Inflation is rampant. A recession is imminent. And on Thursday, Apple walked in, whistling a happy tune and delivering another record number of financial results. The company set a fiscal revenue record in the third quarter, with $83 billion in revenue, up 2 percent from last year.
But if you look deeper, you’ll see that this was an unusual quarter for Apple. The company was battered by a “cocktail of headwinds,” to quote Apple CFO Luca Maestri with a metaphor that was not only mixed, but shuffled. and stirred. Mac sales plummeted, wearables took a beating, and even the seemingly invincible Services line showed some softness.
And still, it was a pretty good quarter, considering. I realize the word “consider” does a lot of work in that sense, but it’s true. Wall Street seemed relieved that Apple had put in a good, if not great quarter. Here’s what struck me in the numbers (and in the post-game phone call Apple executives traditionally do with financial analysts).
Sweet, sweet relief
Three months ago, Apple warned everyone that it would be unable to meet demand due to supply constraints — amounting to $4 to $8 billion in lost revenue. But in the end, the final number was “slightly below” the $4 billion total, according to Apple CEO Tim Cook. So look on the bright side!
Cook said most of the supply constraints in the past quarter were due to factory closures in China due to COVID outbreaks. The Mac was especially hard hit because the affected factories were almost everywhere where Macs are assembled. (If you’ve been trying to buy a new Mac in the past three months and had to wait a while for your order, this may not surprise you.) Apple thinks these restrictions will ease in the coming months, though you can never tell with COVID ! – but that a constant shortage of silicone parts will remain. All in all, Cook said, Apple should be less constrained in the coming quarter than it was in this last quarter.
And before we turn our attention to other things, let’s take a moment to realize how the iPhone, the heart and soul of Apple’s company, just keeps on driving. Sales increased just a little bit, but considering everything else, that’s a win. Cook cited a quarterly record for iPhone buyers switching from Android and cited strong sales in emerging markets such as Indonesia, Vietnam and India.
Essentially, the iPhone behaved as if nothing bad was going on in the world. Or, as Cook put it: “From an aggregate point of view, if we look at it globally, looking at the iPhone data for the June quarter, there is no clear evidence of macroeconomic headwinds. I’m not saying there isn’t, I’m saying the data doesn’t show.”
That Mac song could have been a lot worse
After a string of all-time record quarters for the Mac, Mac sales fell 10 percent from the same quarter a year ago. Apple says this was largely due to supply constraints and exchange rate issues. (Foreign exchange was mentioned repeatedly in Apple’s comments because the extremely strong dollar makes Apple products much more expensive in other parts of the world.)
And yet, Tim Cook seemed relieved about the whole thing, given that the Mac plants in the Shanghai corridor had actually closed earlier in the quarter. “Honestly, we felt good that by the end of the quarter we could bring this back to where we were 10 points behind.” Only 10 percent lower? You should have seen the numbers a few months ago, buddy!
Several analysts asked Cook and Maestri how big the demand for the Mac was. On the one hand, many people believe the pandemic has brought up a lot of computer sales that under normal circumstances would have happened a little later — and that sets Apple up for a fall. PC sales have also fallen. On the other hand, the move to Apple silicon has boosted demand for Mac — and those chips aren’t going anywhere.
Unfortunately, Apple says it just can’t tell what the demand for the Mac is! “You can’t really test demand until you have the supply,” Cook said. And Apple just didn’t have the Mac facility.
The cocktail of headwind
So what goes into Luca Maestri’s famous Cocktail of Headwinds? Well, you start with those rough exchange rates because of a strong dollar. They tend to either make Apple products more expensive elsewhere in the world or (if Apple doesn’t adjust prices), they cut the margins. Apple is trying to combat this by having a currency hedging program, but there are limits. Maestri said foreign exchange will weigh The next quarterly earnings by maybe $5 billion.
Then you throw in “the situation in Russia”, as Cook and Maestri kept referring to. (The situation is that the company has largely left Russia as a market after the invasion of Ukraine.) It’s not like Russia was a huge market for Apple, but it’s a market that has changed slightly from last year to nothing this year, and that hurts.
Add in some supply restrictions, a combination of COVID plant closures and that global silicon shortage, just for a dash of flavor.
And finally, there’s the classic bit of financial seasoning, the “difficult equation,” when this year’s Apple product announcements just don’t match those in the year-ago quarter. Cook went so far as to cite the AirTag that came out last year as the reason why the Wearables, Home and Accessories category was so low this year. (I’m skeptical. AirTag, really?)
But other than that, if there’s one part of Apple’s product portfolio that has been hit by the current global economic bad vibes, it’s been Wearables, Home and Accessories. “Looking at the numbers, there seems to be headwinds beyond the four items that we can formulate — and we think these are macroeconomic headwinds.”
So the iPhone continued to sell despite everything, but it’s entirely possible that anyone thinking about buying AirPods or an Apple Watch decided they might just stick with that money for now.
Finally, one of my favorite things about listening to Apple’s phone conversation with financial analysts is that there’s a real question-and-answer session, in which Cook and Maestri have to provide real answers — or, just as likely, dodge the questions completely. . There were some doozies this time.
The winner of this quarter’s Non-Answer Award goes to Richard Kramer of Arete Research, who asked Cook a focused question about how Apple’s App Tracking Transparency policy was directly related to its success in building its own App Store search ad network. Cook’s response was to read his boilerplate that privacy is a fundamental human right, then said that search ads were great for developers. Kramer’s question was a good one, and Cook’s evasion wasn’t strong.
And the Nice Try Award goes to Cleveland Research’s Ben Bolin, who tried to ask Cook about Apple’s rumored AR/VR headset product – by not ask him about it. Instead, he asked about “AR/VR progress in” [Apple’s] existing products.” I admire your skills, Ben Bolin.
Bolin probably got just as much out of Cook as anyone could have. After citing the 14,000 iPhone and iPad apps in the App Store based on the ARKit framework, Cook said, “We’re always exploring new and emerging technologies, but I don’t want to say anything more about it. “
It’s a phone call, so I’m not sure, but I like to imagine Cook winking as he said it.