Apple’s Q4 2018 earnings call: iPhone XS and Apple Watch fueled growth

With another quarter down, there’s yet another record for Apple CEO Tim Cook to celebrate: Apple once again delivered the strongest fourth fiscal quarter in its history. Following tradition, Cook and Apple CFO Luca Maestri are hosting a quarterly live question-and-answer session for financial analysts, and we’re covering it live, with updates below in chronological order as the call proceeds.
The good news: Apple’s revenues for the quarter were up sharply, roughly 20 percent over the year-ago quarter, and Maestri is predicting between $89 and $93 billion of additional cash to flood into the company’s coffers during the always-lucrative holiday season. The bad news: iPhone sales were flat for the past quarter, iPad and Mac sales were down, and the most significant growth came from “other products” and services — likely the Apple Watch, Apple Music, and Apple Pay. Moreover, Apple’s growth appears to be coming at least as much from price hikes as from new customers.

2018 Wrap-Up: iPhone, Services, and Apple Watch

Cook opened the call by discussing the big picture for the year, noting that the company’s seen its highest growth rate in three years this quarter, with the iPhone, wearables, and services driving momentum. Continued strong sales of the iPhone 8, 8 Plus, and X, plus the successful launches of XS and XS Max made that possible, Cook said.
He noted that iPhone XR will bring the A12 Bionic’s breakthroughs to even more users, and iOS 12 has been installed on more systems in its first month than any iOS version ever. Later, Luca Maestri mentioned that the iPhone’s average selling price (ASP) is now a remarkable $793, above even analysts’ estimates in the $750 range.
Sales across basically all of Apple’s services improved, said Cook, with Apple Pay as a standout. Transaction volume tripled year-over-year, and generated four times the growth rate of PayPal Mobile, surpassing it in transactions. In the U.S., 71 of the top 100 merchants now support Apple Pay, and Apple is trying to replace the wallet for student IDs, plus Apple Pay Cash as the highest-rated person-to-person payment system.
Maestri added that there are now 330 million paid subscriptions on Apple’s platform, up 50 percent over a year ago, and 30,000 paid subscription apps are now out there, with the largest offering less than 0.3 percent of total services revenue.
Wearables, including Apple Watch, AirPods, and Beats products, showed huge growth. Cook said that Apple Watch Series 4 has seen great consumer response, and the ECG app is coming “later this year” to let users take electrocardiograms at any time; earlier watch models will soon gain support for arterial fibrillation detection, as well.
Cook also wanted to point out two items outside the financial statements: over 5,000 schools worldwide are now using Apple’s free coding curriculum, Everyone Can Code. Educators in over 350 schools are now using Everyone Can Create, tools to help kids use iPads to be creative. Additionally, Apple says that it’s proud to be using 100 percent renewable energy in its facilities, and 100 percent recycled aluminum in some of its products.
Nearly half of iPad buyers during the quarter were new to iPad, Maestri noted. On the enterprise front, over 450 airlines have adopted iOS to help make flights safer, and some are using it for superior passenger experiences. And iOS devices are being used in retail increasingly to provide superior shopping experiences. Apple’s deal with Salesforce will bring its devices even deeper into the enterprise market.

Major Accounting Changes

Starting in December, Maestri noted that Apple will no longer break down unit sales for iPhones, iPads, and Macs. Additionally, Other Products will become “Wearables, Home, and Accessories” to better capture the products in that category. The company will also be reclassifying its accounting in a manner that will change the way it recognizes bundled products and services, in compliance with new accounting rules; Apple will disclose both the revenues and costs for providing services, in addition to products. Revised financial statements will follow on this.

