A look inside Apple ahead of its Q2 2016 earnings report

Posted:
in General Discussion edited April 2016
Apple -- the world's most profitable public company -- is a day away from releasing its March quarter earnings. That means that while the company itself is in an official quiet period, everyone else is free to publish false and misleading information about it. Let's take a look at some of the worst fallacies.

Apple Infinite Loop campus


Macs: 7% of PC volume, most PC profits



Reports on the state of Apple's conventional computing platform often obscure the fact that Mac market share has incrementally continued to grow while sales volumes in the PC industry-at-large continue to rapidly shrink (by 9.6 or 11.5 percent over the past quarter, depending on whether you look at numbers from Gartner or IDC).

That's the largest year-over-year decline in the history of the PC industry. And yet Apple is now selling more Macs than it ever has, despite the fact that it has also been selling iPads over the last five years as a direct alternative to conventional PCs. Apple isn't just out-swimming its PC peers; it now has two computing platforms (Macs and iPads) that are each roughly equivalent to HP's consumer PC business, while also being far more profitable (with profit margins about ten times higher).

It's noteworthy too that the worst-performing segment in PCs is the "other" category of vendors outside the top five name brands. We've been repeatedly told that "others" were producing the cheap commodity white box bargain PCs that consumers and businesses want, but according to Gartner and IDC, those "other" PC sales are shrinking the fastest--by 18.4 or 19.8 percent (again depending on the market estimator). Clearly that commodity story wasn't true.

Apple builds the majority of the world's premium-priced PCs and pockets the lion's share of profits generated by conventional computer sales. On top of that, it faces very little real competition from other PC makers in the premium space.

Additionally, there's some significant potential for growth among Apple's Macs as Windows--which still represents around 92 percent of PCs globally--continues to lose importance as a platform. Over the last year, companies have reported major support cost savings per user by switching from Windows PCs to Macs (IBM reported saving $270 per Mac).

MacBook


Despite the supply of ever cheaper PCs, Apple has been pushing most of its Mac offerings up market, particularly with its new Retina iMacs, MacBook Pros and the new ultralight but not bargain-priced MacBook. It's hard to imagine a greater rebuke of the "commodity always wins" theory that Windows PC advocates have been promulgating since the beginning of PCs.

At the same time, Apple has not introduced any radical new product categories or show-stopping new breakthrough features in its own conventional PC space. Macs haven't even inherited hallmark iOS-related features such as Touch ID yet, instead coasting along on incremental but regular new annual OS X feature updates such as FaceTime, iMessages, Handoff and other iOS Continuity features, along with increasingly faster and more efficient hardware component upgrades.

That casts doubt upon the incessant insistence of pundits that without major new and surprising product features, Apple will be unable to sell new generations of iPhones and iPads. While it's true that key differentiating features have indeed helped to sell iOS devices, it's also true that the superior experience of Macs and iOS have helped even minor refreshes to sell and reach new record numbers.

The fact that Apple's Mac platform is still profitably chugging along after 30+ years, having withstood viruses and malware better than Windows while also more adeptly adapting to the emerging mobile-centric world, says something powerful about the prospects of Apple's newer iOS platform. Pundits were wrong: Apple does seem to know how to beat everyone else in the industry, and keeps doing so year after year.

iPad remains the only successful tablet



Jumping from Macs to iPads, many of the same themes reoccur. The commodity tablets (first running Windows, then webOS, then Android, then Chrome, and most recently Windows 10) that were supposed to beat Apple's iOS iPad have only kept manufacturers busy--but not profitable. None of those alternative OSs have built a real platform for successful tablet-optimized software.

iPad Pro


And while there is extreme scrutiny of the exact numbers of iPads Apple sells each quarter, we have no audited data on the tablet unit sales of other manufacturers, including Samsung and even Microsoft. That hasn't stopped pundits from bleating praise of the Microsoft Surface as being wildly successful, a message that is simply not true.

For example, Brad Jones of Digital Trends wrote that Microsoft's earnings indicated "strong Surface sales" based on a 61 percent year over year increase in Surface revenue. However, that increase is calculated in comparison with the relatively pitiful $713 million in revenue Surface earned in the year-ago quarter, on sales of less than 1 million units. Increasing that to $1.65 billion for the current quarter results in a quarterly unit figure that's somewhere south of 1.5 million units. That's not "strong;" it's inline with the Zune.


