Calibration for New Reporting Methodology
- When it comes to reporting, disclosing less information is a negative. That said, we support Apple’s move to align their reporting and, therefore, investor thinking with a strategic shift in their business to a more service-based model. Keep in mind, Apple’s updated disclosures are debatably more helpful than other large-cap tech.
- We’re expecting Services to have a 65% gross margin and account for 13% of revenue and Products to have a 27% gross margin and account for 87% of revenue. Given this is the first reported quarter with segment margins, consensus estimates will have a wide, less helpful range.
- We’re hopeful that Apple provides a year of historicals that follow the new reporting methodology for modeling purposes. We believe those historicals will show slightly increasing hardware margin in FY18 based on increasing iPhone ASPs, but we expect the hardware margin will decline in FY19 and Services margins will rise. The net effect is flat margins.
- Going forward, if hardware margin steps down measurably, it’s likely a sign the company is losing pricing leverage (e.g. Blackberry in 2008). The rare case in which a step-down in Apple’s hardware margin would be acceptable is an offensive initiative to gain market share (and Services revenue) with lower-priced devices.
Other Key Topics for the Call
- Updated thinking on the use of cash for buybacks vs M&A and R&D.
- Timing, scope, and go-to-market of original video content offering.
- Direction related to Tim Cook’s January 8th comment that, “if you zoom out into the future, and you look back, and you ask the question, ‘What was Apple’s greatest contribution to mankind,’ it will be about health.”
- Has China stabilized in the first month of the March quarter?
- Expectations related to changes in China trade and their impact in FY19.
- Would Apple consider making the more generous iPhone trade-in terms permanent?
- Outlining the business model benefits of Apple’s privacy-first approach.
- Apple’s perspective on subscription offerings that include hardware, services, and support.
Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio.