The term Post-PC was first coined by MIT scientist David D. Clark in 1999 and was quickly adopted by both Microsoft's and Apple's former CEOs. Jobs popularized the term "post-PC" in 2007 (the launch of the first iPhone), and in 2011 when he launched iCloud, a service enabling Apple devices to synchronize data through cloud services, freeing them from dependency on a PC.
The Post-PC era was posited during the late 2000s and early 2010s presupposing a decline in the sales of personal computers (PCs) in favor of devices, phones, tablets, wearables, IoT, etc. These devices were mobile first (i.e. battery-first as opposed to plug-first), connected second and cloud-powered third. They were designed to run "apps" not "applications" and had new ecosystems with millions of developers selling through online-only stores, priced often as subscriptions rather than seat licenses.
In the last decade or so, the PC did endure an overall decline in sales while phones, tablets and wearables climbed to at least 10x volumes of the PC. But the last few months have shown a resurgence in PC sales. Certainly the necessity of working from home is the reason but will this last?
The fact is that the PC did not disappear. It certainly is still in use and there are buyers for it. There just isn't a lot of growth or energy. There hasn't been for a decade. The software and hardware efforts are uninspiring because the talent has moved elsewhere. The creativity, R&D budget have gone the same way.
But what about the Mac? The Mac is the PC from the company that more or less defined the Post-PC era. Would it not be the first to be sacrificed for the new future? As it stands, as the graph below shows, the Mac today is double the business it was decade ago and although it has been overtaken by wearables, it has kept ahead (after a time) of the iPad.
As it turns out the Mac is doing just fine.
The trouble with PCs, including the Mac, is that they are stubborn in how they define themselves. Like the power user, they see performance along certain dimensions. They also don't see performance along new dimensions which devices offer with glee. For example connectivity to cellular networks (still missing in even the fanciest laptop but available on my watch.) Then there are the sensors which measure my heart rate, activity level, location, altitude, etc. Then there are cameras which on phones now boggle the mind. PC cameras are comical in comparison.
Then there is portability and usability without being plugged in.
Well, it was. With the M1, Apple has finally delivered the always-on feel of a tablet or phone and the more-than-one-day battery life. It also added a lot of neural engine horsepower and a lot of on-chip memory. Apple is delivering a system on a chip which makes the Mac more device-like in its integration. And sales are likely to rise, on the back of a great 2020 for the Mac. The form of the machine might even change with new designs being made possible by the lower heat profile and space savings.
And so I'm writing this post on a Mac. The graph you see above was created on the Mac. It's possible to do all this my iPad and even on my iPhone but it would be harder. But I'm also willing to bet you're reading this on a phone.
And that's the crux of it. The PC is still the machine of choice for authoring while the device is the machine of choice for consuming and consuming will always be more popular. What the iPad has done is taken a share of PC use and in my case I do use it for some tasks like email a lot more frequently. The theory would suggest that the iPad will continue its upward trajectory while the PC would abandon the low end.
This disruption has already happened but it hasn't been complete. The median performance band now belongs to devices but the professional will always ask for more of the performance which they see as productive while the consumer will always ask for more of the performance which they see as convenience. Here the market bifurcates.
What has been problematic with the smaller of the two markets has been the vicious cycle of lack of investment due to decreasing margins, commoditization and talent flight. What Apple is doing once again is ratcheting up the bar for the PC to make sure it's the top choice for creative professionals. And as long as they are productive, the consumers will keep them employed if not in riches.
The iPad was launched in April 2010, about three years after the iPhone. Followers of the company will know however that the iPad was designed first, starting sometime in the early 2000s.
The iPad was the prototype touch device because it's less constrained but also because Apple was, at its heart, a computer company and the iPad was a computer first, device second.
Concepts of tablets predated Apple's entry and go back to the 1990s. The idea of a "Tablet Computer" was envisioned by Alan Kay as the Dynabook as early as 1968. He famously remarked that if Apple were to build a tablet-sized iPhone it would "rule the world".
But has the iPad come to rule the world?
Ten years is not a long time—the Mac is now 36 and it's still kicking, Windows is only 25 years old—but already 500 million iPads have been sold.
The sales history of the iPad in units is shown below in blue vs. the iPhone in green. (Note, values in last 8 quarters are estimated).
The story that did not pan out for the iPad is that the unit growth did not match that of the iPhone, which, in its first decade sold 1.2 billion units.
But that is because the iPhone and iPad differ in significant ways. Ways which were difficult to anticipate early on.
Difficult because internally the two are basically the same. Both share the same processors and architecture and (until recently) the operating system and user interaction model. They have a similar "bill of materials" (though prices are quite different, with iPhones typically more expensive.)
The main difference has been in the display size. As I noted early on, a few inches of display may not look like a big difference but it is qualitatively very different—as much as a bathtub and a swimming pool both contain water, the quantity of water changes dramatically what you can do with either.
As a result of its size, the iPad is more likely to remain at home; not stationary in one spot, but not "in-hand" at all times. That affects how long it lasts and the tasks it's assigned to do.
As a result, iPads stay in use longer, get passed on to new users and serve for many years. Their average life span is likely well over 4 years and 9 year old iPads are not uncommon. It's therefore very likely that the vast majority of all iPads sold are still in use.
So the true measure of success is not units sold but number of active (and satisfied) users. The iPad user base is probably around 400 million (about 27% of total active Apple devices.) The degree of activity is also telling and is reflected in the million apps built specifically for the platform.
400 million users makes for a healthy ecosystem, especially as the users tend to be willing to spend on apps and services, which in turn, attracts more investment from developers, which leads to more usage, and so on, in a virtuous cycle.
As with all aspects of Apple analysis, the qualitative is just as important as the quantitative, even more so. The quality of the users, the usage and the product is the pre-eminent assessment.
iPad users, usage and product make for a remarkable combination. On the product side, the Fall 2020 line-up is another leap forward. In particular, the price points, breadth of offering, accessories (mini, Air, Pro, pencil, Smart Keyboard, etc.) and the power across the board.
This year sees a performance jump in the middle of the line-up with the usual mind-boggling measurements (some beginning with "nano," and others with "tera".)
So where to for iPad now? What worlds remain for it to conquer? So far has found users in the three "E"s: Enterprise, Education and Entertainment. Pro usage is a niche that is growing in production, especially media. What many might say is that it needs to aim at replacing the laptop, or the PC in general.
It has not done that so far, much to the delight of naysayers. But this is not as big a failure as it might seem.
First note that the Mac user base itself is not nearly as big (110 million +/-10%). iPad could be 4x bigger in user base. The Windows base is larger at 1.2 to 1.4 billion but that resists frontal assault as it is deeply entrenched around enterprise workflows. It's also bereft of profit.
What iPad did do is create its own demand. It sits comfortably aside other platforms not in place of them. Most iPad users also have an iPhone and a PC or a Mac. I happen to have all those and more than one iPad. The iPad did something grander than kick the PC off its perch. It sat next to it and found life quite comfortable.
At time of writing (December 12, 2019) AirPods Pro delivery wait time is over 4 weeks. It's been like this since they shipped. I tried stores in several countries and although units can make an appearance on a shelf, they sell out immediately.
AirPods are part of the "Wearables & Home" category for Apple which used to be called Other Products and include also the Watch, iPod, Apple TV, Beats and HomePod (among other items.) iPod revenues were broken out as recently as 2015 but as the graph below shows, there have been no specifics on any product in "Wearables & Home" since then.
Wearables, Home and Accessories in a historic perspective with the iPod.
It therefore falls upon us to estimate how much of the entire category is any one product. It's been very difficult as the only clues lie in growth rates, sometimes cited for the Apple Watch and sometimes for "Wearables" alone. As far as I can tell from the available clues, the split is roughly as shown between the Orange and Green areas. Orange reflects estimate for Watch and Green everything else.
This analysis helped me conclude the Apple Watch overtook the historic "peak iPod" which occurred in the fourth quarter of 2007 at $4 billion. My Watch revenue estimate was $4.2 billion in the fourth quarter of 2018. This conclusion was confirmed by statements from the Company.
The problem lately has been that AirPods have become huge unto themselves. There is literally no information about AirPods sales as a product category. The only option is to guess Watch and subtract it from Wearables and then guess again the portion of "non-Watch Wearables & Home" that is AirPods.
Looking forward to the next quarter, I am expecting a 51% increase y/y for Wearables and 24% growth in Watch. This results in a Watch revenues about $5.2 billion and non-Watch $5.7 billion. Now if we assume $1.7 billion for non-Watch-non-AirPods (i.e. Apple TV, HomePod, Beats, iPod, other) then this quarter AirPods will have overtaken peak iPod.
Remember that iPod was the phenomenon which reset all expectations for Apple. It caused Apple to cease calling itself Apple Computer. It (at least psychologically) laid the foundation for iPhone and everything else that followed. In 2005 and through 2007 Apple was "the iPod company". I remember people working in a large search engine company calling Apple "that media company" as a result of over-intellectualizing iTunes.
(One more footnote on the AirPods Pro is that at $250 a pair and $300 for Apple Watch, throwing in a case puts these attached accessories for an iPhone at roughly the same average selling price for the iPhone of a few years ago.)
For the AirPods to overtake the iPod highlights just what a phenomenal category Wearables has become. In combination with Home and other accessories the category is going to decidedly overtake the Mac, having already passed the iPad.
And so it goes, something dismissed as inconsequential–"does not move the needle"–ends up becoming a massive force of change. The iPod was that, the original Apple II, the Mac and yes, also the iPhone. It's the asymmetry of humility that this happens over and over again.
To hear more about the profundities of AirPods Pro tune in to the next Critical Path podcast.
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WWDC 2019 included a vast list of releases and it's quite difficult to summarize. The focus is always on software updates but this year the list seems more exhaustive than usual.
The highlights for me are:
WatchOS now includes direct App Store access. This continues the separation of the Watch from the iPhone, on a trajectory that remains predictable.
Hearing Health/Noise App/period and trends management extends the iPhone's health maintenance "jobs to be done".
AR & Swift extend the platform through Reality Kit and Reality Composer and Swift UI.
MacOS improves through a new Apple Music app, Sidecar iPad integration, Accessibility and "Find My" Mac offline beacons.
iPad and Mac are beginning to share Apps with Project Catalyst.
New Mac Pro and new XDR Display are quantum leapfrog leaps in the high-end performance computing market where Apple has lagged for a few years.
Sign-in with Apple is a huge and much needed update to identity management on-line. A big deal.
iPadOS introduced as fifth Apple OS. Rather than merging iPad and Mac which would be suggested by Project Catalyst, Apple preserves and sanctifies the modularity of form factors based on their differences rather than commonalities.
If there is one thing I took away as most significant it would be the iPadOS spin-off. I don't quite know how this will change the fortunes of the iPad but in declaring itself a platform distinct from iOS it signals that iPad can evolve rapidly in a new direction. The promise and problem with the iPad has always been that it was great hardware held back by software that was not able to take advantage of it.
The core apps, interfaces and connectivity were all constrained, which is not necessarily a bad thing. Constraints make a system and the constraints of the iPhone made it great. Not having a stylus, not having a menu system and not having windowing meant the UX had to be drastically simplified.
But apparently the iPad could not evolve without a re-evaluation of these constraints. The last iPad Pro release hinted at what was coming: it had a full-size keyboard and an immensely capable processor and screen.
So we saw new features such as split view for the same app, Files folder, doc sharing, USB and SD drives support, Zip/Unzip, Desktop class Safari optimized for touch. Download manager, custom fonts, new text editing gestures (copy/paste/floating keyboard). Pencil latency improvement. All these changes are geared toward "productivity" or Pro use.
And yet, the iPad is not Mac. It will remain separate and target Mac non-consumers. Indeed there are three times more iPad users than Mac users and it's quite possible that the iPad base can expand further with enhancement into productivity.
The iPad has not proven to be either an iPhone or a PC killer. It's just in between. It's not a bowl and it's not a swimming pool. It's a bathtub. And yes, bathtubs are never going to be as common as bowls but they have their uses and are not obsoleted by better water containers.
