Why Ap­ple loves China but hates sales fig­ures

Ja­son Snell reads be­tween the lines and lis­tens to the specifics

iPad&iPhone user - - CONTENTS -

It’s an­other record quar­ter as a part of a record fis­cal year for Ap­ple. The rev­enue was nearly $63 bil­lion, the profit more than $14 bil­lion, and for the year Ap­ple gen­er­ated $265 bil­lion in rev­enue and nearly $60 bil­lion in profit. It’s the com­pany’s eighth straight quar­ter of rev­enue growth, and that growth has ac­cel­er­ated ev­ery one of those quar­ters. This is

a healthy com­pany; you couldn’t find a health­ier one if you tried.

Yes, Ap­ple’s stock is get­ting hit be­cause its guid­ance – the amount of money it ex­pects to make dur­ing the cur­rent quar­ter – is ac­tu­ally slightly be­low what Wall Street an­a­lysts were ex­pect­ing. For the record, the rev­enue Ap­ple has guided to – be­tween $89 and $93 bil­lion – would be the most rev­enue Ap­ple has ever gen­er­ated in a quar­ter, and some­where be­tween 1 and 5 per­cent growth. In other words, get ready for an­other record Ap­ple quar­ter, be­cause this one’s shap­ing up to be huge.

As al­ways, it’s worth read­ing be­tween the lines of the fed­er­ally-man­dated fi­nan­cial dis­clo­sure ta­bles and lis­ten­ing to the specifics of the com­pany’s rit­ual phone call with fi­nan­cial an­a­lysts to see what else is on the com­pany’s mind. Here are a few things that I no­ticed.

iPhones ship­ping back­ward

One of the rea­sons Ap­ple cited for its fore­cast of slower rev­enue growth next quar­ter than in pre­vi­ous quar­ters is the sim­ple fact that its iPhone roll-out strat­egy is the op­po­site of its strat­egy last year. Then, the low­est-priced mod­els (the iPhone 8 and 8 Plus) shipped months be­fore the higher-priced iPhone X. This year, the re­verse is true, with the iPhone XS and XS Max ship­ping to­ward the end of the quar­ter, and the iPhone XR not ship­ping un­til late Oc­to­ber.

The im­pli­ca­tion is that dur­ing the hol­i­day quar­ter last year, the first wave of iPhone X sales hap­pened, while this hol­i­day quar­ter will miss the re­lease of the iPhone XS and XS Max en­tirely. This is what they call,

in the ex­plain­ing-things-to-an­a­lysts busi­ness, a ‘tough com­pare’. (That’s the phras­ing Ap­ple CFO Luca Maestri used on the call when ques­tioned about the rev­enue guid­ance by an­a­lyst Shan­non Cross.)

Tim Cook likes China and the global econ­omy

If you’ve been lis­ten­ing to Tim Cook for the past few years, you know that he has been, and re­mains, bullish

on the fu­ture of Ap­ple in China. When asked by An­a­lyst Wamsi Mo­han about Ap­ple see­ing slow­downs in some emerg­ing mar­kets, Cook blamed cur­rency is­sues that re­quired Ap­ple to raise prices (thereby hurt­ing sales) in some coun­tries: Turkey, In­dia, Brazil, and Rus­sia were the mar­kets he cited.

But Cook went out of his way to ex­clude China from Mo­han’s think­ing. “Our busi­ness in China was very strong last quar­ter – we grew 16 per­cent,” he said, cit­ing strong iPhone growth.

The cloud hang­ing over all dis­cus­sions of China is the pos­si­bil­ity that an es­ca­lat­ing ex­change of tar­iffs and other as­pects of a trade war might hurt Ap­ple, which as­sem­bles many of its de­vices in China, as well as sell­ing many prod­ucts there. An­a­lyst Katy Hu­berty asked Cook if he had any plans to di­ver­sity Ap­ple’s sup­ply chain, pre­sum­ably to pro­vide the com­pany with a hedge on pro­duc­tion in case US-China re­la­tions de­te­ri­o­rated to the point that they might have an im­pact on Ap­ple’s abil­ity to pro­duce and ship prod­ucts.

Cook would have none of it. First, he re­jected the premise of the ques­tion, point­ing out that Ap­ple prod­ucts are “re­ally man­u­fac­tured ev­ery­where”, with con­tri­bu­tions from the US, Ja­pan, Korea, and China.

