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

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.

Weekly readings – 21st September 2019

How Photos of a Remote School Went Viral, and the Happy Ending That Followed. A beautiful story that makes me appreciate what I have more

The Sun Is Stranger Than Astrophysicists Imagined

A Brief Primer of Asia’s Mid-Autumn Mythology in 3 Folk Tales. Ever heard of Mid Autumn season in Asia? This article offers a great primer on one of the most popular events Asians, especially Southeast Asians, celebrate.

Remarkable story about small Vietnamese community and its transformation

USC Law Commencement Speech. An honest and insightful commencement speech by Charlie Munger

Creativity Is the New Productivity

China’s second largest e-commerce site J.D.com Experienced a 480% leap in iPhone Preorders over Last Year

NPR Shopping Cart Economics: How Prices Changed At A Walmart In 1 Year

Amazon Changed Search Algorithm in Ways That Boost Its Own Products. The change in algorithm goes against the ‘customer-centric’ philosophy that Amazon is known for

The Cost of a Mile

Raising Prices is Hard

What Really Brought Down the Boeing 737 Max? A super long and doozy read on 737 Max, but boy, is it good!

Vietnam Becomes a Victim of Its Own Success in Trade War. As a Vietnamese, I am no stranger to the terrible infrastructure in my country. That’s why I haven’t been bullish on our chance at benefiting from China’s tariff war with the US

Silent Skies: Billions of North American Birds Have Vanished

Netflix: how will the story end?

Apple’s multi-sided game

There were quite some surprises unveiled at Apple Event today:

  • Apple Arcade: $4.99/month for a whole family
  • Apple TV+: $4.99/month for a whole family and free if you buy a new iPhone, iPad, Apple TV or Mac
  • Price cuts for devices such as iPhone and Apple Watch Series 3

For a company notorious for ripping off consumers, a notoriety that they earn to a large extent, undercutting competitors and lowering prices for their high-end products are unusual. However, it may make sense in the game that Apple is playing.

Formerly relying on hardware, especially iPhones, for their revenue, Apple has been transitioning to be more of a service company. They have been pushing hard on the service part, including but not limited to Apple Pay, iCloud, Apple Card, Apple News+, Apple Arcade, Apple Care. However, to sell these services, they first need to find a way to put hardware into humans’ hands.

In return, hardware would be just boring pieces of metal without great user experience that comes from the operating system and ecosystem, including apps and services. There is no shortage of alternatives to expensive products that Apple offers. To really convince a consumer to dole out a significant amount, they need to present compelling reasons. Hence, the gradual updates to operating systems and a slew of services.

But Apple can’t do everything alone. They need partners. They need content partners such as publishers, game companies and producers as well as strategic partners like Goldman Sachs. These partners, I guess, are interested in the reach that Apple has through its installed base. By working with Apple, they hope to leverage the media coverage that Apple enjoys and get to many customers as quickly as possible.

By lowering entry prices for Arcade and offering TV+ on a very attractive term, I suspect that Apple wants to expand the subscriber base quickly from the existing user pool. The bigger the subscriber base, the more leverage Apple will have with content and strategic partners, whose future creations in turn will increase the appeal of Apple’s services.

By lowering hardware’s prices, there may as well be other reasons and I am so speculating here, Apple wants to lure non-Apple users and expand its user pool. It’s a two-pronged approach to grow the ecosystem.

It’s truly remarkable to me how a company this size can keep adapting to the changing landscape of the business environments to be competitive in a highly competitive industry. Some folks say Apple isn’t taking risks. But any strategic mistake by omission or commission may result in at least two years behind competitors and billions in market valuation. Others complain that the Cupertino-based company is no longer innovating. It’s tricky to tell if it’s completely true or false. But it’s worth remembering that Wearables & Accessories, including Watch and Airpods, generated $5.5 billion in revenue in 90 days last quarter while the main products still remain sticky to consumers.

As a student of business, I admire the company. No company is flawless, but it’s amazing what Apple has been able to do to navigate through competition and constantly changing business environments.

Disclaimer: I do own Apple stocks in my humbly small portfolio.

iOS12 and Time Management

I have been on iOS12 since it was first released and much satisfied with this new version even though my phone is just an iPhone 5S. In addition to the speed and the UI, one feature that I am very happy with is Screen Time.

Only does it allow users to keep track of how much time is spent every day on their phones, but it can break the time down into app categories such as productivity (emails) or social networking (Twitter, Facebook, Slack…). Moreover, users can put a time limit on each category and application’s usage. Once a limit is applied and reached, the categories or apps in questions are temporarily unavailable. It means that users have to manually remove the limits first in order to activate the apps again.

One feature I really like is Downtime. Applied to a specific time span in a day, the feature locks down the phone applications, barring some that are specifically spared by the user (see below)

IMG_8251

I tend to apply Downtime from 7-10am to avoid distraction and maximize productivity (I let YouTube through to listen to work/focus music videos that are usually hours long on the app). In this Internet era, focus is a luxury. Everybody’s attention span is destroyed and distractions are everywhere. This feature, though reversible, helps us avoid that reliance on our phones and regain some productivity.