View fullsize

After using the iPad Pro for 3 months now, I’ve finally come to an opinion about where this latest iteration fits into my life. Here is my configuration:

• 12.9” Silver

• 512GB Storage

• Wi-Fi + 4G LTE (Cellular)

• Apple Smart Keyboard

• Apple Pencil 2

Let’s not kid ourselves, this setup is not cheap. The iPad base price in this configuration is $1,499. Add in the $129 Apple Pencil 2 and the $200 Smart Keyboard and you’re in for $2,000. As a point of comparison, the new entry-level 2018 MacBook Air with the 1.6GHz processor and 256GB of storage comes in at $1,399, and already has a keyboard (although some would consider that a huge downside). But effectively, you could still bump up that MacBook Air to 16GB of RAM (8GB is standard) and match the 512GB of SSD storage, and still be at $1,800.

So to most, Apple’s iPad Pro seems like a far over-priced media consumption device, but once again, technology is all about ‘context’ - where does it fit in your life, and how much value do you put to that place? For me, the iPad has always been exactly where Steve Jobs wanted it - somewhere between my iPhone and my laptop. Although I’ve compared its pricing to a laptop, it’s utility is far higher to me. I don’t need to duplicate what I already have. I’ve always found myself yearning for that product that fills a void and the iPad Pro continues to be ‘that product’. Whether it’s the battery life, the seamless integration with Apple’s “ecosystem”, or just the shear convenience of having such a powerhouse (A12X Bionic SOC is a beast), the iPad Pro is a must-have no matter where I go.

The naysayers will continue to point to Apple’s inability to move iOS forward in a meaningful way to fully unleash the power of the A12X SOC (which is, by all measures, a laptop-level CPU), but for me, not having all the legacy issues of a laptop is what makes this device continue to be special. Apple has come a long way with its file system and iCloud platform, which makes sharing content easier and provides some semblance of a PC-style folder system.

There are many that want Apple to merge iOS and MacOS to expose the true computing power of the tablet. I am not one of them - it would completely defeat the context of the tablet and the void it fills. More to come on this…

Apple (AAPL) beat the Street’s Q1-FY18 expectations on revenue, profit and earnings, but fell short on iPhone unit shipments and soft guidance for its fiscal Q2.  

While Apple reported iPhone unit shipments of 77.3 million (a 1.3% year-over-year decrease), if you read through the commentary provided by management on its earnings’ call, the actual “sell-through” was likely around 73.2 million (a 5.1% year-over-year decrease).

Understanding the iPhone Channel

The iPhone channel is defined as any non-AAPL, authorized retailer that sells the iPhone. The reason why the iPhone channel inventory level (and changes) matter at all is because of the way AAPL recognizes sales (revenue). Here is how that criteria is defined in the "critical Accounting Policies" of its SEC filings:

• (Sales to Retailers - Channel Partners – SELL-IN): 

Product is considered delivered to the customer once it has been shipped and title, risk of loss and rewards of ownership have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. (Emphasis Added)

Now contrast that with how AAPL recognizes revenue on sales to individuals:

• (Sales to Individuals): 

For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion of the risk of loss on these sales during transit.

So the key takeaway is that an iPhone sitting in the channel (e.g., on the shelf of a Best Buy or a wireless carrier) shows up on AAPL’s income statement as a reported sale for that period as that unit (and revenue) has already been recognized as a sale upon shipment. It makes no difference when an end customer buys that phone.

AAPL’s ‘uncharacteristic’ description of its iPhone channel inventory change.

I have been tracking AAPL's channel inventory since the company began providing detail around its channel inventory units in 2012. AAPL has historically been quite straight-forward with the estimated change in its channel inventory, but it has always provided that change on a “sequential” basis.

For example, CFO Luca Maestri has provided the remarks with regards to its iPhone channel inventory and they have typically been very straight-forward and detail the change during the quarter.  A couple of examples:

• Q4-FY17: “…iPhone channel inventory increased by 1.3 million units sequentially to support the launch of iPhone 8 and 8 Plus.”

• Q3-FY15: “…"We reduced iPhone channel inventory by about 600,000 units during the quarter." 

