Apple Earnings: iPhone, Mac and China Fuel Growth

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Apple iPhone TV commercial 7/19/15

“We had an amazing quarter,” said Apple CEO Tim Cook, who spent much of Tuesday’s quarterly earnings call discussing Apple Watch and China as bright spots for the brand’s future. The company’s fiscal third quarter earnings report reported that Apple generated revenue of $49.6 billion in the quarter, followed by net profit of $10.7 billion, or $1.85 per share, compared to $37.4 billion in revenue and net profit of $7.7 billion, or $1.28 per diluted share, a year ago.

Apple is nearing $200 billion in cash and investments and growth in Q3 came from record sales of iPhone and Mac sales, as well as the launch of the Apple Watch.

“Today, we’re proud to report record June quarter results with revenues of $49.6 billion and earnings of $10.7 billion,” said Cook on the earnings call. “Our year-over-year growth rate in the fiscal third quarter accelerated over the first half of fiscal 2015. Revenues were up 33%, our fastest growth rate in over three years, and earnings per share were up 45%. We achieved these incredibly strong results despite reducing channel inventories across our product lines by over 1 million units and despite the challenging FX (foreign exchange) environment.”

Overall, as Cook stated in the press release, “We had an amazing quarter, with iPhone revenue up 59 percent over last year, strong sales of Mac, all-time record revenue from services, driven by the App Store, and a great start for Apple Watch. The excitement for Apple Music has been incredible, and we’re looking forward to releasing iOS 9, OS X El Capitan and watchOS 2 to customers in the fall.”

Luca Maestri, Apple’s CFO, added: “In the third quarter our year-over-year growth rate accelerated from the first half of fiscal 2015, with revenue up 33 percent and earnings per share up 45 percent. We generated very strong operating cash flow of $15 billion, and we returned over $13 billion to shareholders through our capital return program.”

Tim Cook Apple Watch iPhone

Hold the iPhone

Apple sold 47.5 million iPhones, 10.9 million iPads and 4.8 million Macs in its Q3.
International revenue now represents 64 percent of the company’s total revenue. Last quarter, boosted by Chinese New Year sales, revenue soared 71 percent. While Apple Watch is still penetrating the key market of China, iPhone—which Apple has been promoting with new ads—grew 112 percent year over year.

As Cook told analysts, “We had another stellar quarter for iPhone, establishing a new June quarter record. iPhone unit sales grew 35%, which is almost three times the rate of growth of the smartphone market overall and we gained share in all of our geographic segments. iPhone revenue grew even more strongly, up 59%. The strong iPhone results were broad-based in both developed and emerging markets and we experienced the highest switcher rate from Android that we’ve ever measured.”

“Most importantly,” he added, “iPhone customer metrics are tremendous. ChangeWave’s most recent survey of US customers found that iPhone has the highest customer satisfaction rate of any smartphone brand by a wide margin, and that among iPhone owners planning to purchase a new phone, 86% plan to purchase another iPhone. That compares to 50% repurchase intent for the next highest brand measured.”

Apple China iPhone

China Rising

While acknowledging the importance of iPhone and Mac sales on the earnings call with analysts, Cook emphasized two areas of growth for the company: Apple Watch and China, which will have 40 Apple stores by mid-year 2016 and is poised to one day become the company’s biggest market.

In its latest quarter, China was certainly a star market despite some economic volatility in the market: “Our results from Greater China were outstanding with revenue growth of 112% and iPhone unit growth of 87%. This is particularly impressive given IDC’s estimate of only 5% growth for the Greater China smartphone market. We also achieved our highest ever PC market share in the segment with Mac sales growing 33% over last year. And our ecosystem in China continues to grow at a very fast pace, with App Store revenue more than doubling in the quarter.”

Cook also pointed to China’s growth in responding to an analyst’s question, commenting that “our job is to grow our products regardless of the price, which means that we need to convince in some cases people to move from one price band to the other. And that we think if we do a great job with the product that people will be willing to spend more because they get so much more out of it. And I think you can look at the results on the iPhone and see that in action. I mean, we grew 87% in China. We grew 90%-plus in India. Emerging markets are growing 65%. These numbers are unbelievable and they’re done in an environment where it’s not the best of conditions.”

Apple Watch China

Driving the point home, Cook reiterated in responding to an analyst’s concern over the stability of China’s economy that “we remain extremely bullish on China and we’re continuing to invest. Nothing that’s happened has changed our fundamental view that China will be Apple’s largest market at some point in the future. It’s true, as you point out, that the equity markets have recently been volatile. This could create some speed bumps in the near term. But to put it in context, which I think is important, despite that volatility in the Chinese market, they’re still up 90% over the last year, and they’re up 20% year-to-date, and so these kind of numbers are numbers I think all of us would love.”

