Anyone who follows Apple commentary closely, either by what Apple has said on previous calls, or by the Wall St. analysis, knows this quarter’s YoY decline in revenue was not a surprise. A key point to make, right off the bat, is Apple met their own guidance for this quarter. Apple guided between $50 and $53 billion in revenue for Q2 2016 and they came in at the low-end of $50.6. Gross margin guidance was 39%-39.5% and they came in at 39.4%. Basically, Apple knew this was coming and prepared investors for it. The fiction is that they missed expectations. What they missed was beefed up Wall St. expectations. If they miss their own guidance then we have a story. If they miss expectations by the street, then all is still right in the Apple world.
As I reflected on the past few years, an interesting observation must be made. It appears what happened in the December quarter of 2014 and the March quarter of 2015 with the iPhone 6/6 Plus was an anomaly and could not be counted on to be repeated. This was actually a point made by many at the time, calling the 6/6 Plus a super cycle and questioning whether it should be used as a comparable for the following years’ same quarters. While Apple narrowly beat YoY Dec quarter revenue, the inflated March quarter in 2015 due to China hyper growth of iPhone sales proved to be the harder compare. Bottom line, the iPhone 6/6Plus created a perfect storm of a super cycle in both the US, getting a large number of consumers to upgrade early, and creating massive demand in China. It is unlikely we’ll see a scenario like this again for some time. The kind of quarterly numbers Apple will put up in terms of iPhone sales and revenue in calendar 2016 are likely to be the true baseline quarterly numbers to compare here on out. I’m not going to be surprised if YoY revenue declines are still in the coming quarters. Apple is guiding lower for the upcoming Q3 2016 quarter over last year’s Q3 2015 quarter. So again, they see it coming and my advice is to abide by Apple’s guidance and their guidance only.
The real question I’ve been asked by the media yesterday is, where do we go from here? Well, it’s going to get worse before it gets better. But we can’t ignore the larger global smartphone market favors Apple the more mature it gets. What we have observed in non-US markets like China, parts of Europe, and pockets of emerging areas like Brazil/Mexico and India, is those consumers who have owned multiple generations of smartphones begin to realize how important the device is to them and they look to spend more on their next one. This is a key market dynamic fueling the switch to iPhone narrative and our research with consumers confirms that the longer an Android smartphone owner has one, the more likely they are to consider Apple over time. Which means Apple still has many customers in waiting. They just have to be patient.
On the iPad front, I don’t see things getting better at all. As Carolina Milanesi articulates in this post, tablets are still viewed as a luxury, not a necessity, and are ranked lowest in “most important device”. Will some consumers swap out their current PC with an iPad Pro? Yes. Will it be enough to change the iPad trajectory? Probably not. I’m intrigued by Tim Cook’s statements of positivity around next quarter’s iPad numbers. Our research still shows high levels of contentment with consumers and their current iPads but perhaps they have some kind of promotion coming they believe will help push volume.
I’m still bullish on Macs and the PC/Mac vs. Tablet research we have suggests to me the Mac may see more upside short term than the iPad, unless Apple can dramatically change the narrative around driving consumers to replace their PC/Macs with iPads. The PC is still viewed as a necessity in many consumer markets and, with some level of consumer refresh likely coming, I’d wager Macs benefit from this in the second half of 2016.
Services are the buzzword around Apple lately. On this point, Tim Cook said:
Services revenue jumped 20% to 6 billion dollars. App Store revenue was up 35% to beat last quarter’s all-time record, and Apple Music continues to grow in popularity with over 13 million paying customers today.
We feel really great about the early success of Apple’s first subscription business and our music revenue has now hit an inflection point after many quarters of decline.
The services business is powered by our huge install base of active devices which crossed 1 billion units earlier this year. As we discussed on this call in January, those 1 billion plus active devices are a source of recurring revenue that is growing independent of the unit shipments that we report every three months.
Let’s pull out a few statements. Interestingly, he calls Apple Music their first subscription business when .Mac and MobileMe were technically subscription businesses. As is iCloud photo storage and sync, but perhaps media subscription business is more apt. And yes, there will be more media subscription businesses from Apple than just Music.
This line is also quite telling. “…recurring revenue that is growing independent of the unit shipments..” Cook and Apple are telling us this is a growing business and is expanding whether hardware shipments are or are not. “Look past hardware sales” is the main point Tim Cook is trying to make here and I agree. I’ve been saying the same thing for some time. Apple has a large installed based that has a propensity to spend in the Apple ecosystem over others. Even our data confirms Android switchers to iPhone almost instantly begin spending more once they are on iOS than they did on Android. Our data also confirms this golden point. Apple customers, on average, spend more in Apple’s ecosystem the longer they are in it. Meaning they spend more in year three than they did in year one. This is all upside on the services front from Apple and I’m bullish they continue to make strides integrating services into their hardware and software strategy.
Lastly, on the iPhone. We are in a lull in the global smartphone market at large. Growth is happening in pockets, like India, but only in pockets, not at large. For the developed world like China and the US, Apple is going to need to ignite a new cycle and my gut tells me it the dual-camera feature will do it. Unfortunately, it doesn’t seem like dual-cameras will be on the mainstream iPhone lineup until 2017 at the earliest. So, with iPhone sales, I expect calm waters to continue and Apple needs to navigate with very little to no wind at their back.