Apple had a stellar holiday quarter. There are several things that stood out, which contributed to their record quarter, which showcases the incredible foundation Apple has laid as a global business.
- Revenue grew in nearly all geographies. Apple reported all-time revenue records in the Americas, Europe and Asia Pacific, and a return to growth in Greater China. During the earnings call, CFO added a nugget of insight that services growth was broad and double-digits across all five geographies. This point, to me, signifies an important fundamental point that services is a global growth story and not restricted to specific regions. Apple’s hardware growth was global, and the growth of its services was global.
- The active installed base continues to grow. Apple reported their customer base size is now 1.5b devices in use, nearly one billion of those iPhones (my estimate). This indicates something that has long been a thesis in our analyst circles. A colleague named Carl Howe, who used to cover Apple but is no longer in the analyst community, put forward a thesis called the Android leaky bucket. In summary, his thesis was iPhone loyalty will always remain stronger than Android. He built his thesis out explaining the rate of change from iPhone to Android would be slim, while the rate of change from people using Android to iPhone would remain steady.
The data shows the rate of change from those switching to iPhone from Android has slowed dramatically since early in the decade, quarterly averages globally in the single digits. But that switch correlates to an increase in disposable income. This was true in China, even segments of SE Asia, and even India, all markets where research shows those with higher income choose the iPhone. It’s safe to say that at a global level, the iPhone completely dominates the high-end of the smartphone market.
Apple’s active installed base continues to grow because customers remain loyal, and Apple is benefitting from a slow leak of Android particularly when countries see economic growth, and a rising middle class emerges. It’s safe to assume Apple’s installed base continues to grow at a relatively steady rate.
- The iPhone will have a solid 2020. From a Wall St. perspective, the worst of the iPhone sales declines appear to have happened. A new baseline normal, of average annual sales, has now been established in the 180-200m range, and analysts simply need to feel out if a particular year will be in the high or low end of that range. 2020 appears to be more in the 190-200m, and most Wall St. research notes I’ve seen are upping their iPhone estimates for 2020 into that 190-200m range. That is still well off from iPhone’s annual peak sales of 230m units, which we likely won’t see again, but strong given the maturity of the market. While Apple does not disclose unit sales any longer, most believe sales were in the 69-72m range for the quarter with an ASP between $780-$795.
This year the iPhone 11 lineup was particularly strong. A starting price of $699 for iPhone 11 helped as well and will continue to help for the remaining quarters. I don’t believe in the iPhone supercycle theory any more when it comes to iPhone upgrades, but I do this year is seeing a healthy percentage of upgraders and new customers over the last two years.
To the Apple bears, and yes, there are still those who are bearish on Apple, it looks as though Apple is defying gravity. But for those who truly understand the company, none of this is surprising. What is most impressive about the Dec quarter earnings was that Apple set an all-time record in revenue without needing to set a record in iPhone sales. We were used to them continually setting quarterly records while the iPhone was still in growth mode. Now, with the iPhone ex-growth, Apple is still setting records.
I’ve argued all along that just focusing on iPhone sales was the wrong way to look at Apple. If you believe they are just an iPhone company, this is what you would do, and it is what many in Wall St. did. But when you step back and look at the forest in the trees, you could see Apple building strong revenue streams across the board. Total revenue growth was easy to predict, even if iPhone sales slowed when you see the big picture.
I’ve long argued Apple is a product company that is among the best at customer experiences. They are consistent in their ability to make great products with great experiences across the board. So it stands to reason that any category Apple gets into would follow this philosophy and end up being a healthy business. Mac/iPad, wearables, and now services all follow this philosophy and showcase the strength of Apple’s fundamental business.
Building great products leads to higher customer engagement, loyalty, and willingness to purchase more product offerings. This is the fundamental reason to remain bullish on Apple’s growth prospects and what truly sets them apart from so many other companies.
There are a few points worth making as it relates to Apple’s 2020. First, I found it interesting that Apple is getting a handle on estimating the growth of their subscriptions. Apple gave a forward estimate of reaching 500m by the end of March and 600m by the end of 2020. For Apple to have the confidence to share an estimate like this, it means they have seen relatively steady and predictable metrics. This is positive when it comes to understanding the steadiness of services as a whole.
I understand the guidance range given and the concerns of Coronavirus. I was quoted by CNBC earlier in the week, making the same point that if the virus gets bad enough that cities or factories get shut down, it will impact Apple’s ability to meet demand, which is already relatively tight! For the sake of China, and all of the world, I hope it does not come to that, and we can contain the virus’ spread.
I’m still curious about what happens with the Apple TV+ promotion over the long-haul. It will be good to know for many of us who study this, how many customers remain loyal to AppleTV+ after their promotion, and how Apple can continue to grow that business and recoup the costs of their content spend, which is large and getting larger. Apple’s ultimate goal with AppleTV+ is something I’m still looking for evidence with, given the increased competition. One can argue if they want this service to be a revenue growth business, they may need to acquire more assets, even a studio or network. But things are getting competitive, and Apple’s long-term strategy here is interesting to watch.
Last point which is on wearables. I find it fascinating demand for Apple Watch Series 3 is still so high. But, given the price to feature ratio for Watch, this is an incredibly powerful product to get people into the Apple Watch family. This is a positive for the business because those customers will likely now stay loyal to Apple Watch, and upgrade at some point down the line. Five generations into Apple Watch, and we see why a new product category takes years to build, and why a robust product line is essential to its success. Quickly on AirPods/AirPods Pro. That product is going to continue its momentum in 2020 as Apple can’t make them fast enough. I firmly believe the S-curve for AirPods is only getting started and will be steep.