Source: Microsoft


The floral language used to beatify the Microsoft Surface as supposedly being wildly successful (despite actually being a drop in the bucket of PC sales after three years of absolute failure) is curiously not also used for new product introductions like Apple Watch, which appears to have shipped about twice as many units as the Surface despite being an entirely new product category. Apple Watch is a fashion accessory, while Surface is essentially a PC alternative that runs conventional Windows software.

Surface should be much easier to flog than a relatively expensive and not particularly business-essential watch. Why is the first generation Apple Watch trouncing Surface in volume sales in Microsoft's fourth year of trying to sell an iPad-like PC?

Over the December quarter, Apple's introduction of the brand new 12.9 inch iPad Pro outsold the entire Surface line by itself. A quarter later, Apple began selling an even less expensive, smaller 7.9 inch iPad Pro. We won't see Apple's numbers for March quarter iPad sales until Tuesday, but we do know that Microsoft's Surface sales have subsided by nearly 18 percent quarter-over-quarter (via the company's reported results last week).

Imagine how many pundits would be patting Apple on the back if it were to report an 18 percent decline in iPad revenue for the quarter!

The drop-off in Surface sales since the holiday quarter also indicates that Surface is much more of a cyclical, holiday niche product that only satisfies a very small minority of the PC audience, rather than being a substantial anchor for Windows 10 as a platform, or potentially offering any hope for Microsoft's stated goal of selling significant volumes of hardware devices.

Outside of Microsoft's Surface, there's little indication of any other real competitor to iPads outside of Google's Chrome netbooks that the search giant has been dumping on education users as a loss leader while vainly hoping that enterprise users would notice or care. (They haven't.) There's also no shortage of Android tablets to choose from, but that isn't resulting in businesses choosing them, either.

As with conventional PCs, the same low end, "white box" commodity tablets and cheap devices being sold by vendors such as HP have not proven successful or sustainable. HP backed out of the cheap Android tablet business last quarter.

In start contrast, iPad and its iOS platform has been cementing a strong lead in the Enterprise, taking particular advantage of the trend toward mobility. With Enterprise partners including IBM, Box and Cisco, Apple's iPad is best positioned as the tablet platform to take over share from the conventional Windows PC going forward.

iPhone cyclical, but hasn't really peaked



While supply chain rumors first predicted a year-over-year decrease in iPhone sales last quarter (which turned out to be wrong), even Apple projected that it would sell fewer iPhones in the March quarter than it did last year. However, that's also in keeping with the fact that Apple ramped up supplies of iPhone 6s faster this year than last, and that iPhone 6 sales were so incredibly high last year due to pent up demand that beating those numbers with an "s" model refresh was assumed to be unlikely.

iPhone 6s


This is a pattern that has played out before. There is no indication that smartphones are going away the way that PCs are, or the way that tablets have plateaued. And despite the availability of many Android models at lower price tiers, Apple hasn't really seen defection away from its $650+ iPhones to Android. On the other hand, a large number of new iPhone buyers are coming from Android.

This is more evidence that the smartphone "cheap commodity" model which perpetually predicts eventual doom for Apple is seriously flawed, just as it has proven to be with PCs and tablets. As was the case with early iPods, there are buyers who are willing to pay less for lower priced competitive devices. However, any time there are enough buyers to warrant targeting with a less expensive model, Apple has quite decisively and successfully won them over.

That happened with the iPod mini, nano and shuffle, again with the iPad mini, and most recently with the refreshed iPhone SE, which targets both the market for smaller phones and for a lower-priced iPhone. Even if the market for luxury-priced $600+ iPhones does peak at current volumes, Apple has lots of similar potential for addressing new emerging markets with lower-end or second hand iPhones going forward.

More color for Apple Watch, Apple TV and related Services income



Apple hasn't ever published quarterly sales figures for Apple TV or Apple Watch, making it harder for competitors to understand the potential value of copying the company's work. That also makes it harder for the market to value the potential of Apple's iOS outside of tablets and phones.




However, we do know that Apple Watch is by far the most commercially successful wearable, and that it's having a significant impact on mechanical watch demand. Apple TV is also a strong player in set top box and media sales and rentals, and holds the potential for launching new subscription services in parallel with the quite successful Apple Music, resulting in new streams of reoccurring revenue.

