Notes from Apple’s Q2 2017 earnings call

Notes from Apple’s Q2 2017 earnings call

Opening Apple’s investor conference call following the company’s announcement of numbers for Q2 2017, CEO Tim Cook described the results as representing a “strong March quarter” that accelerated revenue growth and earnings per share up by 10 percent over last year. Cook noted that iPhone sales were in line with Apple’s expectations and demand for the iPhone 7 Plus continued to be strong. He explained that the installed base of iPhones grew by double-digits year-over-year and that based on the latest IDC data, the iPhone gained market share in nearly every country.

Cook went on to outline how services revenue topped $7 billion in this quarter, with a deep level of customer engagement across all services. The number of App Store developers increased by 26% over last year, and Apple Music subscriptions and iCloud storage also saw double-digit revenue growth. The total number of paid subscriptions, both for Apple’s own services and third-party content offered on the App Store, now exceed 165 million.
Apple Pay also continues to see strong growth, Cook noted, with the mobile payments service now live in 15 markets, with the recent addition of Taiwan and Ireland to the mix, and over 20 million contactless-ready locations worldwide, including over 4.5 million in the U.S. Alone. Transaction volume also increased by 450 percent over the last 12 months, and half a million transit users in Japan are now using Apple Pay, totalling 20 million transit-related transactions every month.

Cook also touched on Apple having great momentum in the messaging space, offering up the statistic that during this year’s Super Bowl, over 380,000 iMessages were sent per second, more than doubling the number from the previous year. Cook went on to outline that sales from the new MacBook Pros set a new March quarter record, the new iPad is gaining share in a number of major markets, Apple Watch sales nearly doubled year-over-year, and demand for AirPods continues to outpace supply. Cook went on to note that Apple’s new wearables products combined — the Apple Watch, AirPods, and Beats headphones – now by themselves provide revenue the size of a Fortune 500 company.

Possibly in response to the political winds of the new U.S. administration, Cook also interestingly emphasized Apple’s commitment to the United States, describing Apple as “a company that could have only been created in the U.S.” Cook also pointed out that Apple supports more than two million jobs in all 50 states, and the company has spent more than $50 billion in the U.S. With American suppliers, developers, and partners, and that Apple “continues to invest confidentially in our future.”

During the Q&A portion of the call, Cook candidly admitted that Apple did not get the mix between the iPhone 7 and iPhone 7 Plus right last fall, with demand for the iPhone 7 Plus being much higher than Apple predicted. He explained that it “took a while for Apple to adjust all the way back to the supply chain to bring the iPhone 7 Plus into balance,” adding that “you can bet we’re brushing up our models and will apply everything we learned to next time.”

Responding to questions about how Apple is doing in China, Cook noted that the iPhone 7 Plus sold the highest number of Plus models in the first half than ever before compared to the iPhone 6 Plus and iPhone 6s Plus, and that the Mac was also up 20% in China this past quarter, along with “extremely strong” growth in Apple’s services business in mainland China. Retail and online stores also grew in China by about 21%, with traffic up by 27%; Cook added that seven of Apple’s top ten highest-traffic stores in the world are now located in Greater China. He did however note that Apple’s performance continues to be weak in Hong Kong, and that Apple didn’t perform as well on prior-generation iPhones in China.

Asked about what overlap exists in the 165 million subscribers that Cook spoke of, Apple CFO Luca Maestri declined to get into specifics, but did concede that there are obviously those subscribers who subscribe to more than one service, so there is some overlap, but that the total number of unique subscribers is “very very large,” adding that Apple quoted the same numbers a quarter ago at 115 million, so a December-March increase of 50 million subscriptions “gives a good idea of the momentum” in Apple’s services business. Maestri also added that the number of paying accounts on the App Store over the past 90 days is the “largest increase we’ve ever had” so there are still a large number of new people coming into the Apple ecosystem.

Discussing the Apple Watch and wearables market in general, Cook emphasized that Apple has long considered the Apple Watch as a “really key product category” even before the company launched it, adding that “We’re really proud of the growth of the business” and that Watch unit sales more than doubled in six of Apple’s top ten markets, which was “phenomenal growth” for a non-holiday season. While Cook said he “wouldn’t want to comment” on where the wearables market is ultimately going, he indicated that Apple remains very committed to that market in general, and the Apple Watch in particular, but added that he’s not surprised that some competitors are falling out of it, as the Watch area is “really hard” from an engineering point of view.

When asked about the current lull in iPhone purchase intent, Cook responded that he believes that Apple is only seeing a “pause” in iPhone purchasing, which he feels is likely due to anticipation of future iPhone models, particularly in the light of the much earlier reports that have been circulating. Cook candidly admitted that he doens’t know for sure that this is what’s behind the data, but that the reports about future models are clearly out there, and could very well be what’s behind It.

A question was also posed about Apple’s recent decision to withhold royalties from Qualcomm, and why Apple would take the risk of a possible detrimental response from Qualcomm — such as withholding vital modem chips or seeking injunctions on iPhone sales — in advance of what might be the company’s “most significant and largest product launch in history.”

Cook responded, “Anyone that has a standards-essential patent has a responsibility to offer it to everyone that would like it under what are called FRAN terms (Fair Reasonable and Non-Discriminatory). Qualcomm has not made such an offer to Apple. So I don’t believe that anyone is going to decide to enjoin the iPhone based on that. I think that there’s plenty of case law around that subject, but we shall see. In terms of why we’re withholding royalties, you can’t pay something when there’s a dispute about the amount. You don’t know how much to pay. They think we owe some amount, we think we owe a different amount, and there hasn’t been a meeting of the minds there, so at this point we need the courts to decide that, unless we are able to over time settle between us on some amount. Right now we’re depending upon the courts to do that. So that is the thinking. The reason that we’re pursuing this is that Qualcomm is trying to charge Apple a percentage of the total iPhone value, and they do some really great work around standards-essential patents, but it’s one small part of what an iPhone is. It has nothing to do with the display or Touch ID or a gazillion other innovations that Apple has done. So we don’t think that’s right, and we’re taking a principled stand on it, and we strongly believe we’re in the right. I’m sure they strongly believe that they are, and that’s what courts are for, and we’ll let it go at that.”