Apple remains optimistic after a tough Q3 2016

Jason Snell
28 July, 2016
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Tim-Cook-apple-ceo-macworld-australiaAnother quarter brings with it Apple financial results – nearly US$8 billion in profit this time, despite a whole lot of tough year-over-year sales and revenue comparisons. But as a part of the results we also get the chance to hear directly from Apple’s executives, in the quarterly ritual of the conference call with analysts. There’s always good stuff to be gleaned from this call, and this quarter was no exception. Here’s what we learned.

Optimism about the iPhone buying cycle

Combine the changes to the way people buy smartphones (especially in the US) with the sales fall-off from the iPhone 6 to the iPhone 6s, and a lot of people are worried that the buying cycle of the iPhone is going to be elongated. In other words, while your average smartphone buyer may have purchased a new phone every two years in the past, maybe that person will now stick with their old phone for three or four years. If that’s true, that’s going to result in reduced sales for Apple – and that will have a huge impact on Apple’s botom line.

Ever the optimist, Apple CEO Tim Cook says he doesn’t think that’s going to happen. He cited the new trend toward plans that supply customers with a new phone after a certain amount of time – including Apple’s own, which provides a new iPhone every year. “Other have an 18-month clock, some have a 24-month clock, and there are even some that have a 30-month clock,” Cook said. “We’ll see more of those this coming [spring].”

iphone 6s 6s plus

But Cook had to admit that for some users, the fact that the cost of smartphone hardware is no longer hidden inside a customer’s phone bill may lead them not to upgrade. “Some of that can be a shock for people who are used to paying US$199 for their smartphone – they come back in and they pay less for their service, but more for their smartphone.”

Overall, for Apple, Cook says he’s “very optimistic”. On this point, I think he’s got it right: some people will no doubt change from a two-year cycle to one that’s longer in duration. But other people will opt for new plans that give them a new phone every year, and others will stick with the familiar every-other-year cycle. While there may be a major change in phone replacement rates, it seems most likely that things will remain pretty close to what they are today.

Apple’s high on AI and AR

Cook took time during the conference call to praise two technologies commonly referred to with two-letter acronyms: AI (artificial intelligence) and AR (augmented reality).

For Apple today, AI means Siri – but it also means a technology that keeps people attached to their iPhones. “As the phone becomes more and more your assistant, you’re not going to leave without it,” Cook said.

Apple has a lot of competition in this space, most notably Google, which is well-known for its prowess in cloud-based services. But I suspect Cook was taking a shot at Google when he said, “The deployment of AI technology is something we will excel at because of our focus on user experience.” In other words, Google will tell you a lot about its machine learning, but Apple will give you AI that you’ll actually want to use.

No comment on whether that’s realistic or not – these days I’m inclined to say that Apple’s abilities on this front are actually underestimated – but it’s interesting to see the confidence there.

On to augmented reality. Analyst Gene Munster asked Tim Cook about the success of Pokémon Go, which uses a light sprinkling of AR (the app uses your phone’s camera to place the titular monsters in the real world around you). Cook managed to call them “Pokey mans,” earning the ire of poké-pedants everywhere, but his statements about AR were fascinating.

“AR can be really great, and we have been and continue to invest a lot in this,” Cook said. “We are high on AR for the long run, we think there are great things for customers and a great commercial opportunity… it will be huge.” There have been reports about Apple doing research into virtual-reality stuff, but this is an admission of investment into the augmented-reality space by Apple. That’s an interesting tidbit for a category in which Microsoft has made most of the noise up to now with the HoloLens project.

Apple’s investing a lot in R&D

You can look at the numbers and see it. It’s right there. Apple is spending a whole lot on research and development, and that number keeps growing. This is famously not a company that throws money at pie-in-the-sky research products, so we have to expect that this is money going to things like VR or AR, as well as Project Titan, the rumoured Apple car.

“We do continue to invest significantly in R&D,” Cook said. “The growth rates are still large on a year over year basis… The products that are in R&D, there is quite a bit of investment in there for products and services that are not currently shipping or derivations of what is currently shipping. So I don’t want to talk about the exact split of it, but you can look at the growth rate and conclude that there’s a lot of stuff that we’re doing beyond the current products.”

In other words, Apple’s spending a lot of money on entirely new products.

The iPhone SE is still a hit

As was suggested during last quarter’s call, the iPhone SE is the Little Smartphone That Could. Apple doesn’t break out sales by individual model, but it’s clear that the iPhone SE continues to sell well.

“I really like what I’ve seen with the iPhone SE, and the fact that it’s opening the door to customers that we weren’t reaching before, and likely convincing some people to upgrade that wanted a smaller form factor,” Cook said.

Or, as Apple CFO Luca Maestri put it, “The iPhone SE is doing exactly what it was intended… [bringing] a higher rate of new-to-iPhone customers… and we see a higher rate of previous iPhone owners that really prefer the 4in form factor. We have not seen clear evidence of cannibalisation from iPhone 6s or 6s Plus.”

Some people just want to buy a smaller phone. This is actually a big advantage Apple has right now in the phone market, because most Android phones skew quite large. People in the market for a good, small phone will look carefully at the iPhone SE.

