Apple FQ4 18 – Opacity rules

Apple signals the way ahead is less predictable.

• Apple reported excellent FQ4 18 results but guided weakly for FQ1 19 which combined with Apple putting an end to disclosing unit figures, caused general disappointment causing the shares to fall 6.5% in after-hours trading.
• FQ4 18 revenues / EPS were $62.9bn / $2.91 compared to consensus at $61.4bn / $2.78.
• Apple sold 46.9m iPhones below consensus at 48.4m but made up most of the gap with higher ASPs which came in at $793 up 28% YoY.
• However, guidance for the all-important holiday FQ1 19 was disappointing with FQ1 revenues expected at $89bn – $93bn ($91bn) compared to consensus at $92.7bn.
• From FQ1 19, Apple will no longer break out unit shipments for its product lines and will reorganise its reporting along the lines of products and services with a gross margin break down for each.
• There are numerous takes on this:
  • First, Apple fan base: A good strategic choice to focus attention on the increasingly important services business.
  • Second, Apple critics: A ploy to hide the fact that shipments are going to go into decline as the segments of the smartphone market where Apple plays are fully saturated and replacement times are lengthening.
  • Apple will have trouble maintaining its recent valuation bump if the market clearly sees declines in shipments.
  • Third, RFM objective view: I think Apple has made this move because visibility is declining, and I think there will be fluctuations in ASPs that Apple does not want misinterpreted and priced into the valuation of the shares.
  • Giving unit shipment numbers makes the calculation of ASPs very easy and it was ASP fluctuation that often caused wild swings in Nokia’s share price back in the day.
  • Furthermore, very little is lost in no longer having its unit shipments broken out as there is any number of analyst houses such as Counterpoint Research, IDC and so on that make very accurate device counts.
  • Hence, this information will still be out there but because it does not come from Apple, Apple will not be forced to comment on it and hence the share price won’t react to it directly.
  • The opinion that this change in reporting is about services makes little sense because while it is still growing fast, it is still only 16% of revenues.
  • Apple is going to be predominantly a hardware business for the foreseeable future and I think that it will really struggle to diversify its business meaningfully away from that.
• The net result of this reporting change is very little.
• Apple is going to remain a hardware business that charges a premium price in order to monetise the ecosystem it has built.
• RFM research has shown that this is by far the most effective way to monetise the ecosystem when compared to advertising (Google) or subscription (Amazon) although it is the riskiest.
• Hence, if Apple were to migrate away from hardware, I estimate that its potential for generating revenue would more than halve.
• I don’t see this as a sign of Apple moving away from hardware, but it is a sign that the hardware business is becoming less predictable which Apple understandably is less willing to try and second guess.
• Apple’s valuation remains fairly unchallenging compared to its peers but this is because growth is going to be much harder to find.
• I remain fairly indifferent to the shares but for those seeking a place to hide from the advertising-related privacy and data issues, it remains the best one.