FOUR THINGS to know ahead of Apple fiscal Q4 earnings: An EPS-less preview

Apple reports Q4 earnings on Thursday, November 1st, after the bell.

Here’s a Google Sheets link to the data and charts used below.

Here are a few things to watch for:

1. iPhones? iPhones

iPhones are it. They are the brain of Apple, making everything else go. iPads? Macs? Accessories? Inconsequential. The company will live and die by iOS.

Here’s why. The company has built the massive product, and gotten in the hands of millions of users. It is THE mobile platform, even if it doesn’t have a dominant market share.

And it’s a cash cow. If you have an iPhone, you’re likely to be buying subscriptions, apps, making in-game purchases. And Apple gets a cut of all of that.

It’s also really the only phone the young folks will consider using. You know, the consumers who really matter.

However, most people who want an iPhone have an iPhone. It’s mostly upgrades from here. So how many people are actually upgrading? Or are more people with older models holding out?

As I wrote a few months ago (Samsung Note 9 vs Apple iPhone X vs You’re probably not going to upgrade anyway), people are waiting longer and longer to upgrade. And that hurts Apple. We used to upgrade every two years, then the phones got better and we could stretch it out to three. I’m still using my four-year-old iPhone 6+, and with iOS 12, it’s running better than it has in two years.

Sample of one, but I’m just part of a larger trend.

Second, any comments on Xs/XsMax/Xr sales?

See also: Product review-less review of the Apple September 2018 launch

The company rolled out the new devices this month, so there won’t be able sales figures for Q3 yet. But the company is definitely going to provide some updates on the new slate of iPhones, especially with the crucial Q4 coming up.

But look for comments on the Xs Max – will the up-to $1500 price tag turn off buyers? What about the Xr, which a bunch of reviewers called the best iPhone for your dollar ever?

iPhone ASPs have been slipping in recent quarters. The people who wanted the X last year bought the X, then everyone else who just needed to replace their iPhone 4 just seemed to buy the cheaper models.

Q3 is a down quarter traditionally, but look for some expectation setting.

2. Services growth

Services are the future of Apple, not the iPhone. For so long, the company buttered its bread with the iPhone.

But since almost everyone who wants an iPhone has one, it’s not all about services. Apple’s iPhone sales as a percent of the company’s revenue has only fallen over the past few years, from over 66% in 2015 to an expected ~60% in 2019.

Services, on the other hand, has more than made up that gap, growing from just under 9% in 2015 to an expected 16%+ in 2019.

On a rolling four-quarter basis, iPhone sales growth has rebounded from around -5% in mid-2016, but is only expected to be around 1% – or less – through 2019.

Services, on the other hand, has grown nearly 7% over the past few quarter, and is expected to keep chugging along at 5% quarter-over-quarter or so through next year. That 20%+ growth makes services THE focus for Apple’s future.

To top it all off, Services margins are much higher than device margins. This is only going to be a bigger and bigger story around Apple’s future.

3. China

China sales have clawed their way back in the past few quarter. On an annualized, rolling four-quarter basis, sales in China hit a low in the June 2017 quarter, but have since snapped back, hitting the highest level since the September 2016 quarter in Q2.

However, Apple’s sales in China – as a percent of all sales – has continued to fall since peaking in Q2 2015. For Apple, this is a dual-edged sword. China is obviously the biggest growth market in the world, and Apple is losing market share, falling to the number 5 spot earlier this year (CNBC). On the other hand, Apple is becoming less reliant on China as a growth driver – probably good given the trade tensions between the two countries.

Still, Apple made a deal with China Mobile, which has a subscriber base of 900 million people. Clearly they’re still trying to break through in China.

But speaking of trade uncertainty…

4. Tariffs and trade

The company has posted four consecutive quarters of sales growth in China, but can for how long? Apple was exempted from tariffs for most products, including the Apple Watch and AirPods back in September (WSJ), but the White House is threatening tariffs on all imports from China, depending on how the talks between Trump and Xi play out at next month’s G20 (Bloomberg).

If all Apple products are covered by tariffs, that’s a massive, material risk for the company.

The New York Times wrote in June that the Trump administration said it would spare Apple from tariffs, and the Tim Cook has been lobbying both the US and Chinese governments through the escalating trade spat. But that may not be enough.

WSJ noted recently that “In the U.S., the proposed tariffs of 10% would have added more than $11 to the import cost of about $115 for a Chinese-made Apple Watch Series 3, according to market researcher IHS Markit. Analysts say Apple would either eat those costs on the device, which retails for $269—and similar costs on other products such as AirPods—or pass the costs on to retailers and consumers.”

If an iPhone Xr, at $750, is around three times that amount, that could work out to an extra $33 per phone. And that’s with a 10% tariffs. A 25% tariff has been thrown around, which could make that $750 iPhone Xr suddenly cost around $83 more, or $833.