However, for Q1-FY18, Maestri worded the iPhone channel inventory change differently by comparing it to the year-ago quarter, rather than the previous quarter (sequential):

“We exited the December quarter towards the lower end of our target range of five to seven weeks of iPhone channel inventory with less than 1 million more iPhones in the channel compared to the December quarter a year ago...”

As I have been tracking this data (shown in table below), AAPL exited the referenced ‘December quarter a year ago’ (December-2016) with approximately 20.95 million iPhone units in the channel.  Based on the commentary, I assume AAPL added around 900,000 units compared to the December-2016 quarter, meaning that it had approximately 21.85 million units in the channel.

But here’s where it gets interesting.  If you look at the channel inventory on a sequential basis (as AAPL Management historically has provided commentary around), there was a sequential increase of approximately 4.1 million units – the highest ever channel build in the product’s history – surpassing the 3.3 million unit builds in both Q4-FY13 and Q1-FY16. 

View fullsize

What this does and does not mean?

• iPhone Unit Sales were lower than reported on a sell-through basis by nearly 3.9 million units: As described above about how it accounts for its iPhone revenue and it you assume the ‘less than 1 million more iPhones in the channel’ as mentioned by Maestri was approximately 900,000, AAPL actually had unit sell-through of approximately 73.2 million for the Dec-2017 quarter – a year-over-year decline of 3.9 million units (or 5.1%).
   

• The iPhone channel is a ‘relative’ point-in-time measurement and must be analyzed over time: The iPhone channel is a complex and dynamic measurement of a point-in-time, and most importantly, it is a ‘relative’ measurement.  The iPhone channel continues to expand – AAPL did not provide the number of points-of-sale for iPhone across the world, but as those points-of-sale grow, the more units that are needed to support those channels.  When AAPL launched the ill-fated iPhone 5C in Q4-FY13 and had the 3.3 million channel build, it exited with approximately 14.3 million iPhone units in the channel.  While AAPL may have added approximately 4.1 million iPhone units (sequentially) in Q1-FY18, Maestri indicated that the level was “towards the lower end of our target range of five to seven weeks of iPhone channel inventory”.  Point being, while it was a large build, AAPL drew-down a substantial amount of iPhone channel inventory during FY17 – with a combined draw-down of 4.5 million units in Q2-FY17 (1.2 million units) and Q3-FY17 (3.3 million units).
   

• Unit Sales are not everything: AAPL has never reported a quarter where reported iPhone year-over-year unit sales contracted, but revenue grew…until this quarter.  AAPL reported a 1.3% year-over-year contraction in reported iPhone unit sales, but reported a 13.2% year-over-year growth in iPhone revenue growth – undoubtedly due to the introduction of the iPhone X at a $999 USD price-point and a reported heavier-than-usual skew to the iPhone 8 Plus over the iPhone 8.

How will AAPL’s iPhone Channel Inventory dynamics affect its FY18 performance?

AAPL’s management of its iPhone channel inventory, especially during its launch and subsequent holiday quarters can create significant issues for its financial performance during a fiscal year.  An example of this was the launch of the iPhone 6S and 6S Plus in Q4-FY15 when AAPL built its iPhone channel inventory by a massive 5.25 million units in the launch quarter Q4-FY15 (1.95 million unit build) and the subsequent holiday quarter Q1-FY16 (3.30 million unit build). The remaining 3 quarters of FY16 saw AAPL have to draw-down a net 2 million units, resulting in year-over-year reported iPhone unit contraction of 16.3%, 15.0% and 5.3% for Q2-FY16, Q3-FY16, and F4-FY16, respectively.

That being said, the one dynamic that is new territory for AAPL, and its investors, is its availability and ability to move units at nearly $800 – a year-over-year ASP increase of 15%.  After all, in the eight quarters prior to the 15% year-over-year iPhone ASP increase in Q1-FY18, iPhone year-over-year ASP contracted by an average of 1.9% per quarter, with its largest growth during that period occurring in Q2-FY17, where ASP grew by a $13.16 (+2.1%). So, when AAPL wasn’t moving iPhone units at a higher price, unit sales and ultimately, the channel inventory dynamic became a huge issue for the company’s performance.

So the question that emerges from Q1-FY18 iPhone performance and its effect on the remainder of the fiscal year largely shifts to ASP. Can AAPL continue to convince consumers to move to the higher-tiered phones and if it can, then the unit shipments and ultimately, the channel inventory levels become much more of the static than the true music of what every investor looks for – revenue growth.  
 