The iPad may have turned the corner?

The decline in iPad unit sales that’s been going on for a couple of years has slowed for the third straight quarter. The average selling price of the iPad actually went up, leading to the first year-over-year growth in iPad revenue in 10 quarters. That’s no doubt thanks to the introduction of the 9.7in iPad Pro, which is more expensive than the iPad Air 2. Cook said that half of iPad Pro purchases are being made ‘for work’.

9.7-inch iPad Pro

The question is, where does the iPad go from here? The 9.7in iPad Pro is the new flagship of the iPad line, and its introduction only slightly changed iPad sales figures. Then again, when you look back to the iPad’s largest quarter – the one coinciding with the 2013 holidays – you realise that those iPads are all nearly three years old. When will they be upgrading?

It’s hard to guess where the iPad is going. The numbers aren’t strong, but they’re headed in a better direction than they’ve been in ages. Maybe it’s something to build on.

2 Comments

2 people were compelled to have their say. We encourage you to do the same..

  1. Jamie says:

    This is all well and good but to put it simply revenues are down due to one simple fact – Apple are now totally lacking in the ‘revolutionary’ in their products.

    The iPhone may be their biggest earner and in most part that is simply due to the fact that the Apple faithful will update their phone at least every major product update (be it the major update or the S update) simply to stay up to date and have the supposed benefits of the latest version of iOS but in my mind the major component of innovation by Apple has long gone there is nothing that made my go ‘I HAVE to have the iPhone 6S’ ad to me Force Touch is a minor innovation and does not being anything exceptional to the iPhone and in fact make the interface more confusing and far and away from the simple ‘it just works’ of the past.

    Then there is the Mac, Apple are getting WAY behind in the technology that they are offering in the Mac for people like me who like to buy a machine and be able to at least upgrade some components over its life to keep it usable. The vast majority of machines now cannot be upgraded at all, unless you buy it with your dream configuration you’re forced to upgrade after a couple of years (which of course is what Apple want as they make more money this way). Many will say ‘just get as much memory and disk as you can when you buy it and you’ll be fine – for some, perhaps many, of us this is not an options as Apple’s pricing for memory, disk and SSD is exorbitant.

    Suer there have been some great advances in displays and better video cards/chipsets have become standard on many machines but when you come down to is what would I want to spend over $1200 ($NZ) on a 21.5″ iMac spec’d up to fit my needs when I can get a PC for substantially less and have the ability to upgrade components including CPU, disk, memory, video cards as I need to. Sure you get OS X on the Mac and I much prefer it to Windows but in reality using OS X is not worth $1200 to me.

    Until Apple return to making Macs that can be upgraded I’ll stick with my 2012 15″ MacBook Pro and whack a 27″ screen on to it so that I can get more life and usability from it, when it dies I’m seriously looking at a move back to the Windows world as working on Windows 10 all week at work the OS experience is quite good.

  2. Jamie says:

    I’ve noticed some major readability errors in the above post with respect to the pricing comparison, can you please replace with the below:

    This is all well and good but to put it simply revenues are down due to one simple fact – Apple are now totally lacking in the ‘revolutionary’ in their products.

    The iPhone may be their biggest earner and in most part that is simply due to the fact that the Apple faithful will update their phone at least every major product update (be it the major update or the S update) simply to stay up to date and have the supposed benefits of the latest version of iOS but in my mind the major component of innovation by Apple has long gone there is nothing that made my go ‘I HAVE to have the iPhone 6S’ and to me Force Touch is a minor innovation and does not being anything exceptional to the iPhone and in fact make the interface more confusing and far and away from the simple ‘it just works’ of the past.

    Then there is the Mac, Apple are getting WAY behind in the technology that they are offering in the Mac for people like me who like to buy a machine and be able to at least upgrade some components over its life to keep it usable. The vast majority of machines now cannot be upgraded at all, unless you buy it with your dream configuration you’re forced to upgrade after a couple of years (which of course is what Apple want as they make more money this way). Many will say ‘just get as much memory and disk as you can when you buy it and you’ll be fine” – for some, perhaps many, of us this is simply not an options as Apple’s pricing for memory, disk and SSD is exorbitant.

    Sure there have been some great advances in displays and better video cards/chipsets have become standard on many machines but when you come down to it why would I want to spend over $1200-$1800 ($NZ) more on a 21.5″ iMac spec’d up to fit my needs when I can get a PC for substantially less and have the ability to upgrade components including CPU, disk, memory, video cards as I need to. Sure you get OS X on the Mac and I much prefer it to Windows but in reality using OS X is not worth the $1200-$1800 price premium to me.

    Until Apple return to making Macs that can be upgraded I’ll stick with my 2012 15″ MacBook Pro and whack a 27″ screen on to it so that I can get more life and usability from it, when it dies I’m seriously looking at a move back to the Windows world as working on Windows 10 all week at work the OS experience is quite good. (In fact I have moved back in the last few days as the MacBook has some serious reliability issues with it’s USB ports often not picking up devices and over all slow performance even after a clean OS X install)

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