Apple by the Numbers (Premium)

Apple didn’t just post record revenues in the most recent quarter, it outperformed Microsoft by an over 2-to-1 margin. What the heck is going on here?

Lots of dollar signs, for starters: As I’m sure you’ve seen, Apple reported yesterday that it earned a net income of $28.76 billion on revenues of $111.4 billion in the quarter ending December 31. By comparison, Microsoft, the world’s second-largest corporation, the day before reported that it earned a net income of $15.5 billion on revenues of $43.1 billion in the same time period. Maybe I should have added the word “just” in front of those latter numbers. Compared to Apple, Microsoft looks like a side-hustle.

Apple noted that its quarterly revenues were “an all-time record,” which suggests that its net income was not, somehow, a record. The firm saw all-time revenue records in each of its geographic segments. And it reported double-digit revenue growth across all of its top-level product categories.

The financials are interesting if only because we never see numbers this big in financial reports. But more interesting to me is Apple’s ever-expanding user base. This bears some analysis.

Apple said that its total installed base of active devices hit 1.65 billion in the quarter, up from 1.5 billion a year earlier. And that its active installed base of iPhones is now over 1 billion.

Neither number is an accurate tally of the number of users in the Apple ecosystem. The 1.65 billion number is too high, since most Apple customers own multiple devices. And the 1 billion number is too small, though probably not by much. My educated guess is that the vast majority of Apple’s user base owns an iPhone, and that the vast majority of iPhone users own one or more other Apple devices that are counted in that 1.65 billion figure.

So my spitball guess is that there are roughly 1.1 billion users overall. But whatever the real total, the number of iPhone users now matches that of the number of Windows 10 users, at least on paper. (With the caveat that some of those users are on Xbox, or some other sort-of Windows 10 device, and not a PC.) So maybe the number of iPhone users is actually higher.

(And seriously, wasn’t it notable that Microsoft didn’t provide an update on the number of Windows 10 users in its most recent quarterly announcement? Might that number not have gone up a bit given the pandemic and temporary PC sales bump of 2020?)

That iPhone is Apple’s most important product is obvious. It’s the perfect halo product in that it drives sales of other Apple hardware like iPad, Mac, Apple Watch, and various headphones and peripherals, Apple and third-party software, and, most important, Apple services, the latter of which is getting very important to the firm’s ongoing growth.

On that note, iPhone sales were up 17 percent YOY and … that’s actually surprisingly low given the overall success of the quarter. In fact, among Apple’s major product categories, iPhone growth was the lowest. Still, Apple is estimated to have sold over 90 million iPhones in the quarter, which would make it the single-biggest quarter for any smartphone maker in history. It would also make Apple, at least temporarily, the biggest smartphone vendor in the world.

Apple cited strong demand for the iPhone 12 lineup, which is the biggest family of new iPhones that it has ever launched together. “Research indicates iPhone customer satisfaction of 98 percent for the iPhone 12 family,” Apple noted.

If you’re curious about new users vs. existing users upgrading to a new iPhone, Apple provided just a hint. “Looking at the iPhone 12 family, we saw both switchers and upgraders increase on a year-over-year basis,” Mr. Cook said. “In fact, we saw the largest number of upgraders that we’ve ever seen in a quarter … China also had a record number of upgraders during the quarter, the most we’ve ever seen in a quarter.”

One might naturally wonder if Apple was somehow constrained by the poor availability of components, something that haunts both Sony and Microsoft in the videogame market. Could Apple have sold even more iPhones had it had the parts?

Not exactly. Apple noted that it saw some supply constraints with its iPhone Pro models, but that it exited the quarter with “a level of iPhone channel inventory [that] was slightly below a year ago.” It expects to solve any remaining supply constraints this quarter. And that its sequential-quarter sales path would be “similar to the typical seasonality that you’ve seen in past years.”

There have been many stories claiming that the iPhone 12 Mini, in particular, has sold poorly, and that Apple has told suppliers to make fewer components for that particular model. Apple only addressed this subtly in the post-earnings conference call, noting that “what [it’s] seen so far is a very high level of interest for the Pro models, the Pro and the Pro Max [and not in the non-Pro models].”

Sales of iPads hit $8.4 billion in the quarter, up 41 percent, and Apple cited strong sales of the new 4th-generation iPad Air as a key contributor. The iPad Air combines the look and feel and laptop-like capabilities of the more expensive iPad Pro line with a fun set of new colors, so this is perhaps not surprising. Apple claimed that “research” shows a 94 percent customer satisfaction rate for iPad. Vaguely, it also noted that the active user base for iPad hit “an all-time high” in the quarter, and that about half of iPad purchases are coming from people that are new to the platform.

“It’s clear that some people are using these as laptop replacements, others are using them as complementary to their to their desktop,” Mr. Cook said during the post-earnings conference call. “But the level of growth there has been phenomenal. You look at it at 41 percent. Yes, part of it is work from home, and part of it is just learning.”

