by Jean-Louis Gassée

Apple is perceived as the iPhone company. This wasn’t always the case. A closer look at the company’s latest quarterly numbers might tell us if and how this might change.

Courtesy MacRumors

Apple just released its quarterly earnings, complete with a ritualistic conference call with analysts (transcript here). Since Apple no longer provides unit sales information, we’ll have to content ourselves with revenue by product/services category as summarized below:

The chart broadcasts a mix of messages.

While revenue for the quarter ending in September was the highest ever for the period (Q4 in Apple’s fiscal calendar), the picture across the entire fiscal year is less rosy: Total company revenue is down about 2% and iPhone sales are down by a disquieting number: about 13%.

Q4 is seasonally much lower, by 50% or more, than the following Xmas quarter, with its Holiday’s shopping activity and now traditional release of new iPhones and other hardware. So while revenue is down for the year just ended, is the record-breaking Q4 a harbinger of good things to come for Q1 2020?

Let’s review some history.

At the time, Q4 2018 revenue also set a record for the quarter, with a massive year-over-year increase of nearly 20%:

On the basis of the strong Q4, Apple issued an optimistic forecast of revenue in the $89B to $94B range for Q1 2019 (the 2018 holiday season), only to issue a “profit warning” a few weeks later. This was a way for Apple to tell shareholders the bad news without waiting for the quarterly earnings discussion.

Indeed, revenue for the traditionally busy Xmas quarter ($84.3B) came in much lower than the initial forecast due to iPhone revenue falling by more than 15%. Management pointed to good performance from the Services and Wearables, Home and Accessories categories, but since the iPhone represents more than 50% of Apple’s revenue, the January 2019 earnings “surprise” caused company shares to plunge from their early October 2018 high of $232 to $142 (-39%!).

Apple shares have recovered nicely — they’re now at a historical high — but will history repeat itself? My own impression is that the newer iPhone 11 and 11 Pro are likely to provide a modest amount of growth compared to the “bad” quarter last year. Management appears to think so, as well, and provides a cautiously optimistic guidance for the quarter showing revenue growing by a few percentage points to the $85.5B — $89.5B range.

Observers have made an uneasy accommodation with what one could call the iPhone Double Bind. If iPhone provides too high a share of revenue, there is a danger of over-dependence. If other categories keep increasing their percentage of revenues, it means iPhone is stalled, no longer able to grow, either for lack of innovation, or overly high prices, or both.

A second look at the Q4 revenue numbers shows rosier aspects of Apple’s business.

For example, the Mac and iPad numbers. Last week, I bemoaned the lack of discoverability of the new and attractive features offered by iPadOS, a compatible superset of the iPhone’s iOS operating system. I’m still confused and plan to humble myself in front of an Apple Store Genius soon, but the market at large doesn’t seem so befuddled. iPad revenue grew 17% compared to the same quarter last year, and is up 16% for the entire year versus 2018. This at a time when Mac sales for the quarter went down by about 5% and were essentially flat for the year.

Out of curiosity, I looked up the latest annual report from Lenovo, the world’s largest PC maker. Its revenue reached a record $51B for its 2018/2019 year, 75% of which (approximately $38.3B) comes from PC sales. The Mac + iPad total for FY 2019 reached $47B (up 7.8% when compared to the $43.6B achieved in FY 2018). That’s 22% larger than Lenovo’s PC business.

Does Apple now have the right to call itself the world’s largest PC maker? Or is it an unfair sleight of hand to combine the Mac and the iPad?

For years, the Dataquests and IDCs of the world have kept iPads in a different category from Windows PCs and Macs. iPads were often referred to as Media Consumption Devices, as opposed to classical PCs capable of performing Real Work. Now that iPads can open multiple browser sessions or word processor and spreadsheet windows in parallel, one wonders when they will be counted together with PCs and Macs. As a reminder of the unavoidable “invasion” of iPads in the PC category, we ought to also consider Apple’s Catalyst, a set of tools that will migrate iPad apps onto the Mac.

I’ll conclude with items related to the Wearables category.

The AirPods Pro, just announced and delivered, seems to have benefited from intensely positive word-of-mouth, still the most potent marketing weapon (unless corrupted by fraudulent social media “influencers”). Several details show Apple at its best, such as the fit test for earplugs and the Transparency mode that mediates between the isolation of Active Noise Cancellation and raw exposure to ambient noise. I have no idea how such a small device will impact Apples financials with a price ($259) pegged a bit lower than the entry-level iPad at $329.

Apple doesn’t issue specific revenue numbers for the Watch, but even in their absence we can see the impact that the device, now in its fifth iteration, has had on its category. Most notably, Fitbit called it quits and sold itself to Google for $2.1B after lowering guidance because its newer models disappointed. By buying Fitbit, Google seems to admit that its homegrown WearOS hasn’t been overly successful, but one is hard put figuring out what hardware and software synergies the company can extract from the acquisition. In particular, there is little evidence the Fitbit acquisition will do anything to diminish Apple’s advantage in its use of best-in-class homegrown silicon. There must be a Google Slides presentation somewhere, hopefully not just a Search and Replace operation on the Nest acquisition dossier.

Lastly, there are persistent rumors, complete with images allegedly fished from iOS beta versions, of something called AirTags, a possible competitor to the Tile hardware/software combination that lets you affix small beacons to objects thus making them easier to find. This would make broader use of the U1 processor in newer iPhones, the U standing for Ultra Wide Band radio technology that could favorably impact Apple’s Wearable category. Someday.

— JLG@mondaynote.com