The Operating System idea here is a bit of a conceit. In terms of the kernel and the core APIs there are vast common grounds between all Apple's OSs. But what Apple calls an OS is not just the core code but also the positioning of the idea _to developers_. By branding iPadOS the company is signaling to developers that they should think about the iPad differently.
To a large extent they already do. Coding for iPad has always required a different design approach. But now perhaps Apple is drawing an explicit line enforcing the distinction.
Going back to the list of highlights above, none of them is a "home run", re-enforcing the idea that the company has run out of big ideas. But hitting 8 base hits yields the same result as two home runs. There is a consistent delivery of improvements here that can't be ignored. There's something to be said for polishing rocks until they turn into gems.
We want things to get better. The desire of improvement and an increase in performance is seemingly innate. The old adage goes that using the word "new" is the most effective way to increase sales. "New & Improved" if you want to be redundant.
For many in technology, New & Improved means faster with more of every measurable parameter. More memory, more pixels, more storage, more bandwidth, more resolution. In devices, the tendency has been to communicate "new & improved" through an increase in screen size. We are subject to this to such an extent that phones are becoming unusable with one hand, stretching screens to the edge of the device and then wrapping those screens around the edges and then even folding the screens so that we have to unfold or unroll to use the product. Maybe an origami phone is in the works.
But there is a parallel movement where "New & Improved" means smaller. This is the trend to miniaturization. Smaller is better because it's more portable, more conformable. Things sold by the ounce are better than things sold by the pound. The best computer, the best anything, is the one you have with you and having it with you is more likely if you can take it with you. So that which you can take with you is the best. QED.
Apple has had a great history of miniaturization. The original Macintosh was tiny compared with personal computers of its day. It had a handle so you could take it with you. Apple pioneered laptops with breakthroughs in utility and form which made them truly portable. The iMac followed with a degree of integration and portability which made it iconic. Of course the iPod and iPhone were marvels when they first appeared.
Over the years these products expanded into ranges with "good, better, best" type segmentation. The bigger being the best in performance and the smaller typically being the most convenient. However it seemed that the positioning was toward "bigger is better" for a lot of these products. The iPhones Plus, the iPads Pro, etc. As even the largest were getting thinner, the "mini" versions appeared to be neglected. You could get "good enough" portability from the larger products so why bother with the minis.
It came to a head when the iPhone SE was discontinued last fall. Its demise felt like the end of an era. I always considered the SE as the "Steve Edition". It was the last design Steve Jobs was involved in and it pained me to see it go. With it seemed to go the positioning around "mini".
But also last fall we saw a re-boot of another almost-forgotten mini: the Mac mini. For me the Mac mini was quintessentially Jobsian. I remember that he loved tiny products. His launch of the iPod nano was spectacular; reaching into his jeans' watch pocket to pull it out on stage. Holding the Mac mini up as if a tiny tray. Even the iPod shuffle was a quirky and lovable idea ((probably the first Apple wearable as you could actually pin it to your clothes)). And let's not forget the Mac Cube which made the iMac look huge.
When the Mac mini was released last fall in Brooklyn with a huge spec bump and a thunderous reveal I thought something was up. When the MacBook Air was also out at the same event I felt that the company was signaling something. Perhaps a re-dedication to the low end.
Also in parallel there is the wearables product line. The AirPods and the Apple Watch are jewelry. The essential qualities of products you wear are that they be small and beautiful. The smaller the better. Above all, both the Watch and AirPods are marvels of miniaturization. They pack so much in so little volume and that volume is shaped in such an aesthetically elegant way that they become daily essentials. I use my Apple wearables more than any other Apple product. Watch glances and time with AirPods exceeds the iPhone unlocks and iPhone use time. The fact that we don't even realize that the smallest Apple products are also the ones we use most is a testament to their conformability to us.
So the Mac mini that is suddenly the Mac Maxi in performance, the MacBook which is an extraordinarily small laptop, the wearables success, all pointed in a direction that the iPhone did not: that "mini" was back.
And now we see the iPad mini being re-launched with a huge spec bump. We should take the hint. The iPad mini is just charming. I have been trying it out for a few days and it has worked its way into my routine. I have an iPad Pro that I use on a desk to design presentations (and to deliver them). I use it with a keyboard for dealing with email on my lap or on a plane and take it instead of a laptop when going to meetings.
But the iPad mini worked its way to my nightstand. It the one I reach for when on a couch. It is like an iPhone but when you're at home it's better than the iPhone because you can linger on that new true tone screen. It works well one handed. It now has Pencil support so it can be used for sketching and doodling.
I am an analyst not a product reviewer but I sense how it fills a gap between iPhones and larger devices--in a home setting. Of course it can be used in an office. It is much easer to take with you if you carry a laptop in a bag.
Fundamentally explaining mini is pointless. mini is something that is felt more than it is perceived. You can see the attraction of a tiny product only when you come face-to-face with it. In a picture it's hard to get it--there is no frame of reference. What draws me to a MacBook or to a mini or a Watch is when it's touched and held and carried or worn. The experience of the product is not how it works but how it works with you. You have to be part of it. It's not asking "Does it look good?". It's asking "Does it look good on me?" mini means more personal.
That is the nature of mini and that is why I love the new minis: the iPad mini, the Mac mini, the MacBook (mini) and that is what I dare to hope that there is an iPhone mini coming.
Every October, at the end of its fiscal year, Apple files its Form 10K or annual report. In this report the company includes a section titled "Capital Assets" which details expenditures for capital equipment. This is last year's entry:
The Company’s capital expenditures were $14.9 billion during 2017. The Company anticipates utilizing approximately $16.0 billion for capital expenditures during 2018, which includes product tooling and manufacturing process equipment; data centers; corporate facilities and infrastructure, including information systems hardware, software and enhancements; and retail store facilities.
Note that there are categories of spending detailed and that their order might indicate the degree of such spending, suggesting that product tooling and manufacturing equipment is likely to be the costliest category.
After this report, during subsequent quarters the company may update this forecast of spending. In the last (third fiscal) quarter the entry was as follows:
The Company’s capital expenditures were $11.1 billion during the first nine months of 2018 . The Company anticipates utilizing approximately $17.0 billion for capital expenditures during 2018, which includes product tooling and manufacturing process equipment; data centers; corporate facilities and infrastructure, including information systems hardware, software and enhancements; and retail store facilities.
Note that the forecast of $16.0 billion was updated to $17.0 billion and the first 9 months' expenditures were $11.1. Since there is only one quarter remaining ((and since at the time the quarterly report is filed, only about 2 months remain in the quarter)) it's reasonable to assume that the company's forecasts are more likely to be precise and that therefore the difference between total expected spending and already spent, i.e.f $5.9 billion remains to be spent.
The actual spending is not recorded quarterly but an approximate value is reported in the Cash Flow statement as "Payments for acquisition of property, plant and equipment". That can be tracked but it does not equal exactly the capital expenditure. For example, the quote above says expenditures were $11.1 billion through first 9 months but the total of all payments for acquisition of PP&E is $10.272 billion.
Minor ((To the extent that $1 billion can be considered minor)) differences, aside, this forecast and actual spending and payments data is significant because it is highly correlated to Apple's overall business. Assuming that the spending on manufacturing equipment and information systems hardware (i.e. data centers) is in support of the iOS device sales and services we can try to show how sales correspond to spending with the following graph:
Here sales are shown as a bar graph and the various spending forecasts and actual payments are shown as lines. Also note that the spending and sales are offset by one quarter. The fiscal year is used for spending and the calendar year for sales. The reason is that spending is presumed to lead sales by approximately one quarter.
There are some notable discrepancies, especially with the 2012/2013 period when spending was brought forward a quarter thus showing a surplus to forecast in 2012 and a deficit in 2013. But apart from that, there is a broad correlation between spending and sales.
This means that the CapEx forecast in October is a good indicator of sales in the following year.
In fact, the relationship is can be shown with four scatter plots, one for each of the published figure:
I caution that this is a yearly forecast and it is revised through the year on a quarterly basis, sometimes up, sometimes down. It's therefore not a perfect indicator and of course the relationship between sales and spending is not perfectly predictable. Note that there are four types of spending that can be measured, two are forecasts (one year and revised) and two are actuals (cash flow payments and reported total expenditures)
We can measure the best variable that fits the sales data through the coefficient of determination or R-squared. The best fit seems to be with Payments for acquisition of property, plant and equipment (R-squared of 0.976).
This gives the formula for yearly sales as 15.915x + 15809 where x is the expected total spending. That spending to date has been $10.272 billion and it's probably going to exceed $16 billion for the year.
Using $16 billion spending total, we can calculate iOS products and services for calendar 2018 of $270.45 billion.
iOS and Services sales to date have been $103.2 billion with an estimate for next quarter of about 54.3 billion (based on guidance) and thus a total through Q3 of $157.5 billion. Subtracting this from the $270.45 billion expectation from the calculation above gives a fourth calendar quarter iOS revenue of $113 billion.
Adding $7 billion for the Mac results in a total net sales of 120billion. This therefore is what I'd put forward as a reasonable target for CQ4.
Note that this is equivalent to a growth of 36% from the 2017 fourth quarter.
[UPDATE: Original version used total sales rather than iOS related products and services (i.e. excluding Mac). The text has been edited to reflect the correct figures.]
The iMac launched May 6 1998, exactly 20 years ago. It is not the most significant computer to ever exist. It was a clear descendant of the original Mac which established the "all-in-one" desktop computer category. That category, to which it still belongs, is a modest segment. The last time Apple reported portable sales separately was in late 2012 when the desktops/servers and pro systems combined made up only 20% of all Mac sales by units. If iMac were 10% of Mac sales, it would represent about 2 million units in 2017.
Desktops evolved into laptops and personal computing evolved into pocket computing. Becoming more personal means more intimacy and this is leading to wearable computing. There is more beyond that to be sure.
But the iMac is a historically significant machine. It allowed Apple to start on a new trajectory. It did this by first offering a financial lifeline. Sales of Macs, which were at the time the only source of revenues for Apple, increased from 2.7 million to 3.8 million a year. This at a time when Windows PCs were shipping about 100 million units. That was enough to ensure survival. Today Mac units are five times higher while Windows PCs are about 2.5 times higher. The following graph shows the impact of iMac on the Mac's trajectory.
Second, the iMac was the first host of OS X, an operating system built on Unix which made it extremely flexible. iMac gave Apple the space for OS X to be developed and to be optimized for various hardware. The experience with OS X and its inherent scaleability (down as well as up) meant that it could be considered for the post-PC devices of the future.
Lastly, iMac's design screamed "consumer product" which went from signaling inferiority to superiority. It set a standard for novelty, creativity and dynamism in the category that was considered second-rate. In the early 2000s consumers began to lead in the adoption of new technologies. DVD drives, internet connectivity, wifi, instant messaging, media consumption exploded. All the while institutions, hung up on legacy, began to block technologies. At this pivotal moment, the iMac spoke with its looks. It didn't just imply a new order, it stated it.
To me the incredible aspect of the iMac's entry is its uncanny timing. It came not only just in time to save Apple but exactly half-way between the first two ages of computing. In the following graph showing "share of computing" you can see it as launching precisely at "peak Windows".
In retrospect you have to wonder if Apple, with the iMac, was lucky to survive into this next era or if that era would have ever happened without the iMac. It's a question of causality which quickly devolves into an un-winnable argument about stochastic vs. deterministic existence.
Regardless, the result was felt more than seen. The computing industry was pivoting. The results are seen also in the graphs above. The iMac came right in the middle of the "desert" of platform choice of the late 1990s. By the 2000s mobile platforms detonated on the scene. The iPod was Apple's first entry, in 2001, but it was not a computer. It was an appliance. A stepping stone at a time when the early platform contenders Nokia, Palm, Microsoft and BlackBerry surged before realizing that they did not have sound foundations upon which to build ecosystems. Their advances could not be consolidated.