What makes YouTube’s Susan Wojcicki such a compelling name to lead CBS?

An article published by CNBC speculated about potential replacements for Les Moonves as the CEO of CBS. The article argued that the former CEO, who departed after sexual misconduct allegations, should be replaced by a woman. Agreed.

The article named a couple of potential replacements. Anne Sweeney, former co-Chair of Disney Media. Nancy Dubuc, Vice Media’s CEO. Indra Nooyi, who just left the top spot at Pepsi.

But the most compelling name mentioned is Susan Wojcicki, the head of YouTube.

Why would Wojcicki be about the best name possible for CBS? Ken Auletta’s fantastic book Frenemies: The Epic Disruption of the Ad Business (and Everything Else) described Moonves’ time at CBS. In Auletta’s words,

Broadcast television could offer advertisers vast audiences, but they could not offer targeted ads and could not tell advertisers who actually who actually watched their ads and bought their products.

Moonves and his network brethren also resist computerized programmatic advertising that automates the targeting of audiences. Brian Lesser, the North American CEO of GroupM, is not alone in predicting that “all media will be digital” – meaning the TV networks will be streamed over the Internet just as Netflix is – and “all TV will be bought and sold programmatically.” Moonves resists, believing that if he turned over ad sales to machines it would take the skill and timing of the salesman or saleswoman out of the equation, reducing CBS’s leverage.

CBS can’t survive on just retransmission fees and selling rights to Netflix and Amazon. If it wants to continue to survive in the ever-evolving media landscape, it’s going to have to figure out how to better target a shrinking television audience. Programmatic is just one step, but an obvious and easy one.

Even over-the-air television is becoming more and more like digital-first properties. And while Wojcicki is a long-shot to take over CBS – the article noted YouTube’s standalone valuation of $160B vs. CBS’s $21B – she’s the exact type of leadership the company needs.

Links in video:

  • CBS should hire a woman as its new CEO — and industry insiders have some suggestions — CNBC
  • As Leslie Moonves Negotiates His Exit from CBS, Six Women Raise New Assault and Harassment Claims — The New Yorker
  • Anne Sweeney Becomes A Director At Netflix —
  • Vice Media Names Nancy Dubuc CEO — Ad Age
  • Indra Nooyi, PepsiCo C.E.O. Who Pushed for Healthier Products, to Step Down — New York Times
  • Susan Wojcicki Has Transformed YouTube—But She Isn’t Done Yet — Fast Company
  • How to Break Up the Silicon Valley Boys’ Club — Vanity Fair
  • Google I/O 2013 – Susan Wojcicki – 7 Techmakers and a Microphone — YouTube
  • Why Traditional TV Is in Trouble — New York Times
  • Roku Launches a New Marketplace for TV Ad Inventory — Wall Street Journal
  • Comcast Seeks to Harness Trove of TV Data — Wall Street Journal
  • Morgan Stanley Pegs YouTube’s Valuation At $160 Billion, Above Disney, Comcast, And Netflix — Tubefilter

Can Tesla survive automotive – if not broader economic – slowdown?

Elon Musk, he’s polarizing. He should probably go, Or at the very least, he should take a Zuckerberg type-role and find his own Sheryl Sandberg.

But the cars are a different story. It’s hard to, say, watch Marques Brownlee and say to yourself, “Damn, I want that car…”

[I, on the other hand, opted for the Boosted Board as my own electric vehicle]

Anyway, Tesla didn’t begin shipping the Model S until 2012. That means that the company has never faced a downturn in the automotive sector. Nor has it faced a world with rising interest rates. A few quick thoughts:

  • The company has never existed as car sales fell: The challenge becomes – can they still increase sales even as the broader auto market shrinks? Maybe. It’s probably unlikely, but it’s a company that is dependent on brand value. That should help the company weather any economic turmoil, but it’s not a given that fanboy-ish behavior will outweigh broader macroeconomics. Not to mention increased competition in the electric auto space. Electrek wrote recently that Mercedes-Benz is building a new battery factory for electric vehicles in the US. VW wants to sell 1 million EVs in the next seven years, according to The Drive. Meanwhile, Volvo is working wtih Nvidia on a self-driving platform (The Verge). There is no shortage of action in the space, and while Tesla has the competitive advantage right now, it may not always be the case.
The company has never existed in a rising interest rate environment: Speaking of macroeconomics… Big economic trends also have an outsized impact on Tesla. The company has also never existed when rates were higher. Since the company is so dependent on financing, any tightening of financial conditions is only going to put the company under more and more pressure. Which is a big problem when the bills come due: Tesla said it doesn’t need financing in the near future (Business Insider), but the company has three debt payments that will come due between November and March that total around  $1B. The company has around $2.2B in cash, but nearly a billion of that is for Model 3 deposits. If the company does have to raise cash, it’s going to be at a higher rate. For a company already living on the cash flow edge, that’s tough.

