29 January 2020 (Lille, France) – Two years ago, when all the naysayers were dumping on Apple because iPhones were not selling at peak volumes, and Apple’s downturn was now “unavoidable”, I wrote that Apple had ceased to be just an iPhone company. People did not understand the strength of all their other business/product lines. Its services line was likely to pass Cisco revenues soon, the giant in service revenue.
Bang. Apple just posted an all-time Q4 revenue record (its most important quarter every year) and it was all due to the strength of its services. I am up to my keister covering the international cyber security forum here in Lille, France (Le FIC) so I have only had time to scan the numbers but the services run rate is $50B+ it seems. Briefly, a few points:
Revenue grew in nearly all geographies. Apple reported all-time revenue records in the Americas, Europe and Asia Pacific, and a return to growth in Greater China. My CTO, Eric de Grasse, said during the earnings call, the CFO added a nugget of insight that services growth was broad and double-digits across all five geographies. This point, to me, signifies an important fundamental point that services is a global growth story and not restricted to specific regions. Apple’s hardware growth was global, and the growth of its services was global.
The active installed base continues to grow. Apple reported its customer base size is now 1.5b devices in use, nearly one billion of those iPhones (Eric’s estimate). This indicates something that has long been a thesis in analyst circles is proven. And, Eric says, it is another element showing iPhone loyalty will always remain stronger than Android. Plus, the early drafts coming out in preparation for next month’s Mobile World Congress shows the rate of change from those switching to iPhone from Android has slowed dramatically since early in the decade, quarterly averages globally in the single digits.
Surprise. The iPhone will have a solid 2020. From a Wall St. perspective, the worst of the iPhone sales declines appear to have happened. A new baseline normal, of average annual sales, has now been established in the 180-200m range, and analysts simply need to feel out if a particular year will be in the high or low end of that range. 2020 appears to be more in the 190-200m, and most Wall St. research notes I’ve seen are upping their iPhone estimates for 2020 into that 190-200m range.
To the Apple bears, and yes, there are still those who are bearish on Apple, it looks as though Apple is defying gravity. But for those who truly understand the company, none of this is surprising. What is most impressive about the quarter earnings was that Apple set an all-time record in revenue without needing to set a record in iPhone sales. We were used to them continually setting quarterly records while the iPhone was still in growth mode. Now, with the iPhone ex-growth, Apple is still setting records.
I’ve argued all along that just focusing on iPhone sales was the wrong way to look at Apple. If you believe they are just an iPhone company, this is what you would do, and it is what many in Wall St. did. But when you step back and look at the forest in the trees, you could see Apple building strong revenue streams across the board. Total revenue growth was easy to predict, even if iPhone sales slowed when you see the big picture.
And as I have long reported Apple is a product company that is among the best at customer experiences. They are consistent in their ability to make great products with great experiences across the board. So it stands to reason that any category Apple gets into would follow this philosophy and end up being a healthy business. Mac/iPad, wearables, and now services all follow this philosophy and showcase the strength of Apple’s fundamental business. Building great products leads to higher customer engagement, loyalty, and willingness to purchase more product offerings. This is the fundamental reason to remain bullish on Apple’s growth prospects and what truly sets them apart from so many other companies.
Going forward, I am still curious about what happens with the Apple TV+ promotion over the long-haul. It will be interesting to know how many customers remain loyal to AppleTV+ after their promotion, and how Apple can continue to grow that business and recoup the costs of their content spend, which is large and getting larger.
Last point: wearables. I find it fascinating that demand for Apple Watch Series 3 is still so high. But, given the price to feature ratio for Watch, this is an incredibly powerful product to get people into the Apple Watch family. This is a positive for the business because those customers will likely now stay loyal to Apple Watch, and upgrade at some point down the line. Five generations into Apple Watch, and we see why a new product category takes years to build, and why a robust product line is essential to its success.
Enough. I need to get back to prepping for the last day at Le FIC.