The spoils went to the later entries of iOS and Android. The resulting disruption was shocking and disorienting. Not only did the old order get up-ended but the magnitude of the new was 100x the old. The iMac enabled at least a trillion dollars of value to be created and made Apple the biggest company in the world.
As you would expect, at the time, 20 years ago, none of this change was anticipated. iMac was a 'cute' computer. Toy-like and obviously unprofessional. It attracted and relished contempt.
So now we are at a point where the second era of computing is at its apex. With markets near saturation, the device business is inflecting from growth to possible stagnation if not decline. There are two platforms--though unlike Windows, Android is fragmented and iOS is not just on one form factor. Nevertheless there is stasis. The touch UI which begat nine billion devices is normative. The next interaction metaphor has not emerged as an obvious successor.
The question for today is what is the new iMac? What is the enabler for change? It's not easy to spot. It is not the thing of the future but it points to the future.
The following is a transcript of the comments from Tim Cook (CEO) and Luca Maestri (CFO) at Apple's Q1 2018 Earnings Conference Call February 1, 2018. I color coded my interpretation of the comments into four categories:
Grey: Background and promotional commentary
Red: Strategy and signals of what management considers important and may include data beyond the regularly reported numbers.
Green: Financial data
Black: Commentary.
Blue: My commentary, in brackets.
For a quick read of Apple's strategy, read the Red text. These comments are not repeated in financial reports. Highly recommended.
For a quick read of Apple's financial performance, read the green text (which are replicated in financial reports). Read this if you don't want to wade through the financial reports.
For marketing or product material, read the grey text.This is sometimes unique but also repeats product launch information.
---- Tim Cook: Thanks, Nancy and thanks everyone on the call, and welcome to everyone today. Before we dive into the quarter, I'd like to take a moment to talk about a significant milestone we recently crossed.
Apple's active installed base reached 1.3 billion devices in January and is at an all-time high for all of our major products. 1.3 billion devices represents an astonishing 30% growth in just two years. It speaks to the strength and reliability of our products and our ecosystem, as well as the loyalty, satisfaction and engagement of our customers. It's also fueling tremendous growth in our services business, which I’ll talk about a little later in the call. [This is probably Apple's most important number. For at least the next 20 years this is the key performance metric and it can be used to derive company's valuation. A summary of the history of active devices vs. units sold is shown in the graph below:]
Turning to the December quarter. We're thrilled to report Apple's biggest quarter ever, which set new all-time records in both revenue and earnings. We generated revenue of $88.3 billion, which is above the high-end of our guidance range, and it is up almost $10 billion or 13% over the previous all-time record we set a year ago.
It's also our fifth consecutive quarter of accelerating revenue growth with double digit growth in each of our geographic segments around the world. What makes us even more remarkable is that the quarter we're reporting today was 13-weeks long, while the year ago quarter was 14-weeks. When we look at the average revenue per week in the December quarter this year compared to last year, our growth was a stunning 21%. [The 13-week vs. 14-week year-on-year comparison is repeated several times. The summary differences are shown in the table below:]
Our growth was broad-based and a key driver was iPhone, which generated its highest revenue ever. iPhone X was the best-selling smartphone in the world in the December quarter according to Canalys, and it has been our top selling phone every week since it launched. iPhone 8 and iPhone 8 Plus rounded out the top three iPhones in the quarter. In fact, revenue for our newly launched iPhones was the highest of any lineup in our history, driving total Apple revenue above our guidance range. [The iPhone X is a huge hit. It drove the average selling price $100 higher y/y. This is not only unprecedented for Apple but for the entire Industry. The average smartphone sells for less than $300 while iPhones sold for $800. The gap is widening. The following graph shows the product mix and the average resulting price.]
I want to take a moment to recognize the tremendous amount of work that went into creating iPhone 10. Our teams carried out an extremely complex launch from both an engineering and operations perspective, executing an outstanding product ramp that required years of research and development; one that introduced innovative features like an edge-to-edge Super Retina Display and the TrueDepth Camera, which enables face ID. Our customers love these new features and the new gestures like simply swiping up from the bottom, which make using iPhone even more intuitive and enjoyable.
Our team has put the technology of tomorrow in our customers’ hands today, set a standard for the next decade of smartphones and we are very proud of their achievements.
It was another very strong quarter for services with revenue of $8.5 billion, up 18% over last year, and we’re on pace to achieve our goal of doubling our 2016 services revenue by 2020. The number of paid subscriptions across our services offerings passed 240 million by the end of the December quarter, that’s an increase of 30 million in the last 90 days alone, which is the largest quarterly growth ever. [Services has been growing relentlessly for over a decade. This steadiness of growth makes is a juggernaut. Apple is increasingly speaking about subscriptions as the key metric and 240 million is reaching record territory. The rise of Services is shown below (both revenues and consumer spending.)]
We had an all-time record quarter for the App Store with our best holiday season ever. We’re seeing great excitement around augmented reality with customers now enjoying over 2,000 ARKit enabled app, spanning every category in the App Store. In December, when Pokémon GO released its new augmented reality features built with ARKit, it jumped the top of the App Store charts. Last week, on a stop in Toronto, I met developers who are hard at work on creative applications using ARKit from art appreciation to ecommerce, and I was very impressed with what I saw.
Just for months after ARKit launched to the public, we’ve already released ARKit 1.5 in beta to developers around the world, and the response has been tremendous. Augmented reality is going to revolutionize many of the experiences we have with mobile devices. And with ARKit, we’re giving developers the most advanced tools on the market to create apps for the most advanced operating system running on the most advanced hardware. This is something only Apple can do.
In addition to the App Store, several other services had their biggest quarter ever, including Apple Music, iCloud and Apple Pay, all of which saw growth in both active users and revenue.