It should be noted that the following analysis does not normalize any metrics or amounts to account for the 13-week (Dec-17 / Q1-FY18) vs. 14-week (Dec-16 / Q1-FY17) quarter.

Image Source: ZDNet

On its FY15 earnings’ call in October 2015, AAPL CEO, Tim Cook, unexpectedly revealed an estimate of just how big the Enterprise segment is for AAPL:

“We estimate that enterprise markets accounted for about $25 billion in annual Apple revenue in the last 12 months, up 40% over the prior year and they represent a major growth vector for the future.”

AAPL’s Enterprise Initiatives:

To understand that growth, it is important to understand the various programs that AAPL is using to penetrate the enterprise:

• Mobility Partner Program (MPP): An effort to boost sales of iPhones and iPads in the enterprise through collaboration with software developers and integrators.
   
• IBM MobileFirst for iOS: “IBM MobileFirst for iOS solutions combine the power of enterprise data, analytics and cognitive with an elegant user experience, to fundamentally redefine how professionals interact, learn, connect, and perform.” (Source)
   
• Other Strategic Partnerships: Collaborative go-to-market partnerships with enterprise service providers to optimize services and technology hardware for businesses.
   
• Enterprise Device Sales: Sales of iOS devices (specifically iPhones and iPads) to enterprise customers for use within their respective businesses.

AAPL has provided various commentary around these programs for the past two years:

View fullsize

Source: Various quarterly earnings' call transcripts for AAPL obtained through Seeking Alpha

Additionally, AAPL’s management has provided additional color around its enterprise efforts on its quarterly earnings’ calls:

• FY17 Q1: ”…the total number of joint customer opportunities has grown over 70% since last quarter…Corporate buyers reported a 96% satisfaction rate and a purchase intent of 66% for the March quarter”
   
• FY17 Q2: “All our products continue to be extremely popular and drive more buying transformation in the enterprise market. We set a new enterprise revenue record for the March quarter, and we expect this momentum to continue for the remainder of the year….Corporate buyers reported a 96% satisfaction rate and a purchase intent of 68% for the June quarter.”

Why AAPL is Seeing Increasing Success in Enterprise:

The dynamics of enterprise have drastically changed as mobile has become an increasing part of the daily workflow and AAPL has proven itself capable of leveraging its unique strengths and alliance partners to penetrate a space that was once an after-thought for the consumer-focused company:

• AAPL is bridging its Gaps with Partnerships: AAPL is continually focused on selling more devices both in consumer and enterprise markets. However, AAPL understands that its enterprise strategy needs to be much more reliant on integrating those devices into the workflow of the companies it sells to. Much like it is retaining customers in the consumer markets with an integrated offering of hardware, software, and services, it realized that it needed deep breadth in industry verticals to create the same effect in Enterprise.
  
  The once outlandish idea of AAPL actually partnering with IBM not only came to fruition, but has enabled AAPL to combine its deep breadth in industry verticals and enterprise-wide service / support with AAPL’s devices. This has inevitably enabled companies to dedicate resources to build native iOS apps that address specific pain-points in their businesses and deploy them at-scale. Additionally, AAPL has been aggressive in forming more partnerships with other enterprise service providers and consultants to further its standing as the leader in mobile – an area that is capturing increasing CIO wallet share every year.
   
• Employee Choice Creates a ‘Double-Down’ Effect: The ‘consumerization of IT’ is now in full swing. In its 2016 annual survey, Jamf reported that 44% of the companies it surveyed offered a choice to their employees between a Mac or PC, but a significantly higher 71% of the companies offered choice between different mobile devices.
  
  With AAPL reaching all-time highs in U.S. smartphone adoption, and its disproportionate share within the demographics that represent the enterprise segment, employee choice for corporate-issued smartphones is creating a “double-down” effect. Employees want the same experience and familiarity on their corporate smartphone as they do on their personal smartphones, not to mention the desire to access the same content through their Apple ID. This culminates in the all-too-common scenario where an employee has two iPhones – one for personal use and one issued by his / her company – both with upgrade cycles. This type of demographic also reaffirms Cook’s point about likely strong penetration in the Bring Your Own Device (BYOD) segment, which some companies have migrated to.
   