Both devices also help to increase the stickiness of Apple's iOS platform, particularly with their integration in Health and HomeKit devices, and with related services including the aforementioned Apple Music, other iTunes media sales, iCloud storage and Apple Pay.

These Services-related income sources all contribute new revenue from the existing billion-device installed base of iOS. When you look at the euphoria and hope surrounding the prospects of Facebook, YouTube and Snapchat to generate tiny sums of ad revenue multiplied by a billion users, it's simply curious that there isn't similar attention being given to Apple's potential for growing and expanding upon its paid offerings for its intensely loyal and massively large, global user base.

That's a subject that's likely to get primary attention during Apple's earnings call on Tuesday.
applesauce007
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Comments

  • Reply 1 of 41
    rob53rob53 Posts: 1,915member
    With all the insanity caused by the FBI I'd like to see a Mac include a TouchID button along with the Secure Enclave for better encryption control. Make FileVault, or whatever Apple wants to call it, the default. I know many people move their data and drives between Macs so there would have to be a secure way to re-address TouchID when doing this but I wouldn't mind logging on or at least unlocking the drive(s) simply by using my TouchID. Backups would be managed the same way. There's no reason why iOS devices should be the only devices with easy and secure encryption. Of course, there would have to be a management "backdoor" so enterprise and government users could set a master, site-specific, unlocking key but having TouchID wouldn't preclude that capability (simple admin login and password). 


  • Reply 2 of 41
    Great to see a DED article again.
    (Minor typo: 9.7" iPad Pro, not 7.9".)
    lkrupppatchythepiratebaconstang
  • Reply 3 of 41
    Finally. A DED editorial.
    lkrupppatchythepirate
  • Reply 4 of 41
    I tend to agree.
    Bottom line, it's a challenging market for everyone and Apple still has excellent marketing and sales force.
    Keep the faith!

  • Reply 5 of 41
    MacProMacPro Posts: 17,586member
    rob53 said:
    With all the insanity caused by the FBI I'd like to see a Mac include a TouchID button along with the Secure Enclave for better encryption control. Make FileVault, or whatever Apple wants to call it, the default. I know many people move their data and drives between Macs so there would have to be a secure way to re-address TouchID when doing this but I wouldn't mind logging on or at least unlocking the drive(s) simply by using my TouchID. Backups would be managed the same way. There's no reason why iOS devices should be the only devices with easy and secure encryption. Of course, there would have to be a management "backdoor" so enterprise and government users could set a master, site-specific, unlocking key but having TouchID wouldn't preclude that capability (simple admin login and password). 


    Surely what is needed is the ability to send a remote message to your lost iPhone, iPad or Mac that sends an audible warning that the device will self destruct in 5 seconds followed by a large cloud of white smoke being emitted just before the internals melt.
  • Reply 6 of 41
    sirlance99sirlance99 Posts: 1,096member
    Why no links for the Apple TV? A "strong player"? Where is this information? I genuinely want to know just how well the Apple TV is doing compared to other streaming services. 
  • Reply 7 of 41
    rob53rob53 Posts: 1,915member
    rob53 said:
    With all the insanity caused by the FBI I'd like to see a Mac include a TouchID button along with the Secure Enclave for better encryption control. Make FileVault, or whatever Apple wants to call it, the default. I know many people move their data and drives between Macs so there would have to be a secure way to re-address TouchID when doing this but I wouldn't mind logging on or at least unlocking the drive(s) simply by using my TouchID. Backups would be managed the same way. There's no reason why iOS devices should be the only devices with easy and secure encryption. Of course, there would have to be a management "backdoor" so enterprise and government users could set a master, site-specific, unlocking key but having TouchID wouldn't preclude that capability (simple admin login and password). 


    Surely what is needed is the ability to send a remote message to your lost iPhone, iPad or Mac that sends an audible warning that the device will self destruct in 5 seconds followed by a large cloud of white smoke being emitted just before the internals melt.
    You can already send a self-destruct signal to your iPhone that will erase (or lock) your iPhone from another iPhone or Mac using Find my iPhone. Having it melt into a glob of metals, plastics and aluminum would work as well.
  • Reply 8 of 41
    robjnrobjn Posts: 194member
    Good article. This is reasonable argument has been completely missing in the media!

