Apple: The major decision is coming

Q119 “was always going to be an interesting report because Apple changed how it reported its results,” Bill Maurer writes for Seeking Alpha. “ne thing that investors really liked is that by providing gross margins for the Services segment, Apple showed a 453 basis point rise for that category over the prior-year period. Services gross margins of 62.8% were almost double that of hardware margins that came in at 34.3% for the period. Hardware margins were down by 180 basis points over fiscal Q1 2018.”

“Yes, it is good to see Services gross margins increase. However, you have to remember a couple of key points. First, while this segment is growing its revenue number nicely, it still only represents about 13% of the overall total, so hardware still dominates. Second, the most important number here is likely operating margins,” Maurer writes. “I bring up the point about operating margin for Apple because the company has been growing its operating expenses at a rate much faster than revenues over the long term. Five years ago, for example, the company spent 7.6 cents on the operating line for every dollar of revenue generated. In the just reported quarter, the number was 10.3 cents, and we still would have been close to a dime even if Apple hit its original forecast.”

“After a disappointing start to fiscal 2019 for Apple, the company will likely need to make a decision this year on what to do with the flagship iPhone,” Maurer writes. “Does management think it should continue to target high margins, or should it lower prices a little to attempt to return to unit sales growth?”

Read more in the full article here.

MacDailyNews Take: We think Apple stays the course — premium products at premium prices for premium customers — but will get more aggressive with financing deals and pricing on older models.


    1. Apple may be a Porsce but it is definitely not a Porsche. With a real Porsche, you have the option of buying cutting edge hardware that can, and does, win races. You can choose build-to-order options to get exactly what you want and Porsche happily supports customers making further modifications as they choose to. You do not have to buy media, gimmicks and services.

      Lately, the management at Apple has been into media and subscriptions while its overpriced hardware is often trounced in direct head to head tests. Mac Pro anyone? Workstations, servers, laptops? Apple will be happy to give you a clickety clack junk feeling laptop for 50% more than the competition but it can’t demonstrate superior performance by any measure.

      Apple is a luxury fashion company – all about style, losing substance fast.

  1. Problems with Apple:

    Phones are a commodity now just like PCs and Apple is pricing out a majority of the population, both domestically and internationally (not just on phones but Mac PCs and even higher end iPads as well); all this at a time when better values for struggling consumers are readily available for a fraction of the price with Apple’s competitors.

    Apple Service are mediorce at best under Cook’s negligent leadership. Even still Apple Services only represent a fraction of revenue and are totally dependent on the fact that the consumer stays on the platform. Also keep in mind that Services will obviously disappear altogether when consumers leave the platform, and Cook is forcing many consumers to other alternatives with his predatory pricing tactics.

    All is not well behind the walled garden. There is another name for a place that walls you in and doesn’t let you have freedom or allow others to gain access… it’s called prison.

    1. LOL …. it’s a bloody big “prison”!,

      Apple inc. sells the best experience bar none, consisting of the best mobile supercomputer, otherwise called an iPhone. Show me any business in the world today that does not have an app in the AppStore!

      Apple inc. is also all about user security and privacy, unlike the sieves otherwise known as Facebook and Google.

      These Seeking Alpha “experts” have been for ever saying that Apple inc. should offer cheaper iPhones ….. well, guess what, they have the financial Clout to do whatever they want!!!

      1. But they also have an Android app too. Apple is no longer exclusive in this regard. I know the demographics say people who buy Apple products spend more, but any business would be foolish to solely rely on the iPhone for its marketing and at the moment the lions share of consumer reach is not with Apple.

      2. @Lambrettamike

        There were other big prisons that consumers also escaped from:

        Nokia penitentiary

        Blackberry state prison

        No prison is escape proof. Not even Alcatraz.


      3. I don’t think we need to explain how the Mac is a superior computing product if you want the freedom that personal computing promises.

        The problem that Timmy needs to understand is that he squandered the lead Apple had in exclusive apps. Android also has every business app in the world in its app store. Nothing makes the iOS app inherently better. As a developer, you’d be stupid to restrict your apps for the 10-20% market share platform.

        Then we have hardware. Apple routinely has the problem of a fragmented lineup of iPhones that seem to be driven more by vanity than cohesive strategy of feature or performance. Apple’s X phones offer huge price increases for no real world value benefit. So while Apple forces iOS major updates annually, to users of legacy iPhones it’s 90% bloat. App developers waste time tinkering around with stuff like screen layout changes for iPhone X models when they should be improving functionality and performance.

        With the many independent hardware developers, its more likely that another maker will offer the size/price/feature set that you actually want — and that doesn’t mean all cheap. There are android phones that cost more than iPhones due to special features or exclusivity, some of them even allow you to avoid subscribing to Google services. For example: look at the hardware Nokia is selling. Hardware wise, its hard not to tip your hat to their continued ability to produce top notch quality with specs that rival and beat the newest iPhones, while offering user options for nice things like retaining the 3.5mm audio jack.

        We all know Google and Facebook are evil in every way, but iOS users still install their apps. Why don’t these apps come with clear warnings? Well Apple doesn’t really care about your privacy as long as they get a cut of the sale.

        If Apple wants to prove to the world that it cares about your privacy and security, it’s going to need to do a much better job earning my trust. If Apple still held an iOS security advantage, why doesn’t it make the point by putting it in writing in the user agreement? And why doesn’t it market the security? Why can’t Apple offer better apps than Google for things like Maps or Translation, etc???? Why can’t Apple give the user more information about how and where his data and tracking thereof is going? Reviewing your iCloud account is a joke.

