portables.
Turning to iPad, sell through 11.2 million as we reduced channel inventory by 300,000. Customer metrics are positive. Changewave measured a 97% positive rating for iPad Air 2.
5:19: We do not participate in low end of tablet market. We have 76% of market for tablets over $US200.
5:22: China developers have made 250,000 apps.
Apple Watch was over 100% of growth of “other” and offset drop in iPod. We don’t plan to report Watch, don’t want ot help competitors.
Thanks to popular mobile store app, mobile traffic equaled desktop for first time ever. Global store 456, 190 outside the US, 40 stores in China by middle of next year.
5:24: $US202.8 billion in cash, 89% is offshore. We did $US10 billion term debt, $US8 billion US, $US250 million yen. $US50 billion of term debt outstanding. Launched $US6 billion share repurchase in May.
5:25: Review the outlook: $US49 billion-$US51 billion revenue.
Q&A WITH ANALYSTS
Why was sequential decline worse than usual?
Tim: Channel was down by 600,000. We sold more units than we thought we would. We always run with just the inventory we thought we need. In this quarter, we were able to end right at the bottom end of our range. Revenue would have been higher if we expanded channel, but that’s not how we think of the business.
In terms of what’s going on, 35% is almost 3 times the market. Western Europe grew 4X the market, Japan grew 5X the market. We did exceptionally well any way you look at it. In terms of who has upgraded to a 6/6+, 27% have upgraded, we view that as a bullish sign, a lot of head room for upgraders. Happy to see highest Android switcher rate. From our point of view, iPhone doing great.
What is framework to convince that iPhone can continue to grow against tough comps?
Tim: We only do guidance for current quarter. Revenue guidance means iPhone would have another stellar quarter. We are confident future looks great. We’ll take it one quarter at a time. I am bullish because of the 27% number, the Android switcher rate, the customer satisfaction rate versus competition is a huge margin, the loyalty rate versus competition, first time iPhone buyers, still seeing very large in China, Russia, Brazil, a market that will grow from 1.3 billion to $US1.9 billion in 2019, an incredible market. We can compete for a fair number of those.
Questions on iPhone mix…
Luca: ASP up $US99, this is driven by the mix, the fact that we added 6+ to a new price point, 6/6+ doing really well. Keep in mind $US99 offset by $US24 in FX. So we’re doing really well.
Trend in gross margin? Should trend continue? Also, question on the watch…
Luca: GM, we guide to current quarter. As we look at it, every cycle is different for a variety of reasons. Next year is going to present an additional challenge thanks to dollar. There are things that remain similar.
Tim: Talk about the watch some. As you know we made a decision in September not to disclose shipments. That was a matter of not giving competition insight. Look at “other” products. Don’t look at sequential or y/y and assume that was watch. The balance is shrinking, like iPod and accessories. Sales did exceed our expectations despite supply trailing at the end of the quarter. Watch sell through better than iPad or iPhone. Doing with 680 points of sale. Online sales were so great not able to feed inventory until mid-June. As I look, we felt really great about how we did. Our objective wasn’t just sales, we’re happy about how the product is positioned for the long term. We announced Watch OS 2, which will bring native apps. We learned a lot about the buying experience. We plan to expand our channel before the holiday. We think watch will be a top gift of the holiday season.
Question on iPhone market share.
Tim: We look to grow our products, regardless of price. We have to convince people to move to a new price band. You can look at sales in China, India. These numbers are unbelievable. Done where it’s not the best of conditions. We don’t do MBA analysis of X buying in a price band and say we can get X-Y.
Replacement cycle question…
Tim: 86% seems low to me on iPhone replacement. Our own data looks better than that.
On upgrade cycle, and what we’re seeing. Not remarkably different. A number of plans people began signing up for in the past year that could change it. Upgrade any time, 1 year leases that could help upgrade rate. Will be interesting to see how that plays out. I see positive vectors there, not negative.
Question about Apple developing products.
Tim: We think the phone has a lot of legs to it, a lot of innovation left to it. We’re in the early innings. Market rate of growth will also be impressive. There will be multiple winners here. In terms of other things, we can do more than one thing. We have other things we’re working on. At aggregate level, we remain very focused.
I am still bullish on iPad. Split view, slide over, picture in picture, these are incredible features. More and more companies are contracting for, or writing apps themselves. I think iPad upgrade cycle will eventually occur. We’re 6X greater in usage than nearest closest rival. It’s a fantastic product. I see a lot of runway.
As I look geographically, in emerging markets where we are doing well, our share is still not high. I look around, I see opportunity left and right.
Question on China.
Tim: Nothing has changed our view that China will be Apple’s largest market at some point in the future. Yes, equity markets have been volatile, which could lead to speed bumps. Equity still up 90% y/y, stock market participation still narrow, ownership still in a few people that put a smaller portion of wealth in market than we might.
We have pedal to the metal to get to 40 stores. LTE penetration only at 12%, China doesn’t possess level of fibre some of other countries do. Can’t overstate this, rise of middle class is continuing. 14% to 55% over 10 year period from 2012-2022. You can see this occurring with every trip for those of us that travel there.
Question on ads and market share.
Tim: In certain geographies, the way we win is we get switchers. In some it’s to get people to buy first iPhone. In some it’s to get people to upgrade. In some geographies it’s two of those. In some, it’s all three.
Question on FX.
Every currency has strengthened against the dollar.
Question on linearity.
Tim: June Apple Watch sales greater than April or May, contra what’s out there.
AND WE ARE DONE!
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