Apple’s Good News, Bad News Earnings

After weeks of waiting and endless speculation, Apple’s Q1 results are in.

It looks like the speculation won’t be ending anytime soon.

While not the victory march that last year’s Q1 earnings report was, CEO Tim Cook at no point mentioned it being the “Year of Apple Anything” — except maybe “extreme adversity.” The rush of earnings figures didn’t turn up any unforeseen cataclysms or giant, red, flashing danger lights either.

There were plenty of yellow lights, though, and missing on analysts’ (already downwardly adjusted) revenue and iPhone sales projections didn’t do much to inspire confidence. The reveal that iPhone sales had actually shown their slowest growth since hitting the market in 2007 certainly got investors’ attention as the results were announced at the close of the trading day. That news was paired with Apple forecasting its worst sales declines in over a decade for Q1.

Lest it sound like we are aiming to bury Apple, it bears noting that the problems of a firm clocking in $18.4 billion in profit are pretty much, by definition, high-class problems — a fact that is quite obviously not lost on Apple’s leadership.

On the quarterly call that followed the earnings release, Cook sounded like a CEO with some things to explain to investors, not like one who was either apologizing to (or defending himself against) his investors — a la Ken Chenault, Doug McMillon or Terry Lundgren.

“Apple remains incredibly strong. We have a very satisfied and loyal customer base,” Cook noted in his remarks. “We saw a greater number of switchers from Android to iPhone than ever in Q1, and we are very optimistic about our business over the long term.”

“Extreme Conditions”

While the Q1 report did show several key misses for Apple when it came to analyst predictions, Cupertino did notably beat on earnings — $3.28 per share on $75.9 billion in revenue. Analysts had expected Apple to report earnings of about $3.23 a share on $76.54 billion in revenue. And though that revenue figure was a miss, Cook did note that it was a miss largely predicated on the currency headwinds Apple has spent the year battling.

An issue that exists, Cook reminded investors, because Apple is such a large and internationally diversified brand.

“In constant currency, our growth rate would have been 8 percent,” Cook noted. “[That] translates to $80.8 billion in constant currency revenue, which is $5 billion more than our reported revenue. For perspective, that difference is about the size of the annual revenue of a Fortune 500 company.”

The record-breaking $18.4 billion in profit also got a lot of positive airplay, and there is something to be said for that given what a showstopper the $18 billion figure that Apple logged in January 2015 was widely considered to be.

Cook also was quick to defend Apple’s decision to continue to compete in hard foreign markets and repeatedly waved off suggestions that Apple is retrenching, citing repeatedly throughout the call the brand’s popularity, customer loyalty, tendency to poach Android customers and past track record of innovating under adverse conditions.

“We’ve invested through economic uncertainty in the past, and we’ve always come out stronger on the other side. In fact, some of the most important breakthrough products in Apple’s history were born as a result of investing through the downturn. We’ve also seen these times as opportunities to invest in new markets, just as we’re doing now in areas such as India and other emerging markets.”

He also touted Apple’s recent success in China, while acknowledging (eventually) that the Chinese market has been looking increasingly soft of late.

“In the December quarter, despite the turbulent environment, we produced our best results ever in Greater China, with revenue growing 14 percent over last year, 47 percent sequentially, and 17 percent year over year in constant currency.”

Devices Are The Brand…

On the device front, Cook had somewhat less to say. The only specific number on offer was the sales figure for the iPhone — 74.8 million sold — which does narrowly beat last year’s record of 74.5 million. That the figure was essentially flat, however, was not the point Cook chose to hit hardest.

“We sold 74.8 million iPhones in the December quarter, an all-time high. To put that volume into perspective, it’s an average of over 34,000 iPhones an hour, 24 hours a day, seven days a week, for 13 straight weeks. It’s almost 50 percent more than our Q1 volume just two years ago and more than four times our volume five years ago.”

Cook’s positivity on the subject notwithstanding, most analysts and headline writers noted that the flat growth in iPhone sales this quarter represented the weakest year-over-year growth the iPhone line had ever clocked.

