Weekly readings – 7th December 2019

How busyness leads to bad decisions

Why Taxpayers Pay McKinsey $3M a Year for a Recent College Graduate Contractor

How I Get By: A Week in the Life of a McDonald’s Cashier. Reading about her week is heartbreaking. The sad thing is that it’s common in America. Hustling is great, but it shouldn’t be used to describe the economic difficulties a normal person has to face in arguably the richest country on Earth

Israeli scientists find way to treat pancreatic cancer in 14 days

A revelation on how employees suffered emotional toll while working at Away

Apple will start the wireless movement on smartphones in 2021?

3% cash back at Nike with Apple Pay

Today, I received this email from Apple

Here’s something to cheer about: now you can save 3% at Nike every time you use Apple Card with Apple Pay. This includes all purchases at Nike retail stores, Nike Factory stores, and on nike.com and Nike apps.

It is quite a notable development. Apple Pay is already the number 1 mobile payment application, surpassing even the famous Starbucks application (Source: zdnet). Nike is one of the most popular brands in the world with more than 1,000 stores worldwide. In 2019, revenue from Nike Direct, which comprises of sales from retail stores, mobile applications and websites, reached more than $11.7 billion.

Source: Nike
Source: Nike

I did a quick search on the best cash-back credit cards. 3% cash back is among the most competitive offer for retail stores like Nike. Plus, you can earn 3% through mobile apps and websites. The extra 1% in addition to the standard 2%, and the convenience of using Apple Card through Apple Pay will surely spark consumer behavior.

It’s very interesting to see how many more major partners will join the 3% cash back list. Companies will monitor closely the popularity of Apple Pay among consumers and wonder if it will be beneficial to be left out. Once more partners join, Apple Pay will have a bigger appeal to prospective partners and more leverage. The cycle will keep going from there.

Disclaimer: I do own Apple stocks in my portfolio

Apple Q4 Earnings Report

Apple announced their Q4 earnings today. Below are my notes of the earnings report.

Before we go to the financial analysis that I did, here are some noteworthy remarks from the investor call (Source: Seeking Alpha)

  • This Q4’s revenue is the highest ever. The tailwin in foreign exchange was estimated to be around $1 billion
  • iPhone 11 has been the best selling phone since the launch
  • Services saw record growth in revenue in all five geographic segments
  • “For Apple Pay, revenue and transactions more than doubled year-over-year with over 3 billion transactions in the September quarter exceeding PayPal’s number of transactions and growing four times as fast. Apple Pay is now live in 49 markets around the world with over 6,000 issuers on the platform. We believe that Apple Pay offers the best possible mobile payment experience and the safest, most secure solution on the market. We’re glad that 1000s of banks around the world participate.”
  • Customers will be able to purchase new iPhone and pay for it with Apple Card over 24 months with zero interest
  • Wearables saw record revenue in all tracked markets
  • Record revenue was recorded in the U.S., Canada, Brazil, the UK, Germany, France, Italy, Poland, Korea, Malaysia, the Philippines and Vietnam
  • “Our active installed base of iPhone continues to grow to a new all-time high in each of our geographic segments. And in the U.S., the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 99% for iPhone XR, XS and XS Max combined. Among business buyers who plan to purchase smartphones in the December quarter 83% plan to purchase iPhones.”
  • 450 million paid subscriptions compared to 330 million over a year ago
  • “We generated an all-time revenue record for Mac in the US and in India and a fourth quarter revenue record in Japan. More than half of the customers purchasing Macs during the quarter were new to Mac, and the active installed base of Macs again reached a new all-time high.”
  • “iPad revenue grew in all five of our geographic segments with a Q4 revenue record in Japan. In total, over half of the customers purchasing iPads during the September quarter were new to iPad, and the iPad active installed base also reached a new all-time high. The most recent surveys from 451 Research measured a 95% customer satisfaction rating for iPad from consumers and 97% from businesses. And among both consumers and businesses who plan to purchase tablets in the December quarter more than 80% plan to purchase iPads.”
  • Cash and marketable securities stand at $260 billion. Net cash stands at $98 billion
  • In terms of hardware as a service or as a bundle, if you will, there are customers today that essentially view the hardware like that because they’re on upgrade plans and so forth. My perspective is that will grow in the future to larger numbers. It will grow disproportionately”

The following financial analyses are what I compiled from 2014 to now. For YoY comparison, there won’t be any figure for 2014. 2014 still appears on the charts, but only because it will take me too much time on my computer to remove it. Please bear with me.

Operating Margin, Top and Bottom Line Observations

Revenue reached all-time Q4 high even though the growth is modest compared to the two previous years.

Operating income actually dropped quite significantly as the cost of sales increased, lowering both margin and the net income growth.

Product Segment

As you can see below, Mac and iPhone declined year over year. The decline was offset by growth in iPad, Services and Wearables.

iPhone still makes up more than half of Apple’s revenue, but its influence has been waning over the past years. Meanwhile, Services and Wearables have been on the rise, with the latter now bigger than iPad. Services in Q4 almost made up 20% of Apple’s total revenue.

Transition to a higher margin Services-focused company

Apple has reported figures for Product and Services for the past two years. Product segment made up 80.5% of Apple’s total revenue, down from 83% from a year ago. It was offset by the rise of Services, up to 64% from 61% a year ago. It’s a good trend if you look at gross margin. Services carries twice as big gross margin as Products.

Regional Segments

Americas is still the dominant geographic segment for Apple. China has been slightly declining, standing at around 17% of Apple’s total revenue. Rest of Pacific has been increasing, even though its size is relatively small compared others’.