        The bottom line is this: almost all apps record what you do online. iOS doesn’t magically keep you safe and secure. You don’t hold your own encryption keys. You have no way to monitor who’s tracking you, what’s been sent to 3rd party servers from your phone, where your cloud data is kept and how, …. basically you are just blindly hoping that Apple doesn’t screw it all up. Well, my faith in Timmy is just not very high. iOS, like it or not, continues to host scumbag app developers that will gladly abuse your trust when Apple isn’t looking. The lack of transparency with users and investors is unacceptable. Cook thinks he’s locked in customer loyalty with platitudes but I am waiting for he proof.

  2. Regarding Zerorandy (or Ishkabibble von Tink or whoever he is):
    Last week, I responded to one of his repetitive and pointless rants. Not long after, his comment as well as someone’s else’s response plus my comment were gone.

    This would seem to indicate that Mr Zerobrain either works at MacDailyNews or has hacked the back end, because as we all know, one can’t even edit let alone delete posts.

    If the former is the case, what the hell is this brain-dead troll doing working for a website that puts out Apple News?

    His worthless drivel needs to come to an end.

    1. It’s difficult to know what happened to those posts. Things get posted, but the moderator can always delete them. I don’t know if someone at MDN reads every single post. I can tell you, that is a job I would hate! Several years ago I complained about a very obnoxious sexist comment by one of the regular whiners, and it was taken down within a very short period.

      1. His suggestion that Mr. Zerobrain must either work at MDN or have hacked the site, in some way related to a deleted post. I’m just syingthat isn’t necessarily the case.

  3. Thoughts about analyst reports like these..

    Apple have long toyed with products for different market tiers, such as the unapologetically plastic iPhone 5C, the throwback Jobs-sized iPhone SE, the stripped-down iPhone XR — all lower-priced alternatives to their brand-aspirational flagship offerings. (Not to mention price drops on previous year’s models.) What they’ve learnt from such experiments suggests itself in their turn to emphasising growing revenue in services, which is a function of their total installed iOS base.

    The smartphone market is saturated, and they’re facing it by easing out of the fast lane and evolving their tactics..While not giving up on high-margin sales altogether, Apple downplays overall margins derived from the iOS sea. This suggests an expanded foray into cheaper devices, including creating exclusive refurbishment plants (as they’d tried in India), more phones like the SE, a promotional resurgence of iPods and iPad minis, an in-house battery replacement program and a sensible annual Apple watch replacement plan. All of these contribute to the tsunami of services money just as reliably as do dazzling new king’s-ransom hardware. The product introductions won’t be as sexy, but the bloom is off that rose anyway.

    Then, after a few more quarterly reports, after Wall Street has got used to steadily expanding services revenue as their AAPL focus, after investors and traders have been immunised against declining-unit-share panic attacks, — then maybe Apple can coolly return to working on the Mac — still the key to Apple’s future..

    1. That sounds like a good story, but IMO there’s much more to it because of what’s going on “behind the spreadsheet”.

      Specifically, one of the things that Apple’s latest quarter’s report noted was that the Services budget line is being paid for in part by the hardware sales paying a “tax”.

      While it certainly makes sense for Apple hardware to pay something for Maps, Siri, etc … where this gets insidious is that there’s no real clarity in defining what Maps/Siri/etc are worth in the full & open competitive marketplace for assigning how much the hardware division pays.

      Thus, we end up with Services having a downright HUGE net profit margin … golly, that kind of sounds like an accounting shift, doesn’t it?

      This shift can do a couple of things:

      a) If the Services group is overseas, it avoids US taxes

      b) If the iPhone profit margin is looking too fat, this shuffle game allows them to hide that money.

      c) It helps to hide just how reliant Apple is on iOS

      Case in point – – and from memory from another MDN post I made were I laid out the math – – roughly 62% of Apple’s revenues last quarter were from iPhone sales. If roughly half of the Services’ group’s revenue came from a figurative “tax” that the iPhone hardware paid for (IIRC, $5.8B), what this really means is that iPhone hardware was actually ~70% of the entire company, with that ~8% being effectively a Division-to-Division pass-through.

      Overall, this wouldn’t be so bad of a thing if each Division had roughly the same profit margins … but they don’t: the Services is nearly double that of the iPhone, which results in a (semi-hidden) shift.

      FYI, there was also a huge bump up in overhead & admin expenses too … something else to monitor.

  4. I still think Apple’s making a mistake by moving to be a “premium” brand. Under Steve Jobs, it was a brand that, yes, was more expensive than the competitor, but it was also of a higher quality, and you knew you were getting what you paid for. And he balanced iOS with MacOS very well. Under Tim Cook, he’s neglecting MacOS, which supports iOS development, and he’s less interested in making iOS a quality product and more of a status symbol, which is only hurting Apple’s brand. Yes, they may have the dollars to show for it, but Apple isn’t as well respected as it used to be.

      1. Customer satisfaction surveys?

        Well, there’s two things to consider. The first is that there’s a confirmation bias in all of them because people don’t generally like admitting that they made a mistake. That’s why automotive satisfaction rates are in the 90% range, yet the marquee return rate is far, far lower.

        Which brings us to the second part: the absolute score isn’t what’s actually important, but more so what the trend in score is … is the trend improving? Or is it flat or declining?

        I’ve not looked lately, but my recollection is that Apple’s customer satisfaction scores have been trending down.

  5. It’s a mistake to think of the smartphone market as a commodity business. People want to treat them like beanie babies or cabbage patch dolls. The iPhone is just over a decade old. The current iPhone is nothing like the original. Ten years from now the iPhone of that time will be as different. The iPhone is not a thing, it is an action. It is a device that fits in your pocket that grows to include whatever new technology comes along. I can’t wait to see it.

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