• Corporate IT Buyers want Higher Residual Values: There are many articles out there that discuss the very high residual values that iPhones retain over their competitors. No matter how enterprise customers buy or lease smartphones either through AAPL directly or through wireless carriers, higher residual values on iPhones will always be a differentiating factor in what smartphones are available to choose by employees. For example, some large consulting firms that still provide employees with a smartphone offer all versions of the iPhone, but only a few choices that run on the Android OS.  Residual values play a large part into that disproportionate representation - the unit cost of these phones is all within the same ballpark (AAPL iPhone 7 Plus vs. Samsung Galaxy), but the residual values over a two-year period favors the AAPL phones, creating cost efficiencies for the business.
   
• Overwhelming Demand and the Desire for a Consistent Mobile App Experience Favors AAPL: A report by Gartner indicated that by the end of 2017, the demand for mobile apps will outstrip available development capacity by 5 to 1. This lack of development capacity favors AAPL due to the lack of fragmentation afforded by the iOS ecosystem. Companies are, and will continue to have to prioritize development of mobile apps to ensure that applications have access to similar hardware to perform the desired task(s), are all running on the same version of software, and have the ability to deliver a consistent user experience (UX) for the tens-of-thousands of employees that these applications support. The same frustrations about fragmentation that have led commercial developers to develop first, and sometimes only for the iPhone will drive enterprise mobile app developer focus.
   
• Security Matters More: AAPL’s continued focus and unrelenting principles regarding security and privacy will only give it an advantage with corporate IT managers – executives who are keenly aware of both the powers of mobile, but also the related threats to their businesses. With its walled-garden approach of integrated hardware, software, and services, AAPL’s mobile device management platform provides a distinct advantage over other choices that continue to run on fragmented hardware and software, which only decrease the lack of control that corporate IT managers need in a sensitive environment.

As Enterprise Mobile Adoption Expands, AAPL Will be a Big Beneficiary

 We are now past the area where mobile in enterprise meant having a company-issued smartphone, which is still a big piece of the spend.  However, we are rapidly moving into the next phase where these mobile devices become a vital piece of the workflow for employees and engagement with customers. It is a convergence where the understanding of business needs meet proprietary app development and mass deployment to employees on cost-efficient devices in a secure environment. It is a huge area of opportunity that AAPL continues to highlight on its earnings calls, yet analysts continue to either tip-toe around it, or ignore it completely. And that is just the way AAPL wants it.

Yesterday, there were data estimates which showed that AAPL is very likely the largest watch 'brand' in the world, as measured by revenue. The analysis estimated that AAPL's trailing twelve months (TTM) of watch revenue ($5.246 billion) surpassed that of Rolex, whose annual revenue was estimated at $4.5 to $4.7 billion.

While AAPL's ascension to the top watch brand revenue generator in about 2 years is no doubt astounding, it raises some questions about the overall industry - specifically, whether the AAPL Watch has cannibalized traditional watch sales or has grown the revenue pie. In many ways, the question is much more analogous to the debate of how much impact Airbnb has had on the hospitality industry than the 'clear-as-day' impact of how much hurt Uber has put on the taxi industry.

• Same Product? Much like hotels claim that Airbnb offers a different product, many traditional watchmakers have argued that the AAPL Watch is a completely different product that relies on silicon chips and a digital readout, rather than the hand-crafted precision of mechanical movements.
  
  In that vein, traditional watch connoisseurs would not consider the AAPL watch as an alternative to their mechanical watches, nor would a Millennial have the means to consider spending $7,000 on a Rolex. However, that is likely an extreme comparison. The more relevant question is whether a Millennial would consider an AAPL Watch over a traditional quartz watch in a similar price range, such as those offered by Fossil, Swatch or Michael Kors? It is this question that lends itself to a 'zero-sum game' where both products are viewed as equals and subsequent purchases are at the benefit of one, and the detriment of the other.
   
• Creating New Demand? I don't have any research evidence to support this claim, but I would argue that a large percentage of AAPL Watch owners did not wear a wristwatch prior to buying a smartwatch. The smartphone has replaced many devices in our lives - the digital camera, the calculator, the flashlight, and for some, the wristwatch. Millennials, in-particular, have proven to be far less likely to wear a wristwatch than previous generations.
  