However, in terms of gross profit as % of revenue, America ranks last while Japan tops all geographic segments

Operating Expense as % of Revenue

Apple has been spending more as % of Revenue on Research and Development.

Overall, it seems like a good quarter for the company with increase in revenue despite the drop in the iPhone segment. Services is on the rise and so is Wearables. Airpods Pro hit the stores yesterday and I have seen plenty of positive coverage

It’s a bit concerning that cost of sales increased this quarter, which I suspect is due to price cuts. It will be interesting to see how the upcoming quarters will be. The transition to Services and what the company has done have been positively received by Wall Streets

Disclaimer: I own Apple stocks in my personal portfolio

Philosophical approaches in ethical decisions

The first course I took in my MBA was Business Ethics. One of the biggest lessons that I took from the course is that there are essentially three philosophies in ethical decisions

  1. Focus on Consequences (Consequentialist Theories): With this approach, decision makers focus more on the possible consequences. In other words, the ends matter more than the means
  2. Focus on Principles, Duties (Deontological Theories): with this approach, principles and abstract values matter the most in decision making. The question of “what is the right thing to do here?” is a major consideration
  3. Focus on Integrity (Virtue ethics): this approach focuses on the person trying to be a good person more than the act

Recently, there have been an increasing number of disputes between China and American businesses. American companies have to cave to pressure from the Chinese government when it comes to sensitive issues related to their sovereignty and politics. For instance, Apple hides the Taiwanese flag when users are in Hong Kong or Macau, and pulls the app that supports the protest in Hong Kong from App Store, even though it originally approved the app.

China is a huge market for Apple and houses the majority of its supply chain. In the beginning, they tried to do the right thing. Eventually, Tim Cook and the management team prioritized the consequences of his decision, thinking about the impact on the company’s financials, shareholders and to some extent his own bonus, I think.

I don’t think it’s clear cut to say an approach is right or wrong. It varies from one person to another, from one system of values to another. Personally, I would prefer seeing Apple keep the app on the App Store, but I understand the decision as well as I understand the decisions taken by other companies under China’s pressure.

Disclaimer: I own Apple’s stocks in my portfolio

Apple Card raised the bar for easy and smooth credit card application & activation

I got my Apple Card this weekend. While I don’t have intention to use the physical card itself due to its low cash back (1% compared to the standard 2%), I am happy with the how easy the application and activation of the card is.

To apply for the card, you only need to have an eligible phone (iPhone 6 and later I believe), open the wallet application, fill in some basic information, take a photo of a valid ID such as State ID or Driver License and be done with it. The application is processed within seconds. When I applied for other credit cards, the process was a bit more tedious. Online forms and sending physical proof of identity are usually required. With Apple Card, everything is done via the Wallet app, right on the phone.

To activate an Apple Card is even easier. The screenshot below shows all you have to do to activate it

Connect your phone to Wifi, hold it close to the package Apple sends and that’s it. Your card will be activated.

With Apple’s appeal, marketing prowess and a sleek design, I think there will be a lot of activations. Yet, I doubt the physical card will be used much. The benefits are inferior to what the market offers. I won’t be surprised if Apple and Goldman Sachs work together to give users a reason to use the physical card more often. Nonetheless, I am pretty pleased with how I came to receive the card.

Disclaimer: I own Apple stocks in my portfolio

Quick review of iPhone 11

After years of delaying a phone upgrade, I finally gave in when my old iPhone 5S’s battery dropped from 50% to less than 5% after one phone call. I bought a new iPhone 11 last Friday at an Apple Store and wanted to share a few thoughts after using it for almost a week since I doubt that I will have major other use cases later on. It’s worth noting that while I was standing in line to get the new phone (and it’s a long line), I was pretty much one a few people who stood there to get the 11. Most customers were there to get the Midnight Green color which is only available on 11 Pro and Pro Max. I won’t be surprised to see that the color is the best selling iPhone this year. Apparently, Walt Mossberg, a famed tech journalist, had pretty much the same observation

Camera

The camera on iPhone 11 is fantastic. It can take photos with dim lights and photos have remarkable quality. I am not a photographer and I suck at making adjustments for photos, but these are some that I have taken so far

The setting has way less lighting than it looks and I didn’t adjust anything
Some food in Chicago close up

FaceID

FaceID works when my face isn’t directly in front of the camera, when I lie on my bed at night with only the reading lamp on and when I have sunglasses on. You can choose to set up FaceID so that it will work even when your eyes are closed, even though for security reasons it is not recommended. The feature facilitates log-ins and payment seamlessly, something that a person who upgraded from iPhone 5S very appreciates

No notification while driving

The phone’s default setup prevents notifications from app while you are driving. If you are on a train or bus, you can manually turn it off easily. If you just go about your day and drive without giving it much thought, don’t be surprised that you won’t receive alerts from your friends.

Blocking unknown callers

There is a feature that blocks calls from numbers that are not in your phone book. This option; however, may be annoying if, for instance, you are waiting for a call from Google to verify a log-in like I sometimes do, due to the two-step authentication security feature.

Battery

I am not a heavy phone user in a sense that I don’t listen to music much on the new phone yet and I don’t play games. So even though my battery lasts more than a day with all chat messages, Twitter, Facebook and maps, it may not be a practical true yardstick of the battery life. Nonetheless, if your use cases are similar to mine, the phone’s new battery is pretty awesome.

Because iPhone is one of the most covered products and Apple one of the most scrutinized companies, I am sure there are others that have reviews in depth. For the simple use cases and features that fit my life, the phone has been great. So far.

Disclaimer: I own Apple stocks in my personal portfolio.