Apple Pay has reached an important milestone in the U.S. As a result of 50% year-over-year growth in merchant adoption, it’s now accepted at more than half of all American retail locations, which includes more than two-thirds of the country’s top 100 retailers. Now available in 20 markets, global Apple Pay purchase volume more than tripled year-over-year and we’re delighted to be expanding to Brazil in the coming months. [There are no absolute data points on Apple Pay but we do have some scattered growth data. The US data is cited here but in my experience it's more popular in select countries like UK where users are using it habitually]
Today, you can use Apple Pay to take the subway in Guangzhou, China, see a concert at London’s Wembley Stadium or buy a souvenir in Yosemite National Park. In the U.S., we launched Apple Pay Cash in December, and it’s off to a terrific start. Millions of people are already using it to send and receive money with friends and family quickly, easily and securely; to split a bill, pay someone back, or send last minute gift right from the messages app.
It was our best quarter ever for the Apple Watch with over 50% growth in revenue and units for the fourth quarter in a row and strong double-digit growth in every geographic segment. Sales of Apple Watch Series 3 models were also more than twice the volume of Series 2 a year ago. Apple Watch is the most popular, smart watch in the world and gained market share during the quarter based on the latest estimates from IDC. [Apple Watch is growing consistently. The following graph shows my estimates of volume (total 42 million to date) and revenues (total $15 billion) based on all available data and commentary from management.]
It was the third consecutive quarter of growth for iPad revenue, thanks to the strength of both iPad and iPad Pro. Based on the latest data from IDC, we gained share in nearly every market we track with strong outperformance in emerging markets.
Worldwide, almost half of our iPad sales were the first-time tablet buyers are those switching to Apple, and that’s true in some of our most developed markets, including Japan and France. In China, new and switching users made up over 70% of all iPad sales.
For Mac, we launched the all new, iMac Pro in mid-December. It’s an entirely new product line designed for our Pro users who love the all-in-one design of iMac and require workstation class performance. It's the fastest, most powerful Mac ever, delivering incredible computational power, for simulation and real time 3D rendering, immersive VR and complex photography audio and video projects. Worldwide, 60% of our Mac sales were the first time buyers and switchers and in China, that number was almost 90%.
We're looking forward to getting HomePod in customers’ hands beginning next week. HomePod is an innovative wireless speaker, which delivers stunning audio quality wherever its placed in the home, thanks to the advanced Apple engineered hardware and software.
Together with Apple Music, HomePod gives you instant access to one of the world's largest music catalogs. And with the intelligence of Siri, it’s a powerful assistant you control through natural voice interaction. We're very happy with the initial response from reviewers who've experienced HomePod ahead of its launch, and we think our customers are going to love this new product.
We believe one of the key issues of the 21st century is education. And because of that, we've strengthened our commitment and investment into initiatives like everyone can code. To find the innovators of the future, we need to nurture the students of today. Our App Development with Swift curriculum, which is available free on iBooks, has been downloaded more than 1.2 million times worldwide with almost half of those coming from here in the United States. It’s also being taught in dozens of community colleges across the country, putting practical skills in the hands of today’s jobs seekers.
I was in London two weeks ago as we announced that the program was expanding to more than 70 colleges and universities in Europe. Millions of students around the world will have the opportunity to add Swift to their coding vocabulary and gain skills that are essential for today’s economy.
This is an exciting time at Apple and with the best lineup of products and services we've ever had and a set of initiatives that show how business can be a force for good in the world. We could not be more excited about our future.
Now, for more details on the December quarter results, I'd like to turn over the call to Luca.
Luca Maestri: Thank you, Tim. Good afternoon, everyone. Our business and financial performance in the December quarter were exceptional, as we set new all-time records for revenue, operating income, net income and earnings per share.
Starting with revenue, we’re reporting an all-time record, $88.3 billion, up nearly $10 billion or 13% over the prior record set last year. It is our fifth consecutive quarter of accelerating revenue growth. As you know, the December quarter a year ago spanned 14-weeks compared to 13-weeks this year, which is important to consider as we have set the underlying performance of our business this year. When we look at average revenue per week, our growth rate was even higher at 21% with growth across all product categories for the third consecutive quarter.
Our results were terrific all around the world with double digit revenue growth in all our geographic segments, an all-time quarterly record in the vast majority of markets we track, including the U.S., Western Europe, Japan, Canada, Australia and Korea, as well as Mainland China, Latin America, The Middle East, Central and Eastern Europe, and India.
In Greater China, we were very happy to generate double digit revenue growth for the second quarter in a row and in emerging markets outside of Greater China, we saw 25% year-over-year growth.
Gross margin was 38.4% at the high end of our guidance range. Operating margin was 29.8% of revenue. Our net income was $20.1 billion an all-time record, and up $2.2 billion over the last year. Diluted earnings per share were $3.89 also an all-time record and cash flow from operations was very strong at $28.3 billion.
During the quarter, we sold 77.3 million iPhones, the highest number ever for a 13-week quarter. Average weekly iPhone sales were up 6% compared to December quarter last year with growth in every region of the world despite the staggered launch of iPhone 10. We established all-time iPhone revenue record in nearly every market we track with double-digit growth in all of our geographic segments. iPhone ASP increased to $796 from $695 a year ago, driven primarily by the launch of iPhone 10 and the success of iPhone 8 and 8 Plus.
We exited the December quarter towards the lower end of our target range of five to seven weeks of iPhone channel inventory with less than 1 million more iPhones in the channel compared to the December quarter a year ago, in line with our growth in average weekly unit sales. Customer interest and satisfaction with iPhone are very, very strong for both consumers and business users.
The latest data from 451 Research indicates U.S. customer satisfaction ratings of 96% or higher across iPhone models. In fact, combining iPhone 8, iPhone 8 Plus and iPhone 10, consumers reported an amazing 99% satisfaction rating. And among business customers planning to purchase smartphones in the next quarter, 77% planned to purchase iPhone. Our customers are also incredibly loyal with Kantar's latest U.S. research, reflecting a 96% iPhone loyalty rate, the highest ever measured. [Customer satisfaction is the second most important figure after active user base. Combining these two figures yields the recurring revenue value of the company. Remember what Deming said: the most important measurements for a company's value are the multipliers of a satisfied customer and a dissatisfied customer--these numbers never appear on any financial report but they are applied to all the numbers on every report].
