Apple's financial report during the epidemic: iPhone sales declined, but iPhone 12 cannot be late

In the past few months, the epidemic has become a shadow hanging over different industries, and has also made the already weak smartphone market worse.

Against this backdrop, Apple released its second quarter (Q2) financial report for fiscal year 2020, which covers Apple’s performance from January to March. During this period, the pandemic hit, and Apple also experienced shutdowns in its upstream supply chain and closures of offline stores.

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In Apple's Q1 financial report released at the end of January, Apple expected Q2 revenue to reach $63 billion to $67 billion. However, the impact of the epidemic soon exceeded Apple's expectations, and Apple announced in February that it did not expect to achieve its revenue target for this fiscal quarter.

Although this financial report cannot be compared with the Q1 which set many historical highs, Apple still delivered a financial report that exceeded expectations when the market generally had low expectations. However, it is no longer the iPhone that enables Apple to achieve growth in adversity.

iPhone sales are not very good, but Apple is getting rid of "iPhone addiction"

According to the financial report, Apple's net revenue in the second fiscal quarter was $58.3 billion, basically the same as $58 billion in the same period last year. Net profit was $11.2 billion, down 3% from $11.5 billion in the same period last year, but both figures were higher than analysts' general expectations for Apple.

In the past, such data would obviously not be ideal. Although revenue increased slightly compared with last year, it should be noted that Q2 2019 was one of Apple's worst quarters, with revenue down 5% and net profit down 16%. iPhone revenue even recorded the largest drop in a single quarter.

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Although Apple has not yet recovered to the level of 2018 in Q2, considering that China's mobile phone sales in February fell 56% year-on-year and the spread of the epidemic around the world, this result is already good.

Let's take a look at Apple's mainstay iPhone business. Revenue from iPhone was $28.9 billion, down 6.7% year-on-year. However, since Apple no longer announces sales, IDC and other institutions have not counted iPhone sales for the quarter, so the specific sales of iPhone are still unclear.

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If we make a rough calculation based on the average selling price (ASP) data of the iPhone in 2018 (approximately US$724-790), the global sales volume of iPhone in Q2 is approximately between 36.65 million and 40 million.

This is basically consistent with the iPhone sales volume (36.4 million) counted by IDC in Q2 last year. In his report last week, Tianfeng Securities analyst Ming-Chi Kuo also adjusted the iPhone Q2 forecast to 35-37 million units.

The epidemic has obviously dragged down iPhone sales, and the impact on the Chinese market is the most obvious. Q2 sales in Greater China fell from $10.2 billion last year to $9.4 billion, the largest decline in any region.

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Apple temporarily closed all its direct stores in mainland China in February. Apple CEO Tim Cook also said in a financial report conference call that demand in the Chinese market dropped sharply in February and did not fully recover until mid-March.

This is a very special quarter, one I have never encountered before and hope to never encounter again.

But the good news in the bad news is that although the iPhone still contributes half of Apple's revenue, the revenue share of iPhone in Q2 dropped to 49.6%. This is the second time that such a result has been achieved after the iPhone revenue share was less than 50% for the first time in Q3 last year.

Under such circumstances, Apple's revenue still maintains growth. This also means that Apple is gradually getting rid of "iPhone addiction" and the new growth engine has begun to accelerate.

iPad and Mac revenues fell again, but may rebound next quarter

Although Apple released the new iPad Pro and MacBook Air in late March, most of the revenue generated by these two products will not be reflected until the next quarter's financial report. The performance of iPad and Mac remained weak this quarter.

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Revenue from iPad was $4.3 billion, and revenue from Mac was $5.3 billion, both of which declined to varying degrees compared with the same period last year. These two businesses have become Apple's least profitable product lines.

However, Apple is optimistic about the sales of iPad and Mac in the next quarter. The sudden outbreak is poison to smartphones, but honey to tablets and notebooks. The surge in demand for remote work and online education has greatly increased the sales of tablets and notebooks.

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A report from market research firm NPD shows that in the first two weeks of March, sales of notebooks sold to businesses in the United States also increased by 50%. These notebooks are mainly prepared by companies for employees working from home.

Cook said that users have gradually adapted to the reality that home isolation may last for some time and have begun to configure some equipment for working from home. At the same time, the trend of remote work and learning will continue to develop after the epidemic ends, which will drive the sales of iPad and Mac.

The two carriages pulling Apple to accelerate

It can be seen that the revenue of iPhone, iPad and Mac in Q2 is declining. The biggest contributors to Apple's revenue growth are the wearable devices and services businesses.

Sales of wearable devices, home products and accessories represented by the AirPods series reached US$6.28 billion, a year-on-year increase of 22.5%. Kuo Ming-Chi predicts that the AirPods series will ship about 80-90 million units in 2020. In addition, there are reports that the new AirPods may be released next month.

