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Notes of interest from Apple's Q3 2019 earnings report and conference call

Apple CEO Tim Cook and CFO Luca Maestri

Following the publication of results for its third fiscal quarter of 2019, encompassing April through June, Apple provided additional detail surrounding the continuing situation in China, as well as more information about its Services business in an earnings conference call.

On Tuesday, Apple announced $53.8 billion in revenue, with earnings per share of $2.18. Apple predicted revenue in the range of $52.5 billion to $54.5 billion. Thomson-Reuters predicted $53.7 billion in revenue.

In the year-ago quarter, Apple earned $53.3 billion, with more than half of the revenue from the iPhone.

Participating in Tuesday's call were Apple Chief Executive Tim Cook and Chief Financial Officer Luca Maestri.

Highlights from the earnings report and conference call

  • Prior to earnings, Apple stock was up a bit in after-hours trading, to $209.40 per share at 4:30 P.M. Eastern time
  • Following release of the earnings numbers, Apple stock jumped to $216.18 at 4:35 P.M. Eastern time
  • The June quarter was Apple's largest ever, driven by "all-time record revenue from Services, accelerating growth from Wearables, strong performance from iPad and Mac and significant improvement in iPhone trends"
  • Over $17 billion in stock buybacks completed in the quarter
  • Apple is expecting between $61 billion and $64 billion for the fourth quarter
  • Apple's board has declared a cash dividend of $0.77 per share, payable on August 15
  • Quarter ended with $211B in cash and securities, $3B in term debt retired. $108B in total debt remains.
  • 88 million Apple shares repurchased
  • At the conclusion of the call, Apple stock was up $8.92 in after-hours trading, to $217.65
  • iPhone

  • iPhone sales down $3.5 billion from YOY, Mac sales up $500 million
  • Strong customer response to in-store trade in and exchange program
  • More than 5x iPhones traded in versus the year-ago quarter
  • iPhone sales in Apple retail returned to growth
  • iPad

  • iPad sales up $365 million from 2018
  • Third consecutive quarter of iPad sales growth
  • Over half the iPad purchases in June quarter were new to iPad
  • Wearables

  • Wearables, home and accessories up $1.8 billion YOY
  • Apple Watch, other wearables the size of a Fortune 200 company
  • Services

  • Services up $1.3 billion from YOY
  • Services growth 15% after a one-time benefit last year at this time
  • Apple Care, Apple Music, Search Revenue, App Store all time revenue records
  • Apple TV app viewership up 40% Year over year
  • Apple Pay 1 billion transactions per month, twice the volume of a year ago
  • Apple Pay adding more new users than PayPal, monthly transaction volume growing 4x as fast
  • Triple-digit growth in Apple Pay
  • Services accounted for 21% of revenue, 36% of gross margin
  • Over 420 million paid subscriptions, will exceed 500 million by 2020
  • Across all third party subscription apps, largest is only 0.25% of services revenue (probably Netflix - MW)
  • Mac

  • "Enormous amount to be excited about with Mac" - Tim Cook
  • Mac revenue grew in four of five geographical segments, set records in Japan, US, with overall growth outpacing PC industry
  • Active install base of Macs at all-time high
  • Regional Performance

  • Foreign exchange impacted growth, very challenging environment - Luca Maestri
  • Sales down in Europe by $200M, greater China by $300M from YOY
  • Sales up in U.S. and rest of Asia Pacific by $500M YOY
  • Active iPhone installed base grew to a new all-time high in every operating segment
  • Observation: Apple's most recent results are about the same as the 2013 holiday quarter - MW
  • Tim Cook - Return to growth in mainland China
  • China - experienced noticeably better YOY growth in China than in the last two quarters, sequential improvement
  • App Store in China driving force behind Services growth
  • Emerging markets strong double digit growth in India and Brazil, Q3 records in Vietnam, Philippines
  • Odds and ends

  • Intel modem buy second largest by dollar, largest personnel involvement
  • Best June quarter from retail stores
  • 2/3 of top banks deploying Apple products
  • 90 of the largest 100 banks by assets are installing Apple products
  • "Several new products that we can't wait to show you" - Tim Cook
  • 506 stores in 22 countries
  • Question and answer time!

  • Q: Explain growth in estimates September quarter, more than previous percent growths
  • Maestri - Continued growth of wearables, Services expected, includes $1B in foreign exchange headwind penalty
  • Q: What is driving success in China, and why will it continue?
  • Cook - Government stimulus in the form of VAT decreases, pricing action, trading, growing engagement in ecosystem during quarter.
  • Q: Why is Services revenue and growth so strong?
  • (AI Observation, this has already been discussed at some length - MW)
  • Maestri: All-time record revenue, install base is growing, and so will Services alongside that growth.
  • "We feel very confident about reaching those targets" - Maestri, in regards to doubling Services by 2020
  • New services are coming soon, including Apple Card, Apple Arcade, Apple TV+ which will also grow Services
  • Q: Gross margin guidance for September is 50 points higher than June. Why?
  • Maestri: Headwinds will be negative from forex, cost savings in commodities
  • Q: Elaborate on China production, estimates for next quarter
  • Cook: We look at all macroeconomic conditions in great detail — with no elaboration to the question
  • Q: New services a short-term growth, or long-term?
  • (AI Observation, this again has already been discussed at some length - MW)
  • Maestri spelling out new Services launch timetable, "road to monetization takes some time."
  • Q: How effective was the iPhone trade in program>
  • Cook declines to elaborate on numbers, trade-in as a percentage of total sales is "significant"
  • Apple advocating for the exchange program more widely
  • Q: In three to five years, will Services be tethered to the iPhone?
  • Cook: Many services not tethered to iPhone sales now, "We'll see what we do in the future."
  • Emerging markets with low penetration will drive future Services
  • Q: China trade situation fluid, tariff exceptions not granted, potential alternatives to China production?
  • Cook: Don't put a lot of stock into manufacturing moves out of China
  • Apple manufacturing all over the place, China, Korea, Japan, EU
  • "We've been making the Mac Pro in the US and we'd like to continue to do that" - which is what the tariff exemption request was about
  • Q: Comment on broader channel inventories
  • Maestri: In general we decrease inventory during March & June quarter, in 2019 iPhone channel reduction slightly more than 2018
  • Q: How is device retention impacting Apple & Services revenue
  • Cook: Install base growing, people are holding onto devices longer, but staying inside the ecosystem
  • Comparative landscape in China in regards to 5G
  • Cook: Not commenting on unannounced products, and in "Extremely early, early innings of it, and even more so on a global basis."