In the third quarter of 2011, Exxon Mobil posted earnings of $10.33 billion. The company cited "a challenging macroeconomic environment" to ward off any negative sentiment about its report and the next day resumed its perpetual exploration and development of oil and gas worldwide. I suspect many of you are asking yourselves what this has to do with Apple, which continues to churn out iPhones and Macs. Well, until yesterday that $10.33B was the 23rd highest quarterly profit of all time. That's all the companies, around the world, with each quarter broken out individually.
Magic and myth
Let that sink in for just a moment. Now, consider that 5 of the all-time, top-10 quarters also belong to Apple and place what happened for the company in the appropriate context that the business press no longer seems capable of doing. This wasn't Apple's worst quarter in 13 years; it has out-earned fiscal Q2 2016 exactly six times in its history. The 51.2 million iPhones the company sold last quarter is the fourth highest total ever posted, bested only by the past two holiday periods and the January-March interval last year when the iPhone 6 and 6 Plus were still fairly new.
Wall Street, of course, is obsessed with growth and Apple for the moment is delivering the opposite of that. But other than the short-term concerns about share price, it's hard to argue that the company has any sort of serious problem. Does it need to find ways to reinvigorate iPhone sales? Yes, but there's an argument that last year was the anomaly. Jan Dawson, whose analysis tends to be more sober than what comes out of the finance industry, notes that iPhone sales are mostly on a trend that dates back several years. It was the mind-blowing success of iPhone 6 that sent iPhone into the stratosphere; with 6s things are simply more earthbound. Dawson wrote his post before Apple announced earnings, incidentally and said this: "Anything below 40 million iPhones (or $40 billion in revenue guidance) is a sign that Apple is dropping below its long-term trajectory, and would be bad news. Anything above that is cause for optimism, at least in the short term."
Apple guided to $41-43 billion for the upcoming quarter. For the moment, the trajectory appears intact.
'Cause I don't know what he's after
Apple CEO Tim Cook could have been reporting any quarter from his tone on the conference call even as he admitted to challenges. Cook looks at iPhone sales in three buckets (1) upgraders (2) Android switchers and (3) first-time smartphone buyers. He noted that upgrades are running ahead of a similar point in the 5s cycle albeit below the comparable point last year when pent-up demand for large screens sent them soaring. With respect to Android, Cook said, "We added more switchers from Android and other platforms in the first half of this year than any other six-month period ever." And he likes Apple's chances with latecomers to smartphones, too, pointing out Apple's India sales were up 56% over last year.
It's easy to look at those three categories without Cook's optimism of course. Phones that are cheaper than iPhone are increasingly competitive with its modern internals. Apple isn't oblivious to the trend, though, having introduced the iPhone SE at the $399 price point -- its lowest-priced iPhone ever. For the time being the weakness of that product is limited to its small screen (which is also a strength for fans of smaller phones and apparently Apple is struggling to keep up with demand). But Apple's entry into a segment of the market it had completely ignored is significant. It means the company isn't content to cede share to Android solely on the basis of price. If the SE drops to $299 in a year and the iPhone 6 survives in the lineup, it would indicate Apple has much greater designs on volume than it has shown in the past. Worth watching.
Strong as what I believe
Cook was also quick to cite what he saw as Apple's next big geographic opportunity. "I view India as where China was maybe 7 to 10 years ago from that point of view," he said. Cook explained Apple has been working on boosting its retail presence there for several years, with efforts accelerating in the past 18 months. The company has also been offering older models in India at prices not seen elsewhere. If Cook is right, Apple will be selling many millions more iPhones in India over the next several years though the price might be lower than the company's historical average.
Still, that might be a place Apple is increasingly willing to go. "If you look at our installed base of iPhone today versus two years ago, it's increased by 80%," Cook explained. "But the other multiplier in that equation is obviously the size of the installed base" which means that as Apple cultivates more loyal users, more of them become potential upgraders over time. With iPhone loyalty running a record 95% in the U.S., according to Kantar, Apple hasn't taken its eye off that ball.
Longing for love and the logical
Indeed, Apple seems to be more adept at juggling more balls than it is often given credit for. Its services business posted another quarter of just under $6 billion, a 20% rise from last year. How big is that? Well for the time being Apple earns enough from apps, warranties, and things like Apple Pay that the services line is a bigger business than Facebook (which is expected to post $5.25 billion for the quarter). More iPhones equal more services for the long haul and the revenue from services this fiscal year is likely to match Apple's entire revenues from 2007 (around $24 billion).
That was a long time ago, back when iPhone was so new that selling a million in a quarter was a big deal. These days Apple sells a million iPhones every 35 hours. Next year, iPhone turns 10 and an interesting numerical goal for the company might be to generate services revenues that beat out the $32.5 billion the whole company made in 2008. It would be a big lift, but as Cook said that installed base keeps getting bigger.
Of course, there's also another side to the equation: Apple has to keep making iPhones people want to buy. Rumors have suggested a mild upgrade for the iPhone 7. While there is no way to confirm them, a model that is only superficially different from iPhone 6s would likely result in more of the recent past with slow or negative growth and perhaps some further erosion in profits.
Waiting for some kind of miracle
The rumors around iPhone 7 suggest it is the 2018 "iPhone 8" that will really blow people away, with new OLED screens, a sleeker design and whatever secret new features Apple has in the works. Leaving aside all the reasons to doubt this path -- it would break the two-year cycle of major external changes followed by major internal ones -- it could leave short-termers frustrated. Apple Watch sales are still much better than the naysayers understand, but apparently very cyclical and holiday focused Cook tells us. iPad will grow a bit, but only because it's been down for so long. And Mac is overdue for some upgrades that will goose sales, but this is a smallish part of Apple's business.
Which brings us back to iPhone, fresh off a quarter that was objectively great but realistically a disappointment. Still the idea that Apple has reached "peak iPhone" or is "in decline" seems detached from reality. Apple still throws off so much cash it both expanded its share buyback and dividend while also making it clear it could be aggressive in M&A. Cook said, "We would definitely buy something larger than we've bought thus far." Of course, he didn't say if Netflix or Tesla or Mazda was on the table.
But thankfully, neither is Exxon Mobil, whose 2011 third quarter Apple just beat yesterday. All isn't beautiful in Cupertino, but it's hardly a disaster.