The response to that has been universally negative and has sent Apple shares tumbling more than 2 percent in after-hours trading, especially since it was paired with Apple’s downward revision of its revenue projection for Q2. Apple is expecting between $50 billion and $53 billion in revenue, considerably south of the $55.6 billion analysts were projecting.

Past the flattening iPhone performance, Apple Watch and Apple TV both enjoyed their share of praise, with Cook noting Q1 had seen both products breaking previous sales records. Individual numbers for both products were not broken out (of course), but the black box of a category that is “Other” did see 62 percent revenue growth to $4.3 billion.

…But Services Are The Future?

Apple’s other big growth driver in Q1 was its other black box category, “Services,” which houses the App Store, iCloud, AppleCare and Apple Pay. Services grew 26 percent to $6.05 billion, and Cook had much to say about them.

Payments enthusiasts like us were excited, if somewhat perplexed, by the Apple Pay shoutout.

“Consumers have spent billions of dollars with Apple Pay. In the second half of 2015, we saw a significant acceleration in usage, with a growth rate 10 times higher than in the first half of the year,” Cook noted after touting Apple Pay’s international expansion.

That backend acceleration he described is a bit contrary to the PYMNTS InfoScout data on the subject, which shows that Apple Pay did better in the early part of the year in gaining adoption and then fell off as the late adopters got on board in the back end of the year. Not even Black Friday gave Apple Pay a lift, at least according to our survey and receipt data that day.

But, who knows, maybe the company’s data shows the entire world went crazy using Apple Pay in December. We couldn’t tell you; Apple didn’t release that data — or any about Apple Pay. But we will be releasing our next Apple Pay survey results in mid-March.

And in most regards around the Apple services menu, the data was slim, with a few interesting tidbits mixed in. Cook talked as much about the apps being built exclusively for the Apple TV as much as he talked about the hardware.

The subject of Apple’s App Store — and its ever-expanding popularity — came up a lot. Whether the subject was China, the iPhone, the iPad’s future as a business device, the fanatical love of Apple’s consumer base, if it was on the table during the Q1 call, it was more likely than not being connected to the App Store’s success.

It is obviously unsurprising that Cook spoke so much on this; in an earnings report, CEOs talk up good news. Plus, as Karen Webster pointed out in advance of Apple’s earnings release, the App Store could be Apple’s Frankenstein monster — the impressive act of mad scientist genius/technical tactical brilliance that became a once-in-a-generation innovation, which could ultimately prove to be its biggest threat.

But maybe Cook knows that, too, which is why he spent so much time not just talking about Apple’s apps but connecting them to that perfectly organized walled ecosystem which Apple users love so much. Apple doesn’t need all the consumers, Webster pointed out in advance of the launch of Apple Pay, just the best and highest-spending ones in order to build a services brand that could be something of a cash engine. Like the consumers who already use Apple Pay and who, Cook reports, are converting from Android in droves.

Cook is not Steve Jobs and, so far, hasn’t come up with a killer technology. Investors are freaking out because the iPhone carries Apple, and those numbers don’t look so hot. The Apple Watch, Cook and Co.’s creation, may be doing OK but not well enough for Apple to want to brag about it in an earnings report.

But Cook doesn’t have to be Jobs if he can crack the code on building out the walled ecosystem such that iPhone sales don’t have to grow indefinitely, because iPhone users are paying as they go for an ever-increasing number of Apple services (or, in the case of Apple Pay, getting banks to pay for them to use an increasing amount of an Apple service).

If nothing else, Apple could have a big cash engine to keep working on building the next great gadget to keep people hooked on the brand.

So, while everyone will continue to watch the iPhone as the best bellwether for Apple’s future, it might be worth watching those services and seeing what they do. If they grow by a similar amount in Q2, they will be worth $7.5 billion, a not inconsiderable amount.

And One More Thing

Apple’s free cash is currently a staggering $216 billion. American Express’ market cap is $54 billion. We’re just saying …