Apple Inc. (NGS: AAPL) Mac, iPad, Wearables and Services were all strong. iPhone revenue, representing about 40% of sales, fell 21% against a tough year-earlier comp that included the launch of iPhone 11; by contrast, the iPhone 12 launch occurred after quarter-end.
At a separate mid-September event, Apple launched new products including iPad Air and Watch Series 6, and unveiled its first-ever service bundle. That event may have contributed to the rejuvenation of iPad, which posted mid-40% annual sales growth – remarkable for a non-holiday quarter. Mac revenue increased nearly 30%. Plainly the pandemic is driving compute unit sales across all manufacturers, but Apple is growing faster than nearly any competitor thanks to its relentless refresh and upgrade strategy.
Services extended mid-teens percentage growth, as this formerly fastest-growing category now lags the compute products and wearables, which grew more than 20%. While Apple Watch series 6 likely helped watch sales, Air Pods are again flying off the virtual sales and, as in holiday 2019, could well be sold out before Thanksgiving.
No iPhone 12 units were sold in fiscal 4Q20, but management indicated that demand for the new phones is brisk.
For fiscal 4Q20 (calendar 3Q20), Apple posted revenue of $64.7 billion.
Revenue for 4Q20 was an all-time record for a September quarter, ‘despite the anticipated absence of new iPhone availability in the quarter’ noted CEO Tim Cook. We are impressed with Apple’s ability to grow revenue in a September quarter with no new iPhone. Typically, the September quarter includes from 10 days to at most two weeks of the new iPhone, but that can be a difference-maker.
The timing of the new iPhone launch also spurs discounts on older and to-be-discontinued models, which also drive iPhone sales. A year earlier in fiscal 4Q19, iPhone revenue of $29.3 billion increased 7% annually and represented 46% of total revenue.
For 4Q20, iPhone revenue of $26.4 billion (41% of total) declined 21% year-over-year and was sequentially flat. Apple no longer releases unit sales figures for iPhone or any other product. iPhone revenue for 4Q20 missed the $27.5 billion consensus estimate.
In April, Apple introduced its second-generation iPhone SE. The new SE emerged as an affordable option for customers on budgets and/or worried about job security. The popularly priced iPhone 11 was also a big volume driver, according to the company. CEO Cook noted that the absence of new iPhone models in the quarter was felt most keenly in China, where overall revenue declined more than 20% annually.
CFO Luca Maestri noted that through mid-September (when Apple would typically be launching new phones), customer demand was growing in double-digits before tailing off into quarter-end. During the quarter, the active installed base of iPhone reached a new all-time high.
The iPhone 12 series of 5G phones is poised to drive the most meaningful upgrade cycle in years, we believe, although economic and geopolitical events could get in the way. The new iPhones include four devices in three different sizes ranging from a 5.4′ screen to a 6.7′ display. The new iPhones come with the ultra-fast A14 Bionic processor and Qualcomm mobile modems (basebands) after two cycles with Intel chips. For more color on the new devices, please see our 10/13/20 AAPL note.
While iPhone, as expected, dragged down overall growth, sales of products outside of iPhone grew an aggregate 30% in fiscal 4Q20. During 4Q20, Mac revenue of $9.0 billion jumped 29% year-over-year and was up 28% sequentially while crushing consensus estimates by $1.1 billion. Mac revenue was an all-time high, exceeding the prior peak by over $1 billion.
At WWDC 2020, Apple introduced its new macOS called Big Sur, with App icons and interface elements that are similar to those used in iOS. Apple saw ‘amazing response’ to the new MacBook Air and MacBook Pro, according to the CFO, who noted that Mac sales rose strongly in every region.
iPad as the remarkable comeback of this product category continues. The pandemic has been a driver, and supply constraints impacting Mac and iPad earlier in the year may have driven catch-up spending, but we believe the main driver is innovative product refresh. The midrange iPad Air introduced in mid-September has an edge-to-edge screen.
iPad has shed the Home button but, instead of Face ID, has a Touch ID button on the side of the device. It also packs the A14 Bionic processor. At that event, Apple also announced updates to its entry-level iPad, targeted at consumers ($329) and schools ($299). For more detail on the new iPads, please see our AAPL note of 9/15/20.
Wearables revenue of $7.9 billion rose 21% annually and 22% sequentially. In addition to the bedrock products of Air Pods, Beats headphones, and Watch, Apple is growing this category with the HomePod Mini, the MagSafe ecosystem of accessories, and other products.
Services revenue of $14.6 billion was up 16% and also represented an all-time record for any quarter. Revenue in the quarter set all-time records in App Store, Cloud Services, Music, Advertising and Payment Services. New Services including Apple TV+, Apple Arcade, Apple News+ and Apple Card are contributing to growth and widening the services ecosystem. Apple has a mind-boggling 585 million paid subscriptions across its services platforms and should top its target of 600 million by year-end 2020.
During fiscal 2020, Apple revenue of $275 billion grew 6% year-over-year, to a new all-time record. EPS grew 10% to a split-adjusted $3.26 and was also a new all-time record.
Apple did not provide guidance for 1Q21. The company began shipping iPhone 12 and 12 Pro four weeks into the quarter, and will begin shipping iPhone 12 Mini and 12 Pro Max early in November, or seven weeks into the quarter. Despite the late start, Apple expects to grow iPhone revenue during the December quarter, even though 1Q20 iPhone revenue of $56.0 billion included full availability of the iPhone 11 lineup.
The recent 4-for-1 stock split was designed to broaden AAPL’s appeal to retail investors, and could put further wind in Apple’s sails. The September iPad and Watch launch and the October iPhone launch should drive momentum for Apple products heading into the holiday season. We are reiterating our BUY rating and our 12-month target price of $150.
EARNINGS & GROWTH ANALYSIS
Revenue beat the consensus forecast of $63.8 billion by about $900 million.
GAAP earnings totaled $0.73 per diluted share (on a split-adjusted basis), down 3% from the prior year though up $0.08 sequentially. GAAP EPS topped the consensus call by $0.03. Management provided no explicit top- or bottom-line guidance for 4Q20.
Apple did not provide guidance for fiscal 1Q21. The company expects to grow iPhone revenue during fiscal 1Q21, compared to $56.0 billion (iPhone only) in 1Q20, even though Apple began shipping its new iPhones well into the current quarter compared with full availability of the iPhone 11 lineup in last year’s fiscal 1Q20.
MANAGEMENT & RISKS
The coronavirus has now gone from abstract worry to concrete impediment to business. In January, Apple rescinded its 2Q20 guidance in response to the fluid situation in China. The situation is evolving, as the company noted, and we will continue to monitor the outlook for Apple and for other companies impacted by the pandemic.