Apple (NASDAQ:AAPL) is ditching unit sales disclosures in its new fiscal year, further emphasizing its growing (and highly profitable) services business. Meanwhile, guidance for the December quarter left investors wanting more.
In this segment from Industry Focus: Tech, host Dylan Lewis and Fool.com contributor Evan Niu discuss the Mac maker’s fiscal fourth quarter.
A full transcript follows the video.
This video was recorded on Nov. 2, 2018.
Dylan Lewis: Our last company today is Apple. This is one of our favorite ones to talk about. Usually, this is the boring quarter for Apple. The stock is down 7% since they reported. What happened?
Evan Niu: [laughs] There’s a lot going on here with Apple’s earnings. One of the big reasons it’s down is that the guidance for the next quarter wasn’t too great. We can get to that later. Revenue jumped about 20% to $ 62.9 billion, which is ahead of the company’s own guidance. iPhone unit volumes were about flat at 47 million. But iPhone revenue increased 29% to $ 37 billion, which is really just more of the same that we’ve been seeing play out over the past year. Ever since they introduced the $ 1,000 iPhone X last year, they’ve been pulling this lever hard on pricing. Pricing is really where all the growth in this business is coming from nowadays. Units are basically flat. The past four quarters, units have been more or less flat, but revenue has been up considerably because they’re charging so much for these phones now.
Lewis: It’s kind of incredible that, at a $ 1 trillion company, and a company that’s putting up tens of billions of dollars in revenue, they are still capable of doing 20% growth. Not that we should necessarily expect that going forward, but it’s worth emphasizing that a little bit here. Some of that is due to the success of the iPhone segment. Some of that is due to the success of their services segment.
Niu: Services hit a new record at $ 10 million in revenue for the quarter. A year ago, they had a one-time positive adjustment of $ 640 million related to a change in an accounting estimate. But if you exclude that one-time item, that basically means they grew 27% this quarter on Services. On a trailing 12-month basis, Services is now a $ 37 billion business. They’ve been reiterating this target of $ 50 billion by 2020. They continue to march, slowly but surely. Every quarter, they’re marching closer and closer to that goal. They’re right on schedule.
Lewis: The story with this quarter for me is, past results were great, but we’re going to see some major shifts in how this company reports. I think that really signals some major changes with what the company expects from some of their product lines. The financial reporting that we’ve gotten used to for Apple is going to be almost unrecognizable soon.
Niu: Right. They made some very big announcements that are going to be really important for investors, in terms of how they do their financial reporting starting in the new fiscal year. They just closed their fiscal year, so we’re starting fiscal 2019. The big one is that they’re no longer going to report unit sales, which is going to be very controversial, because that’s always been one of the most-watched metrics with Apple. They’re also going to start breaking things down and separating between Products and Services. They’re going to give more granular detail around the cost of revenue for Products and Services. You’ll get a much better sense of the margin profile for Services vs. Products. With their emphasis on Services over the past couple of years, which is much more profitable, I think that’s a good thing. But, of course, it’s a bad thing that you’re going to lose the unit data.
They’ve been trying to shift this focus in the narrative away from hardware to services for two or three years now. This is the culmination. They’re just getting rid of the units altogether. They can’t get clearer than that. They’ve been subtly saying, “Hey, stop paying attention to units.” And now, they’re like, “You can’t pay attention to units anymore.” You’re not getting a choice anymore.
Lewis: And you’ve spent so many quarters and so many years putting together these very excellent Apple charts that track ASPs, what’s going on unit sales. Evan, all those beautiful charts are going to be rendered obsolete! It’s such a shame!
In some ways, we get some more transparency. In some ways, we get less transparency. For my money, given what a big part of the business the iPhone segment is, I would like to know the workings there and understand what’s going on on the unit side, what’s going on on the pricing side. Obviously, my opinion doesn’t matter much, because they’ve already decided to make this decision. We just have to take some solace in the fact that we’ll have a better feel for what’s going on on the Services side.
Also, looking forward, we hinted at this before, the guidance that they gave for next quarter is going to be a big deceleration from that 20% growth that we just saw.
Niu: At the midpoint, guidance is about $ 91 billion. That’s about 3% growth off of a year ago when they did $ 88 billion. This is kind of like we talked about before — you have such a huge business, you’re running into the law of large numbers. It’s really hard to put up double-digit growth rates off such a humongous revenue base. There’s some speculation, are they going to guide to a $ 100 billion quarter? That would have been mind-boggling. I mean, not that that was expected. Analysts were at about $ 93 billion. So, they do have to hit the high end of their guidance to meet analyst expectations. It’s certainly possible, they’ve done that on multiple occasions on the December quarter, which is their busiest quarter. It’s kind of silly that people are disappointed with it. They’re going to be selling a billion dollars’ worth of stuff every day. How are you disappointed with that?
Lewis: That’s nothing to sneeze at. With the sell-off, Apple is actually dangerously close to falling below that $ 1 trillion mark that they were the first company to hit. Evan, we’ve talked about Apple a lot. We have both owned the stock for quite some time. I think the crazy growth days for this company are over. If you’re a new investor, this is not your older cousin’s Apple that’s going to be doubling every two years. What are you doing with your Apple shares? How are you thinking about this business?
Niu: I’m not doing anything with it. I’ve always been a long-term shareholder with Apple. I’ve never had any temptations to sell it or anything like that. Even if the growth isn’t really there anymore, it’s also worth remembering, this buyback program that they have is so massive. Even if their top line isn’t growing a lot, your earnings per share are going to be growing quite a bit. That will help drive the valuation of the shares and keep them cheap, which can actually help translate into more share gains. Not that they’re going to double from here. [laughs] But, the buyback program, they bought back over $ 60 billion worth of stock this year so far. Ever since tax reform, they’ve bought back $ 20 billion a quarter over the past three quarters. That’s not going away anytime soon. That’s going to help keep that bottom line EPS number strong for years to come.
Lewis: Yeah. They’ve been really excellent to their shareholders, in terms of capital returns. That’s not going to change. That’s one thing I think we can continue to bank on, so long as that cash hoard is nice and big, and so long as the Services segment and the iPhone segment continue to post pretty solid results. I can think we can rest assured that that’s going to be the case.
Niu: This stock is so cheap. I’ve always considered it a very safe stock. They’re trading at a discount to the market, something like 13X earnings. This stock is so cheap. It’s not going to tank or anything. It’s a pretty reliable play there.