There is a lot to unpack regarding Apple’s earnings call and their outlook for Q2 2016.
Because we have, and track, data points around Apple’s hardware sales of product by region, I like to look at Apple’s quarterly revenue on a region by region basis. If I know a market is up or down, it helps me model a revenue estimate based on what I know sales look like on the ground in that region. What we have for China and the US is the best data but I see enough of Europe to have a good indication of the trends. For Japan, I have weaker data so my confidence on those regional models is less. I did not anticipate Japan being negative 12% for example, but again I have fewer data points there.
One main takeaway was the US market, Apple’s largest. If you listened to the podcast with Steve Baker from NPD, you heard him talk about the US retail landscape being down over $1 billion dollars YoY. Meaning, US consumer tech sales were down as well. Here are some relevant categories with YoY declines in US retail from NPD’s slide deck:
Notebooks: – 1.8%
Desktops: – 10%
Tablet accessories: – 21%
NPD had Apple’s iPhone sales up in North America and I believe it was up YoY but they highlighted two other categories as being bright spots which also correlated to bright spots in Apple sales. NPD had video streaming boxes, like Apple TV, up 24.3% and wearables (which include the Apple Watch) up 101%. Apple sold a record number of Apple TVs and Apple Watches (5.5-6m units likely) in the December quarter.
The US market is a key driver of Apple’s December quarter results and major segments being negative all around was a factor and not one easily spotted. Particularly since most of the US spend happened toward the end of November and December.
Rest of the World
While the US market is a key, Tim Cook was quick to point out that two-thirds of Apple’s revenue is now generated outside of the country. While Japan and the Americas were the only two negative areas, China was up double digits, which I was anticipating. A great majority of Apple’s upside growth is dependent on China. A stat that stood out was that 50% of iPhones sold in China were to first-time iPhone buyers. If we recall historically during the great growth periods of Apple product lines, Tim Cook would share a similar stat that 50% of sales were to new buyers. This is a signal of growth and it translates to approximately 10-12m first time buyers and net additions to the Apple iPhone ecosystem in China.
Installed Base and Services
The theme of Apple’s conference call was installed base. If you recall, an underlying theme of many of my articles last year was, when a company sees user growth stall, they change tack to focus on better monetizing their existing user base. That is the sentiment being emphasized with a statement like:
Apple’s installed base drove over $31 billion in related purchases in FY15, up 23% Y/Y, and almost $9 billion in Q1’16, up 24% Y/Y
The statement comes from the supplemental material Apple provided. Apple’s installed base of active devices of a 90-day period, meaning in the last 90-days how many devices contacted one of their servers, has now crossed one billion. In my installed base model, I was in the mid-900 million range and a billion is higher than my own and many other models. It speaks to the longevity of life of Apple’s hardware. The elusive number is one we don’t know. That is, how many unique Apple customers are there? 1 billion active devices is great but we know a good majority of Apple’s customers own more than one Apple product. My somewhat educated guess is their unique user base is close to 600m. We know this base is growing, thanks to the China 50% net add statistic and the Android switching statistic. We just don’t know by how much. This is key to understand as we look at Apple services revenue upside, something they want to emphasize. How exactly Apple better monetizes their existing base will be vital parts of their revenue analysis going forward.
I suspected Apple might surprise to the upside on guidance but they did not. I sense Apple has presented a worst case scenario for themselves for the March quarter. Sensing the economic headwinds, they are modeling pretty conservatively. If economic issues turn, there could be some upside but it is way too early to tell right now.
I still see momentum in China and expect that region to be up YoY at this point but that may be the only market.
Tomorrow, I’ll talk about what I believe Apple’s growth thesis is for itself, which has become clear when we read between the lines from Apple’s earnings call.