Turning to services. We had a terrific quarter with revenue of $8.5 billion, up 18% year-over-year and up 27% in terms of average revenue per week; that is an acceleration to the 24% services growth run rate that we experienced in the September quarter.
The App Store set a new all-time revenue record. The Store’s all-new design is off to a fantastic start with quarterly store visitors, transacting accounts and paying accounts, reaching new all-time highs. During the week beginning December 24th, a record number of customers made purchases or downloaded Apps from the App Store, spending over $890 million in that seven-day period, followed by $300 million in purchases on New Year’s day alone.
And according to App Annie’s latest report, the App Store continues to be the preferred destination for customer purchases by a very wide margin, generating nearly twice the revenue of Google Play. Across all our services offerings, paid subscriptions reached $240 million with growth of 58% over last year and they were a major contributor to the overall strong growth in services revenue. [Apple has half the user base of Google Android. This is based on Google's May 2017 report of 2 billion active devices vs. the 1.3 billion that we just got from Apple. And yet these users collectively spend twice as much on apps. This ratio of "half the users, twice the spending" has been cropping up in individual developer anecdotes and can also be seen in other metrics of engagement and consumption. This should not be surprising as it conforms to the Pareto distribution of economic value.]
As Tim mentioned, it was our best quarter ever for Apple Watch. And when we add to this us from Beats and AirPods, our total revenue from wearables was up almost 70% year-over-year. In fact, wearables were the second largest contributor to revenue growth after iPhone, which is impressive for a business that started only three years ago. In total, our other products category set a new all-time record with quarterly revenue exceeding $5 billion for the first time. [Wearables now includes more than watches but watches are likely still the dominant product.]
Next, I’d like to talk about the Mac. We sold 5.1 million Macs during the December quarter, which translates to a 2% year-over-year increase in average sales per week. Mac performance was particularly strong in emerging markets with unit sales up 13% year-over-year and with all-time records in Latin America, in India, Turkey and Central and Eastern Europe. On a worldwide basis, the active install base of Macs was up double-digits year-over-year to a new record.
It was also another growth quarter for iPad. We sold 13.2 million units with average iPad sales per week up 8% over last year’s December quarter. iPad sales grew strong double-digits in many emerging markets, including Latin America, the Middle East, Central and Eastern Europe and India, as well as developed markets, including Japan, Australia and Korea. The active install base of iPad has grown every quarter since its launch in 2010, and it reached a new all-time high in December, thanks to extremely high customer loyalty and large numbers of first-time iPad users. [iPad is clearly recovering from a long decline. ASPs are rising as it's being positioned as a PC alternative. Its low end functions are being absorbed by large screen iPhones.]
NPD indicates that iPad had 46% share of the U.S. tablet market in the December quarter, up from 36% share a year ago. And the most recent surveys from 451 Research found that among customers planning to purchase tablets within 90 days, 72% of consumers and 68% of business users planned to purchase iPads. Customer satisfaction is also very high with businesses reporting a 99% satisfaction rating for iPad.
We are seeing great traction in enterprise as businesses across industries and around the world standardize on iOS. For example, Intesa Sanpaolo, one of Europe’s leading banks, has chosen iOS as the mobile standard for its entire 70,000 employee base in Italy; choosing iOS for its security, user interface, accessibility and reliability, Intesa Sanpaolo will deploy native apps to improve employee productivity in customer support, human resources, and marketing across the company.
And LensCrafters, one of the largest optical retail brands in North America, will be using over 7,000 iPad Pros to enable digital eye exams and digital optical measurements in a personalized and interactive experience. We’re also rolling out a new initiative, called Apple AtWork to help businesses implement employee choice programs more easily and offer Apple products company-wide.
Resources from both Apple and our channel partners will enable enterprise IT and procurement teams to buy or lease Apple products more efficiently, streamline the setup of iPhone, iPad, and Mac, and deliver a seamless onboarding experience for employees. We launched the program with CDW in the U.S. last week, and we would be expanding to more channels and regions later this year.
The December quarter was extremely busy for our retail and online stores, which welcomed 538 million visitors. Traffic was particularly strong during the four-weeks following the launch of iPhone 10, up 46% over last year. And across the quarter, our stores conducted over 200,000 today at Apple sessions, covering topics including photography, music, gaming, and app development, and art and design. Just last weekend, we opened our first store in Seoul, Korea and we’re looking forward to opening our first store in Austria in a few weeks. These newest openings will mark the expansion of our retail store presence to 21 countries.
Let me now turn to our cash position. We ended the quarter with $285.1 billion in cash plus marketable securities, a sequential increase of $16.2 billion. $269 billion of this cash, or 94% of the total, was outside the United States. We issued $7 billion in debt during the quarter, bringing us to $110 billion in term-debt and $12 billion in commercial paper outstanding, for a total net cash position of $163 billion at the end of the quarter. We also returned $14.5 billion to investors during the quarter. We paid $3.3 billion in dividends and equivalents, and spent $5.1 billion on repurchases of 30.2 million Apple shares through open market transactions.
We launched a new $5 billion ASR program, resulting in initial delivery and retirement of 23.6 million shares and we retired 3.8 million shares upon the completion of our 12th ASR during the quarter. We’ve now completed over $248 billion of our $300 billion capital return program, including $176 billion in share repurchases against our announced $210 billion buyback program with $34 billion remaining under our current authorization. [An updated look at Apple's cash is shown below]
Turning to taxes. Due to the recently enacted legislation in the U.S., we estimate making a corporate income tax payment of approximately $38 billion to the U.S. government on our cumulative past foreign earnings. This amount is very similar to what we had been accruing on those earnings in our financial results through fiscal year 2017, including the $38 billion payment. We will have paid over $110 billion of corporate income tax on our total domestic and foreign earnings during the last 10 years for a cash tax rate of about 26%. [Apple has paid more tax than any company in history, and is about the make the largest single payment to the US Treasury.]
Our tax rate of 25.8% for the December quarter was close to our guidance of 25.5% as the lower U.S. statutory rate from the new legislation was effective offset by the remeasurement of deferred tax balances.