But this begs the question, could a downturn in the US economy actually help Tesla? If rates come down as investors seek the safety of US Treasuries, could the company actually tap into cheaper capital? Or would the company’s ongoing (and growing?) risks force investors to demand a premium to shuttle cash Elon’s way?

Again, Tesla has never really existed in a time when spreads between corporate bonds and Treasuries have widened. But on one hand, this is Tesla, which has track record of squirming out of financial jams. On the other, 2008.

Adobe Premiere Rush: First Impressions

Adobe released its Premiere Rush app today. It’s a scaled-down version of the full-fledged Premiere, designed for YouTubers and social creators. But is it right for you?

Here are the highlights from the video:

Adobe released Premiere Rush today, it’s on-the-go video editor.

A few quick first thoughts about the concept – it’s really great. If you have been editing video on your phone, chances are you’ve been using Apple’s iMovie app. It’s… adequate. But it is incredibly frustrating after you’ve been using something like the full-fledged Adobe Premiere for awhile. So it’s great that Adobe has gone ahead and released a scaled-down version of Premiere, which we all know and love.

But it’s exactly that – scaled down. It’s nice you can now use a timeline-based video editing app on your phone. And not only that, but it will sync to your desktop version of Premiere, so you can start on your phone, and most likely refine and finish on your laptop.

A few other features:

  • Transitions between videos are nice, along with color grading. Still though, these are going to be hugely limited compared to what you’re doing on the desktop version. You get three transition types. Color grading is limited to 12 presets, though you can use your own presets from your desktop version, or you can adjust sliders like you would in any other editing program.
  • You can add titles from Adobe’s own stock. The only problem – it’s damn near impossible to edit some of the smaller text areas. Please Adobe, let me edit from the dropdown, not directly on the playhead. It gets really difficult to put the cursor in the right spot to delete the word. We can partly blame Apple for its insistence to exclude a delete key on its keyboard, but that’s another video altogether.
  • Audio uses Adobe Sensei, which automatically adjusts the volume of the background music during voiceovers. On your voiceovers, you can even balance out the sound, reduce background noise, just like the desktop.
  • You can change your setup for your video to be vertical or horizontal. So it is finally easy to edit video specifically for IGTV. Is this the beginning of the IGTV boom? I’m… skeptical.
  • I did have some trouble syncing to my desktop. Only a few of the assets – like the voiceovers – came through. Not sure if that’s a bug, or if there’s some other connection I might have to make.
  • I also had trouble exporting from my phone. I eventually had to export in 720p because 1080p kept crashing the app. But, I’m using an ancient iPhone 6+, so that’s not really a surprise. But hopefully future updates will take care of that. 

Look, it’s great to have Adobe timeline video editing on my phone. It’s just going to be limited. No keyframing, making cuts is just kind of difficult, there’s no rate tool so you can’t speed or slow video to fit a certain length.
But it is a LOT better than iMovie. I’ll definitely be using this when I edit video on my phone, but I’m just not sure how often that’ll be. In the Instagram Stories era, why do you need to cut footage in the first place?

Snap: The view through rose-colored Spectacles

I’ve always hesitated to write about Snap because I have a good friend who works for the company, and I want to be supportive.

So I’ll bring up some good news about the company. It’s user metrics are growing!

Sort of. Let me explain.

The platform has shrunk in the past few months. Literally shrunk – fewer people using it for less time per day. There’s a lot behind that, including Instagram rolling out Stories, as well as the Snap redesign that was hated by all those tastemakers who matter.

According to Business Insider this week, Snap shares have wiped out $13 billion with a B from its market cap since that tweet. Clearly there’s more to the decline than just Kylie Jenner, but her role is not insignificant.

The (rare) optimistic note from Wall Street

But today, Brian Wieser from Pivotal Research upgraded Snap from hold to buy, saying his data show a “widening user base.” Weiser did acknowledge it is collectively spending less and less time on the platform, but at least its growing, right?

Weiser is one of the few champions of Snap on the Street.  He also said it isn’t too late for management to reverse usage trends and increase monetization. Sure, it’ll take some more platform tweaks (overhauls?) and pulling people’s attention from Instagram, but Snap once held the fire. With a little bit of luck, they can do it again, right?

The company has taken its lumps in the past few weeks. CEO Evan Spiegel sent out a memo that struck a positive tone, giving the stock a quick boost. But that was quickly shot down. BTIG’s Rich Greenfield said the platform is “the fastest way to communicate” 26 times. Clearly not true in our iMessage world.

Users are just posting less too, making it less compelling to open up the app.

Monetization is also an ongoing challenge. Greenfield said the shift to programmatic ads hasn’t been terribly successful.

But the CPMs on Snap are cheap, and as we’ve seen before, maybe advertisers trying to capture the best relative value is the best, winning strategy?

Err, let’s put a lid on that one and stick it back in the closet.