Apple Breaks Down Three Phases of COVID-19 Impact, Hinting at What's to Come

For the current quarter, Apple said to expect worse results in iPhone and wearables, but better results in Mac and iPad.
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Apple investors are flying blind at least for another couple of months. But on Thursday, management gave some clues on how the current quarter could shape up. 

Apple  (AAPL) - Get Report shares were down 2.6% in after-hours trading after the tech giant beat expectations on both revenue and earnings, but provided no fiscal guidance for the June quarter. 

That was no big surprise -- given uncertainty over the coronavirus's total economic impact this year, and how long the pandemic will last, numerous major firms have revoked forward-looking guidance this year. In lieu of that, Apple executives broke down how the health crisis played out in China in three phases, and gave color on what the June quarter might look like across specific product lines. 

"The lockdown started there toward the end of January, as you know. In February we saw a steep decline in demand. We closed our stores in February. As the lockdown completed in mid-February, towards the second half of February, we began to open stores," explained Apple CEO Tim Cook on the call. "And from a demand point of view, we saw then improvement in March over February, and if you look at kind of where we are today, we've seen further improvement in April as compared to March."

Apple began opening up its China stores on a staggered basis over about 30 days between mid-February and mid-March, Cook said, also noting that Apple's global supply chain had returned to normal by the end of March. 

Outside sales data supports Apple's accounting of events. A Chinese agency reported that Apple sold 2.5 million iPhones in the country during March -- a three-fold increase over February, but still 20% lower compared to March 2019. Cook didn't quantify how much sales further improved in April, but said elsewhere on the call that Apple's new, budget-friendly iPhone SE had garnered an enthusiastic response from customers so far. 

"I inferred from the earnings call that there is huge level of uncertainty," said Geoff Blaber, analyst with CCS Insight. "There is a risk in taking China’s recovery as the blueprint as the emergence from lockdown could be very different in the West. That could have a lasting impact on demand which is impossible to quantify at this point."

Apple CFO Luca Maestri gave further detail on what to expect in the current quarter, also pointing to its March quarter results as a framework for how specific product lines may perform. Wall Street analysts are currently forecasting $51.6 billion in total sales for the current quarter. 

"On iPhone and Wearables, we expect the year-over-year revenue performance to worsen in the June quarter, relative to the March quarter. On iPad and Mac, we expect the year-over-year revenue performance to improve in the June quarter," he said. "On Services, we are seeing two distinct trends. First, customers are actively engaging with our ecosystem and digital services and we believe the very strong recent performance in the App Store, Video, Music, and Cloud Services will continue throughout the June quarter." 

The strong U.S. dollar will also result in a negative revenue impact of $1.5 billion, Maestri said, and economic conditions will also impact AppleCare and its advertising segment. However, tailwinds will include cost savings and the mix shift towards Services.

That adds up to a tricky equation for investors for June. But in the longer term, Apple's loyal and enduring customer base gives it an edge over competitors, according to Ian Campbell, CEO of Nucleus Research.

"While it's difficult to project the technology market going forward due to COVID-19, Apple's second quarter results show that they remain strong with their loyal customer base," he said. "One of the reasons for this is because unlike other hardware vendors, Apple iOS customers do not have direct substitutes, unlike Android users."

Cook added on the call that despite the pandemic, Apple's iPhone installed base -- the number of active iPhones -- grew to its highest level ever last quarter. Its installed base of total devices, inclusive of iPhone, Mac, iPad and wearables, was 1.5 billion at the end of 2019

Apple views the installed base as the linchpin of its roadmap in coming years, as it transitions from an iPhone company to a more diversified hardware and services firm. 

Underscoring that view, Apple reported 515 million paid services, 125 million more than a year ago and up 35 million on a sequential basis -- its highest-ever sequential growth. It's targeting 600 million paid subscriptions by the end of calendar 2020. 

"Success is still built off iPhone, but its destiny quarter-to-quarter is now far more insulated from the bumps in the road for its largest product category," added Blaber.