As we move ahead into the March quarter, I'd like to review our outlook, which includes the types of forward looking information that Nancy referred to at the beginning of the call; we expect revenue to be between $60 billion and $62 billion; we expect gross margin to be between 38% and 38.5%; we expect OpEx to be between $7.6 billion and $7.7 billion; we expect OI&E to be about $300 million; and we expect the tax rate to be about 15%.
Tax reform will allow us to pursue a more optimal capital structure for our company. Our current net cash position is $163 billion. And given the increased financial and operational flexibility from the access to our foreign cash, we are targeting to become approximately net cash neutral overtime. We will provide an update to our specific capital allocation plans when we report results for our second fiscal quarter, consistent with the timing of updates that we have provided in the past.
Finally, today our Board of Directors has declared a cash dividend of $0.63 per share of common stock, payable on February 15, 2018, to shareholders of record as of February 12, 2018.
The answer, regardless of when you ask, is: The same as the current iPhone.
Of course, this is the answer to the question of what will the average new iPhone cost. The average selling price (which combines the revenues and the volumes of all units sold and is reported every quarter) has not varied very much since early 2008. To the degree that there is variance (between $600 and $700) it is due mostly to seasonality and reflects a mix of more expensive units during the launch quarters and a cheaper units during later periods when the product is older and due for an update.
The graph below shows the average selling price as a dashed line and the corresponding prices of individual product variants available for sale in the US during the same time frame. ((Prices outside the US vary depending on duties, taxes and currency hedging but generally are based on the US price))
The graph shows a high degree of consistency of pattern: Every year a new iPhone is launched which replaces the one launched the year before. The older product is still offered at a reduced price. Price brackets are very firm and set at fixed intervals about $100 apart.
A few minor changes in pattern over the years can be observed:
The original iPhone price changed due to a shift in subsidy model shortly after launch.
An increase of $50 mid-2011 when the iPhone became available unlocked.
Every three years a new, higher, price bracket is introduced, with a doubling of maximum memory capacity.
The iPhone SE was introduced at a slightly lower price.
The last year saw a slight increase in the highest price.
The overall pattern looks like a staircase with a widening price range where the lowest price remains constant and the upper price rises every three years by $100.
The "floor" of the range is a consistent $400 while the "ceiling" has expanded from $700 to about $950.
This year's ceiling is due for the fourth leg up and if the pattern persists, we should expect it to reach $1100.
This iPhone staircase has been built over 10 years and I don't see it changing over the next three. I therefore drew the blank box over what I thought would be the price range from now until late 2020.
This is what I call the staircase model of Apple pricing. The staircase model must be understood in combination with the flat iPhone average price as the product matures.
As the product matures the user base grows (to nearly 1 billion today). Later buyers will opt for the lower price points, but the availability of higher, more aspirational models (sustained by the brand) means that a minority will gravitate upward, mainly because they can. This ensures that although the median and mode of the price trend downward, the average price stays the same.
The flatness of iPhone pricing is also to be understood in combination with the flatness of Mac, iPod and iPad average pricing (shown below)
The technique of preservation of average price seems to be in effect across Apple. In other words, the evidence suggests that Apple prefers to keep average pricing for all products constant. Individual variants are priced so that, as the category matures, the changing mix leads to consistency in price ownership.
Thus the iPhone can be seen as controlling the $650 point, the Mac $1200, the iPod $200 and the iPad $450. This pricing signals the product's value and the value of the brand.
The signaling is not just to buyers but also to competitors. Ownership of price forces competitors to occupy adjacent brackets. This process begins at launch: the new Apple product is introduced in what is perceived as a premium stratum ((See for example the pricing of the new HomePod)) thus the reaction from competitors is to "undercut" it. But, as Apple climbs the price staircase, preserving the floor, it keeps competitors bunched up at the bottom. Competing in the same brackets with Apple is futile as other brands can't sustain the perceived premium position.
The result is a remarkable consistency of average pricing which, coupled with a remarkable consistency of competitive positioning, coupled with a remarkable consistency of customer satisfaction and loyalty, leads to a remarkable predictability of cash flows and ability to invest in new product creation..
Apple is thus quite easily understood as a remarkably consistent consumer products business. The only surprise that remains is how long it takes for that understanding to propagate.
Apple reports second calendar quarter results in about a week. I propose the following estimates:
Fiscal Q3 2017: Rev ($B) 45.321 EPS ($) 1.62 iPhone (units) 41 million iPad (units) 9.8 million Mac (units) 4.35 million Watch (units) 2.5 million Services ($) 7.2 billion Other products ($) 2.6 billion Gross margin (%) 38.4
The revenue estimate is visualized in relation to guidance (revenue between $43.5 billion and $45.5 billion) and shown in the context of previous actual revenues below:p
The estimates are also consistent with additional guidance provided:
Gross margin between 37.5% and 38.5%
Operating expenses between $6.6 billion and $6.7 billion
Other income/(expense) of $450 million
Tax rate of 25.5%
The estimates (and guidance) suggest modest growth of 7% in revenues and 13.7% EPS. The predictability of the quarter suggests that attention will mostly be focused on guidance for the next quarter.
Expectations can vary quite a bit because of the effects of a new launch. The product mix, pricing and timing are all unknown at this time.
What is known however is that the customer base for Apple is increasing and loyalty is higher than ever. What I sense, coming from very few data points, is that there are more iPhones in use than ever before. A few years ago when the market was less saturated it was easy to assume that commodity Android phones and tablets would surge and swamp iPhone/iOS usage.
This has not happened, indeed the data suggests that iOS usage is stronger than ever and that there are many more "switchers" moving from Android to iOS than vice-versa.
This may surprise some but if we look at the PC market, a similar phenomenon has been taking place for years. Mac usage grows and Macs are more visible and valuable than PCs.
It's important to note that in the latter, post saturation stages, the markets for both phones and computers are increasingly driven by brand value. This resistance to commoditization is due to buyers' perceptions of quality moving beyond utility and of the prioritization by buyers of new measures of performance. These new measures defy measurement.
Much of what is therefore required of market analysts is intuition.
