Yesterday, Apple announced a record quarter where it became the third company to bring in more than $100 billion in a single quarter. The achievement is pretty remarkable given the timing. We are in an unprecedented global pandemic, where economic uncertainty is concerning, consumer confidence is shaky, and Apple and their carrier retailers having to close stores or limit capacity.
Those who recall the last major recession of 2008-2009 may remember that Apple was an anomaly during that recession. They continued to grow and shatter sales records despite a deep recession. At that time, the smartphone, or namely the iPhone, was one of the most talked-about products in the tech industry, so it was not a total surprise for me that Apple did so well in that recession, although it confounded Wall St. analysts. This time around, Apple was up against even tougher odds to have produced a record quarter, and sure enough, they crushed it. Their many markets and consumer dynamics that I think played a role in Apple’s monster quarter. Still, the thing that really stands out to me is Apple’s ability to have impeccable timing.
I firmly believe, Apple has the best understanding of their customer base than any other technology company in our industry. This does not mean Apple has been right about their customers or market 100% of the time, but they are extremely precise when you look at the body of decisions they have made regarding anticipating demand. If anything, they misread the market because they underestimated demand, not because they overestimated it.
When you listen to Apple executives on earnings calls, they mention performance relative to their assumptions whenever they discuss a past quarter or future quarter. Like most companies, Apple builds market models to try and anticipate demands, and more importantly, understand what product decisions they make and how that impacts sales cycles.
Another unique element of Apple’s customer base is the makeup of customer segmentation they have. As a product, iPhone is the only tech franchise that has customers that span the spectrum of consumer profiles. Apple has customers from bleeding-edge early adopters, all the way to late adopting tech laggards. This makes coming up with market assumptions extremely difficult since each of these consumer segmentations behaves differently and make purchasing decisions using entirely different factors.
Historically, Apple has seen a bigger portion of their customers buy or upgrade when either a design refresh occurs or a leap forward in technology is offered. The last true super cycle for Apple was the 2014 iPhone cycle, where Apple increased the screen size of the iPhone, introduced the Max, and had a design refresh. This cycle, Apple introduced four new iPhones, including the smallest and largest offered simultaneously at a launch. Included a design refresh and a wireless generational moment with 5G.
Supply chain reports in August indicated Apple was gearing up to build 75-78m iPhones. This seemed high given the market conditions. Apple’s timing proved to be impeccable, and this moment in the market was the absolute right timing for Apple. Apple sold a record number of iPhones, likely over 80m last quarter for a record number of sales. Revenue was at an all-time high, and Tim Cook mentioned on the call they believe they could have sold even more iPhones if their retail stores were open. But at the end of the day, Apple knew this year would have the makings of a strong cycle, pandemic aside, and had been planning for it years in advance.
I tweeted yesterday, and it is worth mentioning that 5G played a role in this cycle’s strength, particularly in China. Had Apple not settled with the legal battle with Qualcomm in April of 2019, they would not have had a 5G device out this year and not capitalized on this iPhone cycle.
While there is more we could dive into, particularly around Mac’s upside and the continued strength of Wearables and services, I did want to call out one thing Tim Cook said that I think bears repeating.
Investors on the earnings call kept focusing on the COVID-related lift to certain segments. Tim Cook called out that while the situation around COVID added some wind to the sails, he did not want to detract from also attributing the product itself as a driver. It is a subtle point, most would not disagree with, but I think it bears re-emphasizing that great products get the attention of consumers and move the needle. While COVID did provide some lift, let’s not let that take away from the highly desirable products to Apple customers.