    Investors are deeply concerned that cheaper products will eat into Apple's sales. Yet they seem to easily forget that Apple makes huge profits. If Facebook or Google report profits a tiny fraction of what Spple does, there stock price soars! It makes no sense!

    When Apple state their expected outlook for the Apr-Jun quarter it will register as huge year on year growth. 'peak iPhone' should be exposed as the myth it is - an effect of unprecedented growth in exceptional circumstances (move to bigger screens) the previous year.
    patchythepirate
  • Reply 9 of 41
    sog35 said:

    I'd rather Apple give LESS information than MORE information. I wish they stopped giving iPhone/iPad/Mac units each quarter. No other company does so why the hell should Apple?

    IMO Apple should only report:

    1. Total hardware revenue in dollars.
    2. Total services/software revenue in dollars.

    That's it. Giving more information just gives Wall Street and the media more reason to bad mouth Apple.

    Agree. Between the guidance range that Apple gives and the detailed breakdown of device sales (minus the Watch), analysts have very little homework to do. Throw in one or two moles like KGI's Kuo and a leaky supply chain, and both the media and Wall Street have an easy job to manipulate AAPL to whatever end they want. I am not sure there is much Apple can do now given the long history of granular reporting - stopping is not really an easy option. They will focus more on non device revenue I suspect, as services will grow faster than other revenue segments within Apple.
  • Reply 10 of 41
    cnocbuicnocbui Posts: 3,613member
    rob53 said:
    With all the insanity caused by the FBI I'd like to see a Mac include a TouchID button along with the Secure Enclave for better encryption control. Make FileVault, or whatever Apple wants to call it, the default. I know many people move their data and drives between Macs so there would have to be a secure way to re-address TouchID when doing this but I wouldn't mind logging on or at least unlocking the drive(s) simply by using my TouchID. Backups would be managed the same way. There's no reason why iOS devices should be the only devices with easy and secure encryption. Of course, there would have to be a management "backdoor" so enterprise and government users could set a master, site-specific, unlocking key but having TouchID wouldn't preclude that capability (simple admin login and password). 


    Surely what is needed is the ability to send a remote message to your lost iPhone, iPad or Mac that sends an audible warning that the device will self destruct in 5 seconds followed by a large cloud of white smoke being emitted just before the internals melt.
    Dad, Dad - quick - your car's on fire!
  • Reply 11 of 41
    freerangefreerange Posts: 1,583member
    sog35 said:
    Why no links for the Apple TV? A "strong player"? Where is this information? I genuinely want to know just how well the Apple TV is doing compared to other streaming services. 
    None of the other streaming services post unit sales. Roku, AmazonTV, and Chromecast all don't post unit sales.

    I'd rather Apple give LESS information than MORE information. I wish they stopped giving iPhone/iPad/Mac units each quarter. No other company does so why the hell should Apple?

    IMO Apple should only report:

    1. Total hardware revenue in dollars.
    2. Total services/software revenue in dollars.

    That's it. Giving more information just gives Wall Street and the media more reason to bad mouth Apple. For example the last few years the Plus line of iPhones has been canibalzing iPad sales. Yet the media ignores this and just focuses on unit sales of iPad. Apple should NOT be penaltized for canibalization to itself. Reporting just total hardware dollars will stop this bullcrap. 

    Personally I'm disappointed that Tim Cook does not see this. The more you give Wall Street the more they will crap on you. 
    Actually the oposite is true - the more Apple keeps secret, the more they are susceptible to rumor and stock manipulation which is already a chronic problem.
  • Reply 12 of 41
    eightzeroeightzero Posts: 2,159member
    I predict a docking station for your iOS device. Instead of a desktop, your computer is in your pocket. IIRC, a PC market already makes a plug in PC. It plugs into an HDMI port. And of course henge dock makes a product for mac laptops.
  • Reply 13 of 41
    rob53rob53 Posts: 1,915member
    sog35 said:
    freerange said:
    Actually the oposite is true - the more Apple keeps secret, the more they are susceptible to rumor and stock manipulation which is already a chronic problem.
    Not true. Other companies like Amazon, Google, Samsung, ect all refuse to disclose detailed unit information like Apple and they don't face the same manipulation.

