On Tuesday Apple announced its latest corporate earnings, a relatively flat quarter that still brought in $11 billion in profits. As always, if you look beyond the raw numbers on its reports and listen to its hour-long phone call with select Wall Street analysts, you can get some interesting perspective on where the company is going.
Rumors suppress demand
If there’s anything Apple likes less than discussing its future product plans, it’s probably other people discussing its future product plans. Aside from a tossed-off joke on stage at a product launch, Apple rarely discusses rumors of what it’s working on. Which is why I was struck by Tim Cook’s response to a question by UBS’s Steve Milunovich about a recent survey from 451 Research that suggested a drop-off in intent from prospective iPhone buyers.
“In general what we are seeing… we believe to be a pause in purchases on iPhone,” Cook said, “which we believe are due to the earlier and much more frequent reports about future iPhones.”
In other words: Reporting about Apple’s future iPhone plans is becoming more frequent and happening earlier in the process, and it’s having a material impact on Apple’s current iPhone business. Now, there are some caveats here: First, the promise of a redesigned iPhone may have more resonance in an era where the product hasn’t had a major redesign in two and a half years. Second, buying hesitation might be bad today, but it’s not bad tomorrow if that new iPhone ships and Apple sells a ton of them. Still, it’s interesting to see Cook directly address what Apple feels is the impact of future product reports on Apple’s current sales.
Analysts are worried about Qualcomm
A couple of analysts on the phone call asked about Apple’s dispute with Qualcomm over billions of dollars in patent fees. Bernstein analyst Toni Sacconaghi went so far as to raise the specter of potential court injunctions that could prevent Apple from selling the iPhone in certain parts of the world.
Cook dismissed that sort of talk: “I don’t believe anyone is going to decide to enjoin the iPhone based on that,” he said. “I think that there’s plenty of case law around that subject, but we shall see.” Cook is not a lawyer, but he employees some pretty good ones, who presumably gave him that advice.
More broadly, though, Cook portrayed Apple’s stand against Qualcomm as being against an unfair licensing regime that gives Qualcomm a share of the entire price of an iPhone. “Qualcomm’s trying to charge Apple a percentage of the total iPhone value,” Cook said. “And they do some really great work around standards essential patents, but it’s one small part of what an iPhone is. It has nothing to do with the display or the Touch ID or a gazillion other innovations that Apple has done. And so we don’t think that’s right.”
Congratulations to whomever had gazillion in the Unlikely Words Tim Cook Might Use on an Analyst Call contest.
China’s rough in spots, but not overall
Famously bullish on China, Cook has had to resort to citing specific figures about Apple’s business there to explain the dramatic drop-off in Apple’s performance in the past year. On Tuesday he provided a lot more detail about China to point out the bright spots: Great sales of the iPhone 7 Plus, and major growth in the Mac, services, and retail traffic.
The reasons Cook cited as depressing the company’s Greater China results? Foreign-currency devaluations and particularly weak sales in Hong Kong, as well as slumping sales on all older iPhone models.
“What I now believe is that we’ll improve a bit more during this current quarter,” Cook said. “Not back to growth, but improve, make more progress. And you know we continue to believe that there is an enormous opportunity there.”
Services growth via subscriptions
Apple has been trumpeting its growing Services budget line for a few years now, and with good reason: It’s been the most consistent source of growth at Apple for a little while. Apple provided a bit more detail on that growth by updating a number that its executives mentioned on the previous quarter’s analyst call: the number of active subscriptions to Apple services. Three months ago, that number was 150 million, but it’s now at 165 million. Sequential growth of 15 million subscriptions is nothing to sneeze at.
Yes, that’s not a representation of total users–I’m both an Apple Music subscribe and an iCloud storage subscriber myself, and each of those subscriptions is counted separately in that figure–but it’s still a huge number, and growing fast. What’s more, the number of Apple accounts that are currently paying for something has grown more in the last 90 days than ever before.
It’s all part of a larger story Apple’s telling about its customers, too: their value increases over time. “As people come into the ecosystem and start paying on the ecosystem, we see a spending profile that is very similar around the world,” Apple CFO Luca Maestri said. “People start at a certain level and then they tend to spend more over time.” Once a user buys in, they keep upping the ante. And that’s great for Apple’s services business.
Yeah, making wearables is a tough business
Sometimes when Apple executives acknowledge that a particular product category is difficult, they’re offering an explanation about why Apple has struggled. But sometimes they use that acknowledgement to throw shade. That was the case when it came to discussing the wearables market, especially smartwatches.
“The watch area is really hard,” Cook said. “It–in essence, from an engineering point of view–is similar to a phone in terms of the intricacies and so forth. And so I’m not very surprised that some people are falling out of it, but we’re very committed to it and believe that it’s already a big business and believe over time it will be even larger.”
Cook failed to characterize Apple Watch overall–which suggests that he lacked a specific superlative, unlike last quarter’s sales, which he characterized as the largest yet. But he did say that Watch sales “more than doubled in six of our top ten markets, which is phenomenal growth particularly in a non-holiday quarter. And so we couldn’t be more satisfied with it.”
Roll it up with AirPods and Beats and, Cook says, you’ve got a business that in the past 12 months has grown to be the size of a Fortune 500 company.
All the talk about the Watch came in response to a question that was trying, in that clever way that the financial analysts do, to elicit a statement out of Cook about the future of Apple’s product plans. And while that question was doomed to fail, as all such questions are, it still allowed Cook to offer a promise for the future of Apple’s wearables business.
“Where does it go? I wouldn’t want to comment on that,” Cook said, and audibly stifled a laugh. “But we do have a really great [product] pipeline here.”
Tim Cook wants more out of India
Apple’s famously been a laggard when it comes to India. But recently it has been pushing harder there, with Cook saying Apple has “a ton of energy going into the country on a number of fronts,” including a new developer center in Bangalore. Cook also saved some of his most choice superlatives for his description of the rapid growth happening in India: “They’re moving at a speed that I have not seen, in any other country in the world…. And it is truly impressive.”
But as for Apple’s growth in India? Cook’s not satisfied. “Our growth rates are good–really good, by most people’s expectations,” he said, and then gave a momentary pause. “…Maybe not mine, as much.”
That’s the sound of a CEO who thinks his company can do a better job in one of the world’s fastest-growing markets. Now we all have to watch and see what happens next.