Continuity, cannibals, and Apple Pay: 6 key takeaways from Apple's Q4 earnings
The news was nearly all sunshine during Apple’s fourth-quarter 2014 earnings call on Monday, with sluggish iPad sales the one black spot on the otherwise blazing sun of record-setting revenue. You can listen to the whole call, including the question-and-answer session with analysts, but if that doesn’t sound like the most riveting way to spend an hour, don’t worry: these are the things that you need to know.
Apple can’t make iPhones fast enough
Apple sold 39.2 million iPhones last quarter, which is up 12 percent from the third quarter of 2014, and up 16 percent year-over-year. Tim Cook said the launch of iPhone 6 and 6 Plus was the company’s fastest, most successful rollout to date, and pointed out multiple times: “We’re selling everything that we’re making.”
When peppered with questions from the analysts on how the iPhone 6 was comparing to the 6 Plus, and if Apple felt they guessed correctly on the mix of SKUs supplied to the retail channels, Cook kept having to repeat himself that it’s hard to tell when Apple is selling all the phones they’re making. “I’ve never felt so great after a launch before,” he quipped. “Maybe that’s the best way to summarize it all.”
Mac sales are strong
This was an insanely great quarter for Apple’s Mac business, with 5.5 million sold, an increase of 25 percent from Q3 2014 and a year-over-year increase of 21 percent over Q4 2013. “On the Mac, it was a blowaway quarter, our best ever. It will result in our highest market share since 1995. The back-to-school season voted, and the Mac won, and carried the day. And I’m really proud of that. Being up 21 percent in a market that’s shrinking, it just doesn’t get any better than that.”
Apple isn’t worried about iPad sales
The one dark spot was iPad sales, which slipped a bit. Apple sold 12.3 million iPads during the quarter, which is down 7 percent from the previous quarter and 13 percent year-over-year. Still, Cook expressed a positive attitude about the iPad business. “I know there’s negative commontary in the market,” he explained, “but I have a different perspective.”
Cook is talking about the bigger picture: Apple has sold 237 million iPads in just over four years. “That’s twice as many iPhones sold in the first four years.” In the last 12 months, Apple sold 68 million. In all of fiscal year 2013, the company sold 71 million, so that’s a decrease but not as dramatic as if you only look at the quarter. “I view it as a speed bump and not a huge issue,” said Cook. “That said, we want to grow. We don’t like negative numbers on these things.”
“I know that there’s a popular view that the market is saturated, but we don’t see that,” Cook continued. He explained in the top six revenue-generating countries, as of the end of the June quarter, the majority of people buying iPads have never bought one before. Of customers who are first-time iPad buyers, the range in those six countries goes from 50 percent to more than 70 percent. “When I look at first-time buyer rates in that area, that’s not a saturated market. You never have first-time buyer rates of 50 and 70 percent. What you do see is that people hold onto their iPads longer than they do a phone. Because we’ve only been in this business four years, we don’t really know what the upgrade cycle will be for people. And so that’s a difficult thing to call. What we do know is that people always respond to [us making] great products, and we feel really great about what we introduced last week.”
Don’t fear the cannibals
Another thing that could be affecting iPad sales this quarter? New iPhones and those pesky record-setting Mac sales. “There are obvious cannibalization things that are occurring,” Cook said. “I’m sure that some people looked at a Mac and an iPad and decided on a Mac. I don’t have research to demonstrate that, but I’m sure of that just looking at the numbers. And I’m fine with that, by the way.”
And don’t forget how close the iPhone 6 Plus is in size to the iPad mini too. Said Cook: “I’m sure that some people will look at an iPad and an iPhone and decide to get just an iPhone, and I’m fine with that as well.” Especially since features like Continuity give users easier ways to spread tasks between devices, starting on one and finishing on another—to Apple it shouldn’t really matter which device customers start with, as long as they have a good enough experience that when they decide to buy another thing, they reach for something with an Apple logo.
Continuity is coming to your house
Obviously, Apple employees never give away what they’re working on until they’re good and ready. But it wouldn’t be a Q&A without someone asking. This time, good old Gene Munster from Piper Jaffray wanted to know, since investors think of Apple as a product company, what are the exciting things to be focused on as an investor?
Cook’s answer was pretty great. He said, “Look at what we’ve done and what we’ve delivered. … But more important than all the stuff that you see is to look at the skills within this company. I think it’s the only company on the planet that has the ability to integrate hardware, software, and services at a world-class level. That in itself allows Apple to play in so many different areas, and the challenge becomes one of deciding which ones to say no to and which to say yes to. … We always have more ideas than we have resources to deal with.”
He went on. “I would look at what we talked about last week. Things like Continuity, and if you use your imagination and think about where that goes, there’s no other company that can do that. Apple is the only one. I think this becomes so incredibly important moving forward, for customers living in an environment where they’re using multiple devices. I would look at the skills, the capabilities, the passion of the company. The creative engine has never been stronger.”
Emphasis ours, because yowza, let’s think for a second about where that really could go. Apple already has you covered with computing devices and a phone—the next step is handing off directions from a mobile, personal device like an iPhone or an Apple Watch to HomeKit-compatible devices all around your house. We already see it in CarPlay—since the data walks around with you, on your phone, there’s no logging in to apps in the car or having to enter your home address. It just knows you.
Watch out for Apple Pay
But Cook wasn’t even done with Munster’s question yet. “Apple Pay is classic Apple, taking something that is incredibly old, outdated, kludgy, where everyone is focused on everything but the customer, and putting the customer at the center of the experience and making something elegant. I would look at those things, and as an investor I’d feel great.”
Earlier in the call, Cook was asked if Apple Pay would be a standalone business over time, or if Apple saw it as a feature to sell products. Why not both? Cook said it’s not only the kind of feature they think will sell phones, but like the App Store, the more it’s used, the more Apple’s cut adds up.
“We see huge issues with the security of the traditional credit card system,” Cook said. “Many people who have entered mobile payments are doing so in a way that they want to monetize the data that they collect from customers. And we think that customers in general don’t want this. That they like to keep the data private. So we wanted to have ease of use, security, and privacy, and maximize all three. By doing this stuff, we think we will sell more devices because we think it’s a killer feature.”
“We do not charge the customer for the benefit. We do not charge the merchant for the benefit. However there are commercial terms between Apple and the issuing banks. But we’re not disclosing what they are. Like any other contractural arrangement, those are a private sort of thing.” Apple will report Apple Pay revenue in the Services category, alongside the billions of revenue the iTunes unit is already raking in.