    In fact, Wall Street loves them more without even knowing what they are or aren't doing. "Just the (overall) facts" are all that's needed. If Wall Street can't understand the FACT that Apple is making huge profits nobody else in any company in the world is making then they need to just go away and find something else to do.
    baconstang
  • Reply 14 of 41
    sog35 said:
    freerange said:
    Actually the oposite is true - the more Apple keeps secret, the more they are susceptible to rumor and stock manipulation which is already a chronic problem.
    Not true. Other companies like Amazon, Google, Samsung, ect all refuse to disclose detailed unit information like Apple and they don't face the same manipulation.




    I'll go with Sog on this.
  • Reply 15 of 41
    radarthekatradarthekat Posts: 2,572moderator
    I agree with Sog regarding how Apple should report their numbers, but I'd add one more reporting breakout; recurring revenue.  A higher multiple is placed on recurring revenue versus product sales.  As Apple transitions to a model where they mine their huge and growing installed base, recurring revenues from services will grow strongly.
    badmonk
  • Reply 16 of 41
    palominepalomine Posts: 359member
    Would changing their reporting format really help the stock? I'm not sure if anything can moderate the influences of Wall Street traders. Honestly, look, the stock has been lassoed and tied up in knots by hedge fund and high frequency trading. I bet they rely on AAPL positions to make their quotas, it is too easy to predict what will happen and too easy to make up a story that suits trading goals. Apple is a steady and predictable money maker. 

    it might tank the stock if the rug is pulled out from under those traders, but I agree it might be time to find out. There would be some insane trading for a while, but no more insane than calling Xmas quarter sales "disappointing!!. Anybody reading here knows that Mr. Market decided sales were lacking BEFORE those quarters sales were reported. The meme is still there, that the stock won't recover until iPhone 7.

    too bad there isn't anything we can do about it.
    drewys808patchythepirate
  • Reply 17 of 41
    lkrupplkrupp Posts: 6,404member
    Apple -- the world's most profitable public company -- is a day away from releasing its March quarter earnings. That means that while the company itself is in an official quiet period, everyone else is free to publish false and misleading information about it. Let’s take a look at some of the worst fallacies.
    This first paragraph tells the whole story in a nutshell. Nuff said.
    palominebaconstang
  • Reply 18 of 41
    sog35 said:
    exactly. Wall Street loves the mystery of the unknown ...

    Except Wall Street isn't consistent at all when it comes to this. I would argue that they would continue unabated to manipulate Apple whether with the current detailed reporting or the 'mystery of the unknown'. It's not like there's a rulebook and a new air of mystery would incite them to pin generous valuations on these categories gone dark. No, they would just say that Apple is now trying to hide something that they are afraid of people seeing. What IS consistent is that for some reason Apple has never gotten much love from Wall Street, or when it has it's been somewhat grudging. Whether this was born of the deep and entrenched Wintel bias or what, no one has ever sufficiently explained it. It's why a lot of your advice here wouldn't make a whit of difference. Where there's a will there's a way, and there is plenty of will. and money, in manipulating Apple. 
    patchythepirate
  • Reply 19 of 41
    This article comes off just a wee bit over zealous and blithely ignores certain realities, particularly with regard to the iPad. You spend a great deal of time, almost devoting the entire narrative, attacking the Surface by questioning its true sales success, while completely ignoring the fact that iPad sales are dying. Pointing out that Surface isn't as hot as analysts say is all fine and good, but that doesn't mean iPad is a smash success any longer. 
    cnocbuisingularity
  • Reply 20 of 41
    rob53rob53 Posts: 1,915member
    sog35 said:
    rob53 said:
    In fact, Wall Street loves them more without even knowing what they are or aren't doing. "Just the (overall) facts" are all that's needed. If Wall Street can't understand the FACT that Apple is making huge profits nobody else in any company in the world is making then they need to just go away and find something else to do.
    exactly. Wall Street loves the mystery of the unknown.

    That's why it gives Google a ridiculously high valuation even though their 'secret projects' are losing them $2 billion a year.
    Nest, Fiber, GoogleX, ect are all jokes. Yet Wall Street treats them as potential $50 billion companies.
    It just goes to show that Wall Street, the FBI, and almost all of Congress have no understanding of anything technical, making all their decisions based on suspect advertising and the boisterous blabbering of analysts. I doubt any one of these people actually take the time to read and attempt to comprehend anything that Daniel says so suggesting they do would be a waste of our time. Their attention span is just too short and can't be bothered by knowing the truth.
    badmonk
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