“We have the pedal to the metal on getting to 40 stores mid next year,” Cook added. “The LTE penetration in China is only at 12%. And China doesn’t possess the level of fiber that some other countries do, and so in order to get the great video performance etc., raising that penetration is really great. I think that really plays to an incredible smartphone future there.”

What’s more, he added, “I can’t overstate this: The rise of the middle class there is continuing, and it is transforming China. I saw a recent study from McKinsey that’s projecting the upper middle class to grow from 14% to 54% of households over the ten-year period from 2012 to 2022. So we’re within that period at this moment, and you can see for all of us that travel there so much, with every trip you can see this occurring. And so I think we would be foolish to change our plans. I think China is a fantastic geography with an incredible unprecedented level of opportunity there. And we’re going to be there.”

Apple Watch

Watching Apple Watch

Cook is clearly hanging future growth on rising demand for Apple Watch, too, talking about how much he now relies on his, and not just because he has a vested interest in its success.

“A major highlight of the past quarter for all of us here at Apple was the launch of Apple Watch in April,” he commented. “As you know, we’ve been very excited to get this revolutionary product to customers. We started taking preorders in nine countries on April 10, and demand immediately exceeded supply by a wide margin. To prioritize those first orders and to deliver the best experience for our customers, we delayed the availability of Apple Watch in our own retail stores until mid-June.”

“We made huge progress with the production ramp (up) across the quarter and near the end of the quarter expanded into six additional countries. And in just the past few days, we’ve been able to catch up with demand, enabling us to expand Apple Watch availability to a total of 19 countries currently with three more countries to be added at the end of this month.”

“The feedback from Apple Watch customers is incredibly positive and we’ve been very happy with customer satisfaction and usage statistics,” Cook noted with pride. “Market research from Wristly measured a 97% customer satisfaction rate for Apple Watch and we hear from people every day about the impact it’s having on their health, their daily routines, and how they communicate. Our own market research shows that 94% of Apple Watch owners wear and use it regularly, if not every day.”

While not divulging Watch sales beyond the vague statement that sales “exceeded expectations,” Cook commented that “our objective of the quarter wasn’t primarily sales but also how we position the product in the long term because we are starting a new product category. And as I back up and look at this, with 8,500 apps, we’ve already announced the next watchOS 2 — It will bring native apps, which will be killer. Even though the store layout was delayed, we’ve learned a lot about the buying experience. We plan to expand channel before the holiday because we’re convinced that the watch will be one of the top gifts of the holiday.”

“Most importantly, customer satisfaction is off the charts. So I sort of back up and look at this and feel fantastic about what the team has done and delivered, and I know I never go anywhere without the Watch. And it’s not because I’m the CEO of Apple. I’m that attached to it. I get a lot of notes from a lot of people that feel the same way.”

He did share what’s proving popular on Apple’s flagship wearable tech: “Messaging and activity features are among the most popular and social networking apps including Twitter, WeChat and LINE are seeing the most usage among third party apps. We believe that the possibilities for Apple Watch are enormous and that’s been reinforced in just the first few weeks since it became available to customers.”

“For example, doctors and researchers at leading hospitals in the US and Europe are already putting Apple Watch to work in improving patients’ lives. Nebraska Medicine, the latest hospital to adopt Apple Watch, has rolled out new apps that facilitate communication between patients and doctors and provide quick access to important chart and dosage information.”

“Ochsner Health System of Louisiana is using Apple Watch with hypertension patients to gather important information like daily activity and blood pressure level, and leading cancer centers like London King’s College Hospital are incorporating Apple Watch into trials for ongoing care and monitoring of cancer patients.”

“Great Apple Watch solutions go well beyond healthcare,” he added. “Users are tracking their fitness, getting breaking news alerts, following their investments, connecting with friends, and living a healthier day. The user experience for Apple Pay and Siri is nothing short of incredible and customers are enjoying countless other features through the over 8,500 third-party apps available for Apple Watch.”

“This is just the beginning of what this new platform can deliver. With Apple watchOS 2, developers now have the ability to build richer and more powerful native apps for Apple Watch, taking advantage of the heart rate sensor, the Digital Crown, accelerometer and more, ushering in a whole new class of apps designed specifically for the wrist.”

“It’s a rare and special privilege to launch a new platform with such promise and potential, and I know I speak for everyone at Apple when I say that we can’t wait to see what our developers and customers do with it.”

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