He went on to ex­plain why this is the best ap­proach. “I think that ba­sic model, where you look around the world and find the best in dif­fer­ent ar­eas, I don’t ex­pect that model to go out of style,” he said. “I think there’s a rea­son why things have de­vel­oped in that way, and I think it’s great for all coun­tries and cit­i­zens of coun­tries that are in­volved in that. And I’m still of the mind­set that I feel very op­ti­mistic and pos­i­tive.”

Tim Cook is ex­cited about health and AR

It’s not an an­a­lyst call with­out at least one at­tempt to di­vine a fu­ture prod­uct di­rec­tion from the usu­ally but­toned-up Ap­ple. This time it was Wamsi Mo­han’s turn to tempt Cook with a ques­tion about Ap­ple’s fu­ture role in health­care. And Cook, some­what sur­pris­ingly, an­swered with a vague-yet-pos­i­tive re­sponse:

“Ap­ple has a huge op­por­tu­nity in health, and you can see from our past sev­eral years that we have in­tense in­ter­est in the space and are adding prod­ucts and ser­vices… I don’t want to talk about the fu­ture be­cause I don’t want to give away what we’re do­ing. But this is an area of ma­jor in­ter­est to us.”

Look, that’s pretty much the most you’re ever go­ing to get out of an Ap­ple ex­ec­u­tive re­gard­ing fu­ture prod­uct direc­tions. Ex­pect ev­ery­one else to spend the

next six months try­ing to in­ter­pret what Cook might mean by health be­ing “a huge op­por­tu­nity” and “an area of ma­jor in­ter­est”.

Mean­while, an­other area of ma­jor in­ter­est – aug­mented re­al­ity (AR) – also still makes Cook’s heart sing. An­a­lyst Mike Ol­son cited a slow­down in sto­ries about AR and Cook jumped in to pro­claim that he has “a dif­fer­ent view” on the mat­ter. He cited see­ing de­mos of new AR prod­ucts be­ing built dur­ing his trav­els around the world in Septem­ber, and said he’s “re­ally happy with where things are at the mo­ment”.

10 units or less

Fi­nally, in a bit of a sur­prise, Ap­ple an­nounced that it would no longer re­port the num­ber of in­di­vid­ual prod­ucts it sells be­gin­ning next quar­ter. This means that while we’ll still know how much rev­enue the Mac, iPad, and iPhone gen­er­ate ev­ery three months, we’ll no longer be able to see ex­actly how many Macs, iPads, and iPhones Ap­ple sells.

Maestri chalked this change up to the fact that Ap­ple feels the num­bers can be mis­lead­ing, since the com­pany doesn’t break out which mod­els are sell­ing well. This quar­ter, he said, Ap­ple saw strong iPhone growth at the high end of the prod­uct line, but that was hid­den by an over­all flat unit-sales num­ber. Of course, Ap­ple’s cur­rent strat­egy seems to be to grow rev­enue in an era with flat­ten­ing sales growth, and this move plays into that strat­egy. Also, let’s not for­get that if Ap­ple re­ally wanted to com­mu­ni­cate how well par­tic­u­lar mod­els are do­ing in unit sales, it could dis­close that in­for­ma­tion.

Make no mis­take: this is about Ap­ple want­ing to limit the in­for­ma­tion it dis­closes about its busi­ness. Since there are ap­par­ently no fed­eral reg­u­la­tions that re­quire com­pa­nies to dis­close unit sales (as op­posed to rev­enue), we’re not go­ing to see those num­bers any­more. In­stead, we will be left to guess, based on rev­enue fig­ures, oc­ca­sional fac­toids thrown out by Ap­ple ex­ec­u­tives in an­a­lyst calls or on slides at me­dia events, and the (fre­quently poor) es­ti­mates of in­de­pen­dent an­a­lysts.

Or you could take Tim Cook’s view, via a some­what strange su­per­mar­ket anal­ogy that ended up be­ing the fi­nal words of the hour-long an­a­lyst call. The growth of

the in­stalled base (a num­ber that can be de­fined in a bunch of dif­fer­ent ways so that it re­flects what you want it to re­flect) and cus­tomer loy­alty fig­ures mat­ter more than the unit fig­ure, he said. And be­sides, who cares how many items you have in your cart when you get out your credit card at the check­out?

“This is a lit­tle bit like if you go to the mar­ket, and you push your cart up to the cashier, and she says or he says, ‘How many units you have in there?’ It doesn’t mat­ter a lot how many units there are in there, in terms of the over­all value of what’s in the cart.”.

The iPhone XS Max and XS shipped to­wards the end of the quar­ter

Ap­ple’s Tim Cook seemed bullish on China in Ap­ple’s Q4 2018 fi­nan­cials call

En­joy charts like this now, be­cause you’ll never see their like again

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