Q&A

Thoughts on international sales dips in emerging markets? The value proposition for subscription services?
While Cook said that he was optimistic overall, he suggested that sales in India and Brazil aren’t where Apple would like them to be, and China has a new regulatory setup that has stalled new game approvals within the country. He doesn’t view the approval issue as having anything to do with international trade disputes, and feels it’s strictly a domestic issue within China.
Apple sees itself as providing a lot of value for developers and users. It reviews around 100,000 apps per week and has a one-payment model for users to make purchases without sharing info with multiple developers or payment processors. The company also does a tremendous amount of marketing for developers, including search, recommendations, and editorial content within the App Store. Some developers have concluded they could do things on their own, and Apple’s fine with that, but even the largest developer makes up less than 0.3 percent of Apple’s services revenue, and there are millions of apps in the Store.
What’s Apple’s role in health care going to be, and how will subscriptions tie into it?
Cook: Apple has a huge opportunity in health, and an intense interest in the space, including non-monetized services. He doesn’t want to give away plans for the future, but it’s an area of major interest to Apple.
What variables, including international trade, are being considered for the wide range of possible revenues for next quarter?
Maestri: It’s the strongest lineup we’ve ever had, and we’re forecasting another quarterly record. Launch timing of the new iPhones this year is essentially reverse order from last year, and will have effects on Q4 and Q1; the XS and XS Max bumped a lot of ASP on Q4, and that will change in Q1 with the XR in the mix. Also, currencies around the world have almost all depreciated against the U.S. dollar over the past year, and there will be heavy headwinds — $2 billion — for Apple to overcome year-over-year because of the dollar’s value. There is also uncertainty on supply-demand balance for some products, and bigger macroeconomic questions in emerging markets compared with where they were a month ago.
Why cut back iPhone, iPad, and Mac unit guidance? This is going to make calculation and forecasts difficult.
Maestri: Apple is focused on providing the best customer experience and getting customers into its ecosystem. Unit sales are not representative of the overall strength of Apple’s business over the last 3 years — there is no correlation between units sold and how Apple has been doing. Product categories, meanwhile, have all become wider over time. A unit of sales is less relevant than it was in the past because there is so much variation. Top competitors don’t provide unit numbers. In the future, if Apple thinks the numbers are worth sharing in specific situations, it will do so.
Thoughts on the XS-XR split?
Cook: The XR has only been out for 5 days at this point, so we have very little data. Usually there’s some wait before another product shows an impact on existing products, but looking at the data, there isn’t obvious evidence in the data yet.
AR seems to have slowed down?
Cook: There’s a lot of interest out there, and the number of categories I’m seeing — from gaming to shopping to art exhibits in China, historic education in Berlin — it’s everywhere I go now. It’ll keep getting better and better, but is still in early days.
Apple appears to be at a disadvantage relative to other companies in India, and has perhaps 1 percent market share. What’s going to happen there? Also, shifting away from providing unit sales on iPhones etc. suggests you’re only interested in spotlighting good news, and are looking to not discuss impending declines in iPhone unit sales.
Cook: We’ve had great, productive discussions with the Indian government and fully expect at some point they’ll allow us to bring our stores to the country. The discussions are going quite well. There are import duties on most of the product categories we’re in, and we’re giving lots of feedback on that issue. We do manufacture some of the entry iPhones in India, and that project has gone quite well. I’m a big believer in India as a country, and the people. Currency weakness has been part of our challenge there, but these are speedbumps along a very long journey. I can’t wait for the future there.
Maestri: We’ll still be providing the same guidance we offered before. In terms of reporting results, we’ll be additionally providing information on revenue and cost of sales — and therefore gross margins — for both products and services, starting in the December quarter. It is our objective to grow unit sales for every product category we have, but, as I said earlier, a unit of sale is less relevant today than it was in the past. Unit sales of the top-end iPhones have been very strong, but you don’t necessarily see that in the number as it’s reported. We make our decisions to try and optimize our revenue and gross margin dollars, and that’s what we think is the focus in the best interest of our investors.
Cook: Our install base is growing at double-digit. That’s a more significant metric for us from an ecosystem point of view, customer loyalty, etc. This is a little like going to the market and pushing your cart up to the cashier, and being asked, how many units are in there? It doesn’t matter a lot how many units are in there, in terms of the overall value of what’s in the cart.
Source: VentureBeat
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