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It is that time of the year again, when the largest company by market capitalisation, Apple, reports numbers. I get the sense that it used to be the most hyped and anticipated set of numbers on Wall Street, I sense a shift to Facebook. There was very little expected from the maker of fine things, the maker of devices that you may, or may not have thought that you needed. Yet, once you had them, you wondered why you had not used it before. The other thing about Apple products is that they just work. My Mac is indispensable to me. People will spend hundreds of thousands of Rands and finance a vehicle over a period of time, to use the vehicle for five to ten percent of the day, yet a product that they are likely to use for 40 to 50 percent of the day, they just "need it to work". It is actually the same with a bed. Perhaps apply the same logic to a motor vehicle, get a better computer (get a Mac, really, you will thank me later) and a better bed, you spend more time with those two things.
You can read the numbers here - Apple Reports Third Quarter Results. The highlight was at the top of the pile, the annuity income, the services business grew revenue at 19 percent on last year. That business accounts for 14.1 percent of sales, and has generated sales of 23 billion Dollars for the last twelve months. According to Google finance, if that Apple services was a standalone business, it would have revenues equal to that of German Software giant SAP. Yes. That is how big iTunes, Apple Music, Apple Pay and the App store is. Bigger than you thought, right? Oracle, another giant of the Software world has annual revenues of 37 billion Dollars. With Apple services revenues growing at that rate, how long until that division eclipses Larry's empire? Tim Cook mentioned on the conference call that as a standalone business, the Services segment will be the size of a Fortune 100 company next year.
The flagship product however, the iPhone, saw sales fall to 40.399 million units, a 15 percent fall year-on-year in unit numbers and as a result of cheaper handsets, a 23 percent fall in revenues. How do the other divisions match up? iPad sales, at a units level fell 9 percent, at a revenue level increased by 7 percent year-on-year. Why? Obviously the higher priced iPad pro is having an impact. Half of the current iPad pro purchases are done for work purposes, intrenching their product as a business tool is important in this category. The Mac (on which I type this message), that fell too both at a revenue and unit level, indicating that broader PC weakness is across the market. Here, there and everywhere to borrow that literary genius Dr. Seuss.
From a geographical perspective there was weakness everywhere, apart from Japan. The Americas, meh, China, not good. To put those China metrics into a two year view, which Tim Cook suggested was important to do (he has just visited there and he is large and in charge), total revenue over two years from mainland China is up 55%. iPhone unit sales in China are also up sharply over the last two years, up 47 percent. When comparing the same numbers year on year, the numbers look less pretty, I get what he is saying though, a bit of perspective is needed at times. In another country he visited, and got to catch a little IPL if memory serves me correct, iPhone sales in India grew 51 percent year-on-year.
All the other metrics seemed to be against the maker of fine electronic things, gross margins lower at 38 percent (still more than just good). Cash on hand is still a whopping 231.5 billion Dollars. Total debt is equally eye popping, 72 billion Dollars. The company is 177 billion Dollars through their 250 billion capital return program, having delivered 13 billion in the last quarter alone through share buybacks and dividends. Cash is not a problem here. Whilst the sales were lower, profits were lower, they were better than people anticipated. On the earnings call after the market, Tim Cook said that "Today we're pleased to report third quarter results that reflect stronger customer demand and business performance than we anticipated just 90 days ago and include several encouraging signs."
The outlook was OK, I suspect better than analysts had expected. The cheaper handset has been well received. Tim Cook said that the demand had outstripped supply. Attracting more people into the ecosystem. What is interesting is that Tim Cook said that first time buyers and switchers represented the lion's share of buyers of the iPhone in this quarter. Why would that be the case? Of course everyone is waiting for the refresh, the new phone, the iPhone 7 coming later this year. Then next year, according to some of the analysts that I follow on this score, the phone may well change form. In other words, a dramatic refresh to celebrate the 10th year of iPhone. On the 'new and up coming' front, are all sorts of changes to the operating systems, the biggest refresh ever in the form of iOS 10, new operating system for the Mac, the Apple Watch, the TV too.
On the conference call Tim Cook gave some insight into how Apple Pay is currently working. According to the data he has, Apple Pay is used in 3 out of every four transactions at contactless ready locations across the US, the service has been launched in France, Switzerland and Hong Kong and in his own words, "Adoption outside the U.S. has been explosive, with over half of transaction volume now coming from non-U.S. markets." Nice.
Smartphone penetration across the globe is 42 percent. Not 82 percent. Not everyone can afford an Apple smartphone, even the 399 Dollar version, they are expensive. Ha ha, I was looking for the quote that Tim Cook made in the WSJ about growth, so I searched for the word growth in the earnings transcript, wonderfully transcribed by SeekingAlpha, and I found the word 15 times. And then I thought I recalled the quote had to do with worries around the share price performance and the doubters, so I searched for "worry". And there were zero results.
I think it is important to know that Tim Cook is aware that investors haven't had the best of times lately, I wouldn't be too concerned. The stock price is one thing, the company is another, the two reflect something in the middle. In the WSJ article titled Apple Earnings Fall on iPhone Slump, the Apple chief is quoted as saying "People always doubted us. That's not a new thing and that ebbs and flows with the stock market, so we don't get too uptight about that." Don't get quarteritis. Own the company, a company that still has great prospects. We maintain our buy recommendation on this company and continue to accumulate. The stock is mooted to open nearly 7 percent higher at 103.25 Dollars. Still, the one year performance has been less than breezy, all headwinds, at that level it would still be down mid teens. We are confident that the heavy lifting will happen.