Apple Q2 – Service with a smile.

 

 

 

 

 

Services are what really matters for long term profitability.

• Apple reported disappointing Q2 results as it missed iPhone shipments which cast a pall over the superb performance of the iPad and the Mac.

 

Q2 results                 Q2A                      Consensus

iPhone (m)                      51m                             55.3m

iPad (m)                          26m                            24.9m

Mac (m)                           4.8m                          4.6m

iTunes ($m)                    $4.4bn                       $4.5bn

Revenues ($m)              $57.6bn                     $58.1bn

EPS                                   $14.50                        $14.36

 

• The miss was explained with tight iPhone component supply and changes to North American operator upgrade policies but the reality is that the smartphone market is slowing down.
• Now more than ever, the action is in the cheaper end of the market where Apple has declined to participate.
• This leaves it fighting for share with Samsung and it is only going to get tougher as the number of people who can afford a $600 device is fundamentally limited.
• As a result, guidance for Q3 was muted given the seasonal weakness in the market as well the level of saturation at the high-end of the market.

 

Q3E Guidance           Q3E                                           Consensus

Revenues                         $42bn-$44bn                       $46.1bn

Implied EPS                    $10.4n                                    $10.93

 

• The good news is that iOS devices are still generating far more traffic than Android devices and iTunes revenues still dwarf those of Google Play.
• I suspect that total revenues from iTunes still vastly outstrips all of the Android app store revenues combined underlining how far that ecosystem still has to go when it comes to usage.
• This is an opportunity for Apple but one that to date it has done little to capitalise on.
• This is the central challenge that must be addressed because premium pricing for cool hardware and software and service distribution will not last for ever.
• When the others catch up, as they surely will, unless Apple has services that are exclusive to its own ecosystem its margins will begin to erode.
• Apple was reticent to talk about where its R&D budget is going but I suspect that this is where a large part of the resources are going.
• The problem is that services are not in Apple’s DNA and some of its efforts like icloud, ping and maps have not been exactly big hits.
• If Apple can sort this problem out and come to market with its own services that win users over then, it has a chance to sustain margins.
• Apple is in the same boat as Samsung but critically, it has a better chance of getting this right.