  So if you go back to the Airbnb analogy, many argue that Airbnb has fulfilled demand that was never being funneled to hotels. Examples include getting an Airbnb rental instead of staying with friends / relatives or renting a home on Airbnb for a bachelor party instead of renting a place on another alternative accommodations platform. So in those cases, Airbnb has actually expanded the lodging revenue pie, rather than eaten into it.

If the argument is that the AAPL Watch has added more revenue to the wristwatch industry than taken away from it, then the natural counterargument is the fact that traditional watchmakers have seen significant financial decline over the past couple years. However, it would be wrong to assume that this decline is a direct result of the emergence and momentum created by the smartwatch. An article published in the Wall Street Journal in August 2016 detailed the sales decline of the high-end watch segment, and outlined many factors underpinning that struggle, many of which were unrelated to the emergence of smartwatches.

“Luxury watches are losing much of their luster. Blame a sluggish global economy and changing consumer tastes. Worldwide, Swiss watch exports dropped 16.1% in June from the year before. But exports to Hong Kong plummeted 29%, which retailers say is largely the result of a strong Hong Kong dollar and the Chinese government’s crackdown on gifting.”

— "Hard Times for Luxury-Watch Dealers", Wall Street Journal, August 5, 2016

There is no question that the luxury watch market has been in decline, but the aforementioned article was written about a year after the launch of the first AAPL Watch. And while the article acknowledges the emergence of smartwatches as a factor in the decline, it points to a many other economic issues as the underlying cause of the high-end watch market distress.

Final Take

Just as hotels should be worried about the exponential growth of Airbnb, and must proactively develop strategies to combat its disruptive effect, traditional watchmakers need to do the same. While smartwatches have eaten into the revenues / profits of traditional watchmakers, the extent of that cannibalization is unknown because of the new demand that smartwatches have created and in some cases (especially at the high-end), the lack of comparable products.

In my opinion, the disruptive effect of the quartz watch on traditional mechanical watches that began in the 1980s is very different than what the industry faces today with smartwatches. Quartz watches were a direct assault on traditional mechanical watches predicated on pricing. Smartwatches are attacking traditional watchmakers on functionality - the AAPL watch tells the time, yes, but it is also provides a digital gateway to services through applications that enable a wearer to make payments, request a ride, track fitness activity, etc.

So the traditional watch industry will face much larger, and much different hurdles in dealing with smartwatches than it ever did with the emergence of the quartz watch. We have already seen a response from LVMH's Tag Heuer who debuted its 'Connected' smartwatch in November 2015 running the Android Wear OS. Breitling came out with its B55 Connected smartwatch in December 2015 and most recently, Swatch announced its plans to develop its own smartwatch operating system, which it would license out. The success of these 'pivot products' is largely unknown, but the sense in the industry is that they are merely band-aids to address the much larger wound that the AAPL Watch has punctured.

It is VERY likely that AAPL has become the largest watch 'brand' in the world, as measured by revenue. During its September 2016 special event when it launched the iPhone 7 / 7 Plus, as well as the AAPL Watch Series 2, AAPL CEO, Tim Cook, put up a very interesting slide. It showed AAPL as the second largest watch brand in the world, as measured by revenue, just behind Rolex for 2015 - a year in which AAPL only shipped watches for 9 months. I believe that slide needs to be adjusted:

After looking at the numbers and relying on some very intelligent analysts who have put forth reasonable quarterly estimates on AAPL Watch shipments for the past four quarters (June 2016 through March 2017), it is very easy to conclude that AAPL has overtaken Rolex in TTM revenue, and by a rather large margin - approximately $650 million. Rolex revenue has been stagnant and estimates have pegged its annual revenues at $4.5 billion to $4.7 billion, annually.

View fullsize

Further to this assertion is commentary that was recently provided by AAPL Management when discussing its Fiscal Q2 earnings:

Cook on state of the Watch product:

Opening Remarks:

"Apple Watch sales nearly doubled year over year. Apple Watch is the best-selling and most loved smartwatch in the world, and we hear wonderful stories from our customers about its impact on their fitness and health."

Analyst Q&A:

"We have seen the watch as a really key product category for us since before we launched it. We took our time to get it right, and we've made it even better with the Series 2 offering. And we're really proud of the growth of the business. The watch units more than doubled in six of our top ten markets, which is phenomenal growth, particularly in a non-holiday quarter. And so we couldn't be more satisfied with it."