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As for Apple's service business, which has been in the spotlight since last year, it hit a record high with revenue of $13.3 billion. Cook said that Apple has 515 million app and service subscribers, an increase of 125 million from last year, and is expected to exceed 600 million by the end of this year.

Cook specifically mentioned Apple TV+'s streaming business. Although Apple's investment in self-made content is not as good as Netflix's, it still gained a large number of users by offering a free year of Apple TV+ when purchasing an Apple device.

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Chief Financial Officer Luca Maestri said at the earnings conference that the number of Apple's paying users has maintained double-digit growth. Apple's mature software and hardware ecosystem is Apple's biggest advantage in the service business. After all, more than 1.5 billion active devices can become the entrance to Apple services.

Although the current revenue from the service business is less than half of that from the iPhone, it has become one of Apple’s most important growth engines, setting new records almost every quarter. In time, it may really be able to replace the iPhone and become a new revenue pillar.

If the 5G iPhone is delayed, it may be "unbearable" for Apple

Unlike previous financial reports, Apple did not give an outlook for next quarter's financial report this time. Cook said it is difficult to predict the situation in the next two months and it is difficult to make a judgment.

The question is when do stores reopen, when do shelter-in-place orders get lifted, when can we get back to working in stores and having consumers come out? We don't pretend to be predictive, but we're very straightforward, we can't predict the future.

Although the epidemic in China is gradually under control, the situation in other markets is still unclear for Apple. This also means that there is great uncertainty in supply chain capacity, offline store openings, and user consumption willingness.

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The biggest impact on Apple is that this year's new iPhone flagship may be delayed in its launch.

2020 was supposed to be a key year for Apple to launch a 5G iPhone. If the reason why the iPhone 11 did not have 5G last year was that Apple believed that the market and technology were not mature enough, then if Apple does not launch a 5G phone this year, it may fall behind in the 5G replacement wave.

Except for Apple, all major mobile phone manufacturers have launched 5G mobile phones covering multiple price ranges. Although the market share of 5G mobile phones is not high yet, it is growing rapidly. According to data from the China Academy of Information and Communications Technology, the 5G penetration rate was only 15% in December 2019, but this figure has risen to 37% in February this year.

5G has also become an important factor for many mobile phone users to consider when changing their phones. Many industry insiders believe that this will be a rare wave of phone replacement in the smartphone market, which has entered a bottleneck period. Chen Wenjun, general manager of China Telecom's marketing department, predicts that China's 5G mobile phone sales will reach 170 million in 2020, with a penetration rate of 47%, which is even faster than the switching speed between 3G and 4G.

In the past two months, there have been a lot of news about the possible delay of the launch of iPhone 12. The main basis for these judgments is that Apple's global supply chain has been affected by the epidemic.

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At Apple's earnings conference today, when Cook was asked whether 5G phones would encounter supply chain disruptions, Cook did not give a clear answer, only saying that he would not comment on future products, while emphasizing that Apple's supply chain has the ability to recover quickly from the epidemic.

However, Apple component suppliers revealed that they have received notice to postpone mass production plans by about two to three months. Some sources even said that in the worst case scenario, the release of the 5G version of the iPhone may be postponed to 2021.

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An Apple supply chain company in Shenzhen told Caixin magazine in early April that although its factory had fully resumed work and production, it still had not received any new orders from Apple. He pointed out that due to the impact of the epidemic, Apple staff were unable to be on site to confirm core components, which was the core reason for the delay in construction.

• The launch of the new iPhone will most likely be delayed.

In addition to disrupting the rhythm of the supply chain, the epidemic also affects people's consumer confidence and purchasing power. In a recent report, Guo Mingchi said that iPhone sales may be affected by consumption downgrades, and he predicted that iPhone shipments in 2020 will decline by 10% to 15%.

In addition, a report from market research firm Strategy Analytics pointed out that the epidemic has caused 37% of Chinese people to postpone their plans to buy new smartphones, and the popularity of 5G will also slow down. I don’t know whether this is good news or bad news for Apple.

What is certain is that in the next few months of this year, the Chinese market will become particularly important to Apple. On the one hand, the epidemic in China has been basically under control, and China may be the fastest recovering smartphone market in the world. In addition, more than half of Apple's suppliers are from China, and the supply chain manufacturers that are gradually resuming work can speed up the production of iPhone 12.

Will this year's 5G iPhone be late? For consumers, this determines whether the "Technology Spring Festival Gala" can be held as scheduled in September this year. For Apple, this is not only related to this year's performance, but may also affect Apple's voice in the 5G era.