The biggest surprises from Apple’s shockingly good earnings report

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quotes on Apple
Tim Cook is the CEO of getting a bag.
Illustration: Cult of Mac

The first Apple earnings report of 2020 was a smashing success that shattered most of Apple’s previous records. Thanks to shockingly strong iPhone sales and a surging wearables business that is bigger than the Mac and the iPad, Apple managed to surpass even the most optimistic expectations.

Apple CEO Tim Cook held a call with investors after the numbers came out to dive deeper into the impressive quarterly results. Cook dished on everything from the success of Apple TV+ and problems with AirPods Pro supplies to the Wuhan coronavirus affecting China. If you didn’t get a chance to join the call, don’t worry, Cult of Mac has you covered with all the need-to-know info.

iPhone sales are back to boomin’!

For the last two years, Apple had to expand its other business categories to make up for slowing iPhone growth. iPhone turned the tables last quarter, though, accounting for 61% of all Apple revenue.

iPhone revenue came in at $55.9 billion, growing 8% year-over-year. (It hit $51.9 billion during the same quarter in 2018.) The iPhone’s best quarter ever came in Q1 2018, but some strong signs indicate Apple could get back on pace to top that during the 2020 holiday season.

Multiple investors tried to pry information about a 5G iPhone out of Cook, hoping he’d drop details about a possible upgrade super-cycle. Cook wouldn’t comment on future products but did say 5G is in the early innings of its rollout. That might indicate he doesn’t think 5G will be 2020’s killer feature everyone’s hyping it up to be.

Wearables are the new hit business

They AirPods Pro fit in their case like nothing ever happened.
AirPods Pro are a smash hit.
Photo: Cult of Mac

Everyone’s been looking at Apple’s services as the next big growth generator for the past two years, but the wearables division is where Apple is seeing the most impressive gains. AirPods Pro and Apple Watch are in such high demand Apple literally cannot make enough of them.

The stat line for Apple wearables from today’s call was absolutely mind-blowing:

  • Apple’s wearables business is now the size of a Fortune 150 company.
  • Wearables generated more year-over-year revenue growth (+$2.7 billion) than services (+$1.8 billion).
  • Wearables shot up 37%, marking the 10th straight quarter of growth over 30%.
  • 75% of people buying an Apple Watch are new to the device line.

Apple’s services business only grew 17% last quarter. One of the reasons why growth on services might be slower is because it’s not like people are buying an iPhone just to subscribe to Apple TV+ and Apple Music. The services are reliant on Apple’s current active user base to bring in revenue. That’s not the case for the Apple Watch and AirPods. Cook says a significant number of new customers have been pulled into the ecosystem because of Apple Watch.

Supply issues for the AirPods Pro and Apple Watch Series 3 were two of investors’ top concerns during the call. Cook said Apple Watch Series 3 supply should come into balance during the current quarter. AirPods Pro supply is “fairly substantially off,” Cook confessed, claiming he couldn’t give a timeline on when Apple will catch up to demand.

Cook explains why AR is the future

Cook has been on the “augmented reality is the future” bandwagon for a few years, but today we finally got a pretty interesting insight on why he’s hyped about AR. Before pointing to the thousands of ARKit-powered consumer apps already on the iPhone, Cook noted that there is a ton of development underway on the enterprise side of the application.

“This is the reason I’m so excited about it is you rarely have a new technology where business and consumer both see it as a key to them,” said Cook. “That’s the reason that I think it’s going to pervade your life, is because it’s going to go across the business. And, and your whole life. And I think these things will happen in parallel.”

Apple has reportedly been working on its own augmented reality headsets for a few years now. The company’s first headset isn’t rumored to launch until 2022 or 2023, so don’t get too excited for AR to pervade your life just yet.

Apple is taking the Wuhan coronavirus threat seriously

Terry Gou
A Foxconn plant in China.
Photo: Foxconn

Investors were given a broader range of revenue guidance for Q2 2020, which Cook attributed to possible impacts from the Wuhan coronavirus outbreak in China. Apple shut down a store in China and is cutting back on store hours is restricting. Employee travel has also been restricted as of last week because of the deadly, rapidly spreading virus.

Retail traffic has already been impacted across China, too. Cook revealed that Apple is taking measures inside its stores — deep-cleaning them and conducting temperature checks for employees.

“We’re donating to groups that are working to contain the outbreak,” Cook told investors. “We’re also working very closely with our team and our partners in the affected areas, and we have limited travel to business-critical situations. The situation is emerging and we’re still gathering lots of data points and monitoring it very closely.”

Apple has some suppliers in the Wuhan area but all of those suppliers have alternate sources. The impact outside of Wuhan is less clear. Some factories that were slated to open at the end of January won’t reopen until February 10 because of the Chinese New Year and the coronavirus.

Apple TV+ is off to a ‘rousing start’

Apple declined to dish out specific subscriber numbers for Apple TV+, but Cook said he’s pleased with how well the streaming video service is doing so far. Asked if he measures success for Apple TV+ by critical acclaim or numbers, Cook said both come into play, but he cares most about subscribers. The focus of the service is storytelling, though, so Cook said critical acclaim — like The Morning Show getting some Golden Globes nominations — is another crucial gauge of success.

Before today’s call with investors, Cook told CNBC that Apple TV+ is not a hobby. “It’s a real business,” he said. How much money that business is actually making, though, is one of the investors’ biggest questions. Apple hasn’t said exactly how much it spent on new content or how much revenue was generated. CFO Luca Maestri admitted that money from Apple TV+ is pretty insignificant right now.

“Because we launched the service very recently, the amount of revenue that we recognize during the quarter was immaterial to our results,” Maestri explained. “With regard to the cost of developing the content … as we incur these costs we put them on the balance sheet and then we amortize them over a certain period of time depending on the type of content that we produce.”