Waking up this morning and taking a look back over Apple’s latest earnings release, I’m left with one big, nagging question:
Why is Apple acting so afraid and defensive?
The company remains steadfastly unwilling to give precise information about the impact of a host of new products it launched last year. And the new data points the company appended to its earnings filings yesterday only muddy the picture.
I find this odd for a couple of reasons. First, it seems on a broader level that Apple, under CEO Tim Cook, has been taking baby steps toward becoming a bit more transparent. And second, its earnings for the holiday quarter were largely in line with what people were expecting in terms of record revenues but flat iPhone sales.
Sure, investors drove the stock down 2.79 percent in after-hours trading. But it’s not usual for Apple’s stock to take a hit the day after earnings come out. With $216 billion in cash, record profits, and 1 billion installed devices around the planet, this company isn’t in danger of collapse.
Still, it does have its weak spots. Sales of iPads remain in free fall (down 21 percent); sales of Macs were weak (down 3 percent); and iPhones sales were essentially flat.
There seems to be a fundamental shift happening, in which the company’s future growth may be more dependent on software and service revenues than hardware sales. With such a change underway, it’s reasonable for investors to wonder just how well the company’s broad slate of new products are faring and how well management is navigating this new era.
During the earnings call, however, executives gave only the broadest indicators. The Apple Watch “set a new quarterly record for Apple Watch sales, with especially strong sales in the month of December,” Cook said. Given that the gadget has been on sale for three quarters and this is the first holiday quarter, that perspective is essentially meaningless.
Apple Music has “10 million paying subscribers,” Cook said. Cool. But is that offsetting the ongoing decline of music and video downloads? Again, we have no idea.
Apple TV had its “best quarter by far,” Cook said. Considering that the previous version was a “hobby” that hadn’t had an update in years, beating that performance was a given.
Part of the problem is that a few quarters back, the company introduced an “other services” category that includes the Apple TV, Apple Watch, Beats products, iPod, and Apple-branded and third-party accessories. But lumping so many things into one bucket obfuscates the performance of each individual part.
That “other” category grew about $1.7 billion, or 62 percent, from the same period a year ago. Is that good? Maybe. Nobody knows.
The iPod likely continued to decline, which means new revenue from new devices was actually more than $1.7 billion.
Let’s assume (generously) for a moment that all that new revenue came from the Apple Watch, and that reports at the low end of an average selling price of $425 are accurate. That would mean Apple sold 4 million Apple Watches in the holiday quarter. Is that so terrible? Or awesome?
Of course, the real number could be more, depending on whether the ASP was lower, or iPods fell more than usual. Or it could be less. Again, we don’t know.
In any case, why isn’t Apple willing to just tell investors, rather than leaving them to do amateurish guestimates like mine?
To be clear, Apple is perfectly within its legal rights to do this. Companies have to disclose additional information about products that is “material.” Google and Amazon can also be stingy with details. But for Apple, this unwillingness to disclose the details of these particular products seems to betray a lack of confidence.
From Apple’s perspective, the absence of itemized figures is likely driven by its view that all these products are part of one big ecosystem and so the ups and downs of one piece aren’t that relevant. But even on this high-level count, Apple has managed to blur the picture.
The company yesterday trumpeted that it now had 1 billion devices in active use over the last 90 days, up 25 percent from the past year. Apple’s view is that even if device sales are hitting a plateau (or stalling), the size of the Apple user universe continues to expand because people love the products and continue to use them. (Which is true.)
Even if those users don’t buy another iPad, they drive the use and purchases of other things — like apps, Apple Music, Apple Pay, etc. In the earnings call, chief financial officer Luca Maestri tried to explain this with a series of data points:
“When we aggregate the purchase value of services tied to our installed base during fiscal 2015, it adds up to more than $31 billion,” Maestri said. “That’s an increase of 23 percent over fiscal 2014.
“In the recent December quarter,” Maestri continued, “purchases of installed base services reached $8.9 billion, which is a growth rate of 24 percent year-over-year.”
Cool. Except…it’s also misleading. When Apple is talking about the $31 billion in purchases for 2015, it’s including the amount it paid out to App Store developers and other royalties on content.
In fact, as the company discloses at the bottom of its earnings filing yesterday, the amount of revenue Apple earned from installed base-related purchases grew from $14.9 billion in FY2014 to $16.8 billion in FY2015 (a little more than half that $31 billion figure). That’s annual growth of 15.8 percent. Not bad, but not quite the 23 percent Maestri was touting.
For Q1 2016, Apple’s income from the same metric was $4.7 billion (vs the $8.9 billion highlighted by Maestri). That would roughly put Apple on pace for $18.8 billion for FY 2016 (could be more or less depending on how seasonal those sales are) to increase that number by 12 percent annually. Fine, for sure, but maybe not blockbuster.
Finally, just for fun, Apple threw in a chart to explain its “constant currency growth.” Basically, Apple wants you to know that it’s doing better than you think, but that the growing strength of the dollar is cutting the value of its overseas earnings by about 15 percent.
Of course, it seems one could just as likely turn this around and say, “Hey, Apple’s past results were over-inflated by a weak dollar.” Also, has Apple’s push to cut its tax bill by booking more of its revenue overseas made it more vulnerable to currency fluctuations? We don’t know, of course.
But as with everything else, we’re not likely to get answers to our questions anytime soon.