As for the Mac, Apple saw revenues of $8.7 billion in the quarter, up 21 percent YOY, and a record for that quarter. As with iPad, Mac saw double-digit revenue growth in each geographic segment, and yes, Apple credited strong demand for the new M1-based MacBook Air, MacBook Pro, and Mac mini. Research measured customer satisfaction at 93 percent for Mac in the quarter, and the Mac user base, while never specified, hit “an all-time high” in the quarter.

There wasn’t much Mac talk in the post-earnings conference call, but Apple did note that there is plenty of headroom for growth, given that it owns less than 10 percent of the PC market by marketshare. And there are some switchers, of course.

“If you look at the switchers, if you look at the new to Mac and new to iPad, these numbers are still, at a worldwide level, about half of the purchases are coming from people that are new. And so the installed base is still expanding with new customers in it. And so that’s true on both iPad and Mac. If you look at Mac, the M1, I think, gives us a new growth trajectory that we haven’t had in the past.”

And then there’s Services.

In the same way that Microsoft likes to emphasize its cloud-based businesses because that’s what Wall Street wants to hear, Apple really emphasizes the growth of its services. In fact, it not-so-subtly updated a Steve Jobs maxim about the intersection of hardware and software to include services, noting the “deep integration of hardware, software, and services” in its product portfolio. This is no less a sea change than Microsoft adjusting its vision well past “a PC on every desk and in every home.”

“The kind of things that we love to work on are those where there’s a requirement for hardware, software, and services to come together because we believe that the magic really occurs at that intersection,” Mr. Cook elaborated.

As with Apple’s other businesses, Services saw double-digit revenue growth and an all-time record in each of its five geographic segments in the quarter. Revenues from the App Store, cloud services, Apple Music, advertising, AppleCare, and payment services all set all-time records in the quarter as well.

Put more concretely, Services revenues hit $15.8 billion, with growth of 24 percent YOY, making it Apple’s second-biggest business. That’s right: Apple makes more from services now than it makes from Mac, iPad, or Wearables/Home/Accessories.

Apple also launched Apple One in the quarter, letting customers stack pre-made collections of Apple services like Apple TV+, Apple Arcade, Apple News+, Apple Card, and Apple Fitness+ into slightly more affordable bundles. And it took the contrary step of launching its App Store Small Business Program, which will reduce the commission that Apple gets on most digital goods and services sales in an obvious bid to avoid antitrust action.

“The key drivers for our services growth all continue to move in the right direction,” Apple CFO Luca Maestri explained. “First, our installed base growth has accelerated and is at an all-time high across each major product category; second, the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the December quarter with paid accounts increasing double digits in each of our geographic segments; third, paid subscriptions continue to grow nicely.”

How nicely? During the quarter, Apple exceeded its target of 600 million paid subscriptions before the end of calendar 2020. It added over 35 million paid subscriptions in the quarter than it had in the previous sequent quarter. And there are now over 620 million paid Apple services subscriptions, up from 140 million one year ago.

But here’s the most telling Services number. Where Apple’s overall business experienced 39 percent margins in the quarter—which is crazy high for a company that mostly sells hardware—the Services business delivered 68.4 percent margins. Even for Apple, services are far more lucrative.

Apple’s final business is called Wearables, Home, and Accessories, so it obviously includes Apple Watch, HomePod, and Apple’s other hardware-based peripherals and add-ons. This business hit roughly $13 billion in revenues in the quarter, and it experienced revenue growth of almost 30 percent YOY.

“We’ve brought this [business] from zero to a Fortune 120 company, which was no small feat,” Mr. Cook bragged of this business, which is centered on Apple Watch, a key product that he ushered in as CEO.

But there isn’t a lot of hard data here. Apple noted that it saw “significant holiday demand” for the latest Apple Watch, its entire AirPods lineup, including the new AirPods Max, and the new HomePod mini. And that Apple Watch also had a lot of headroom for growth because nearly 75 percent of the customers who purchased one Watch during the quarter were new to the product. That was about it.

Overall, it’s impossible to ignore how successful Apple has been, even when it’s hard to understand logically. I’ve long felt that Apple makes great hardware, middling software, and more recently, a mixed bag of services, with some truly compelling options and a few duds. I’m not a fan of the company’s hyperbolic approach to marketing, but it’s clearly working. Even Apple’s less-polished offerings are seeing explosive growth, a testament to the virtuous cycle of Apple’s integrated approach, which is all centered on that single halo product, the iPhone.

No matter your feelings about Apple, this quarter was both exception and unprecedented. And anyone hoping for a sign of weakness, or some soft underbelly, wasn’t left with much to chew on. When it comes to personal computing today, there is Apple and then there is the rest of the industry. This quarter really drove home that reality.