Notes from Apple’s Q3 2016 earnings call

Notes from Apple’s Q3 2016 earnings call

Kicking off Apple’s investor conference call following the company’s announcement of quarterly numbers for Q3 2016, Apple CEO Tim Cook reported that while the earnings numbers are slightly down from last year’s quarter, the results reflect stronger customer demand and business performance than Apple anticipated 90 days ago, and that there are several encouraging signs. Cook noted that revenue was near the high-end of Apple’s guidance range for the quarter, and gross margin was actually at the top of the guidance range. The global launch of the iPhone SE in this quarter was very successful, and Cook noted that demand for the new iPhone outstripped supply for most of the quarter, with additional capacity required to achieve balance as Apple enters the next quarter. Cook referred to initial sales data revealing that the iPhone SE has been very popular in developed and emerging networks, and that the percentage of iPhone SE sales going to customers who are new to the iPhone is greater than Apple has seen in several years. Apple had millions of first-time smartphone buyers in the June quarter, and Cook reported that switchers from other smartphone platforms accounted for the highest iPhone sales numbers Apple has ever measured.

Speaking about Apple’s services business, Cook stated that they saw strong increases in Apple Music, iCloud, and AppleCare, with a growth of 19 percent to a record $6 billion in services revenue, up almost $4 billion year-over-year to $21.3 billion in total. Cook explained that services revenue is expected to be the size of a Fortune 100 company by itself by next year, and it continued to be fueled by Apple’s active installed base of devices, making it clear that Apple is continuing to provide services with the goal of gaining ongoing revenue from existing iPhone users rather than relying on year-over-year hardware upgrades and purchases. Cook also highlighted the release of the 9.7” iPad Pro, noting that half of iPad Pro purchase are being bought for work purposes, and touched on the Apple Watch continuing to be the best selling smartwatch, ranking highest in customer satisfaction. Citing the recent launch of Apple Pay in Switzerland, France, and Hong Kong, Cook explained that Apple Pay adoption outside of the U.S. has been “explosive,” with half of Apple Pay transaction value coming from non-U.S. markets.

Speaking about his recent visit to mainland China, Cook explained that he remains optimistic about Apple’s business opportunities and growth in China, and noted that Apple has had a 34 percent installed base growth in China over the past year, and that total revenue from Greater China is up to $4 billion — a 50 percent increase from the same timeframe two years ago. China Mobile has also revealed that there are now more iPhones on their network than any other brand, and that iPhone customers rank first in loyalty and data usage. Cook said that Apple continues to invest in the Chinese market in various ways, citing the recent $1b investment in Didi Chuxing. Cook also explained that India is becoming Apple’s fastest-growing market, with iPhone sales up 51 percent year-on-year, and that Apple has just announced first-of-its-kind design and development accelerator to support Indian app developers, as well as the new office in Hyderabad to accelerate Maps development. Cook also noted that he’s looking forward to opening retail stores in India.

Cook also highlighted the upcoming releases of iOS, tvOS, watchOS, and macOS, explaining how these highlight the “strong relationship” that Apple enjoys with its customers throughout their days, wherever they happen to be. Cook highlighted the new features debuted in iOS 10 at WWDC last month, again speaking of iOS 10 as the largest iOS release ever, speaking to Apple’s new strategy for developing artificial intelligence and machine learning around Siri, recommendations of songs, apps, and news, facial and image recognition in Photos, predictive word choices in Mail and Messages, and context awareness in Maps for directions. Cook also noted that machine learning under the hood will even be designed to help detect users’ usage patterns and improve battery life. Cook also strongly reiterated Apple’s commitment to user privacy, explaining that most AI is performed on the user’s device instead of going to the cloud, and that starting this fall, Apple will be implementing differential privacy this fall, which will enhance Apple’s ability to deliver services at the cloud level without compromising on its commitment to the “individual privacy that customers have come to expect from Apple.”

Cook concluded his introductory comments by noting that Apple has an “incredible lineup of products in our pipeline” and that he is “very bullish” about Apple’s future.

During the Q&A portion of the call, Cook was asked about Apple’s possible move toward a longer refresh cycle of the iPhone, and if Apple may be looking more toward services, and in particular more subscription services, to keep the revenue stream going as less affluent users may not be upgrading on an annual or bi-annual basis going forward. Cook responded saying that as of December last year, there was only 42 percent penetration of smartphones worldwide, so he feels that there’s “quite a bit of room there” while acknowledging that much of it is still in emerging markets. However, Cook explained that Apple has had “reasonable business success” in several emerging markets already, so although Apple enters into those markets “humbly” they aren’t doing so with zero experience. Cook also noted that Apple has been seeing very encouraging numbers on the “switcher side” and that he feels that as the smartphone becomes “more and more essential to people’s daily lives” that users are going to pay more attention to what they’re buying, and he believes the “killer experience” that Apple brings to the table across all aspects from the TV to the home to the car will result in more users switching to the iPhone in the future. Cook also explained that he feels that Apple is going to excel in the development of AI technology because of its strong focus on putting the user experience first.

Cook was also asked about the recent shut down of iBooks and iTunes Movie sales in China, and specifically his perspective on the Chinese market and getting those services back up and regaining share. Cook explained in response that the revenue from both of those stores during the several months that they were in operation was less than $1 million, and that for Apple it’s therefore not a revenue-related issue, but simply a service Apple wants to provide to its customers. Cook clarified that Apple is still “working very closely with the appropriate government agencies” and is optimistic that they’ll be able to resume sales of iTunes Movies and iBooks in China.

Asked about where Apple Pay fits into Apple’s service model, Cook acknowledged that although the growth of Apple Pay has been “astronomical,” the installed base is still very small, and therefore at this point Apple Pay is very much about Apple providing a “great feature for our customers” rather than a revenue stream in and of itself. Asked about Apple’s take on augmented reality in light of the Pokémon GO phenomenon, Cook said he feels that “it’s incredible what’s happened there and is a testament to what happens with innovative apps and the app ecosystem, and the power of a developer being able to press a button and offer their product around the world.” Cook said he feels that it shows that AR can be “really great” and Apple has been and continues to invest a lot in the AR in the long run and that there’s a great opportunity to provide something for customers down the road.

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