“Name another company that can enter a stable industry over 100 years old & become the most lucrative player inside of two years...”

One Caveat:

It is important to note that AAPL is likely the largest watch BRAND as measured by revenue, but it is not the largest WATCHMAKER by revenue. The consolidation of watch brands under one company has created conglomerates like Swatch, which includes the Swatch brand, Omega, and Breguet (just to name a few). The luxury brand conglomerate LVMH has a number of luxury watch brands including Hublot, Bulgari, Zenith and Tag Heuer.

After the close of trading on May 2, AAPL reported its results for its 2nd fiscal quarter of 2017 (ending April 1, 2017). Soon thereafter, AAPL hosted its normal analyst call to discuss its earnings as well as provide its annual update to its capital return program - the April earnings call has been the time where AAPL has chosen to update its shareholder return program, which includes changes to its dividends and authorized share repurchases.

Here are 10 Key Takeaways from AAPL's FQ2-17 Earnings Call

• 'Services' is a beast. Services revenue again topped $7 billion at $7.041 billion, a bit short of the holiday quarter (FQ1-17), where it hit $7.244 billion. It was also the first time that Services was the second largest revenue contributor of AAPL's 5 product segments. In his opening remarks, Cook reiterated the fact that the Services business is "well on its way to being the size of a Fortune 100 company." Just for reference, on the last Fortune 500 list, number 100 was Northwestern Mutual with annual revenue of $28.111 billion. This implies AAPL's expectation that its Services business will meet or exceed an average quarterly revenue run-rate of a bit north of $7 billion, which it just did in both FQ1 & FQ2.
  
  This is significant because it shows the underlying strength and engagement of AAPL's ecosystem and installed base. As a reminder, Services revenue encompasses AAPL's share of paid downloads & in-app purchases from its App Store, digital content revenue from iTunes, AAPL Music subscriptions, iCloud storage subscriptions, ApplePay residual revenue, AppleCare, and licensing of its Made for iPhone (MFI) technology provided to 3rd party peripheral makers.  More than anything, this revenue stream is particularly critical to AAPL because much of it is annuitant in-nature AND it has a very high profit margin (e.g., the revenue from paid App Store downloads is booked on a 'net revenue' basis with little-to-no attributable cost). The strong Services revenue undoubtedly contributed to AAPL coming in at the very high-end of its gross margin guidance (38.9%).  
   
• The App Store is Stronger than Ever: In its prepared remarks, AAPL indicated that App Store revenue grew 40% year over year to an all-time quarterly high AND the number of developers offering apps for sale on the App Store was up 26% over last year. It's a bit difficult to correlate App Store revenue to AAPL's Services revenue as AAPL only retains a percentage of sales (in most cases - 30%). However, it is safe to assume that the App Store is a huge driver of the Services revenue segment, regardless of the revenue retention rate.
  
  Additionally, AAPL indicated that 'paid subscriptions for our own [AAPL's] services and the third-party content offered on our stores' now exceed 165 million. That is a crapload of subscriptions and that momentum should continue to carry the Services segment to new highs. AAPL restated its ambition to double the size of the Services revenue segment by 2020.
   
• That is a lot of iMessages: AAPL indicated that during the Super Bowl this past February, people were sending 380,000 iMessages per second - more than double the number of messages sent during the previous Super Bowl. It's all about ecosystem - AAPL iPhone users don't pay to use the iMessage service, but it certainly is a huge benefit to staying on the platform as iMessage is not licensed out.
   
• Enterprise Penetration Continues to Grow: AAPL pointed out that its enterprise partnerships are really starting to scale, in-particular its partnership with SAP. SAP recently released the SAP Cloud Platform SDK for iOS at the end of March, and over 3 million SAP developers now with access to the tools needed to develop more powerful native iOS apps for enterprise. Additionally, IBM Mobile First iOS apps have been deployed on 3,300 client engagements. One specific company it pointed out was Capital One, where AAPL has helped empower the consumer banking experience by providing Capital One Associates with 40 native iOS applications running on nearly 30,000 iPhones and iPads. I believe a couple years back, Cook indicated that AAPL's enterprise business (not counting BYOD) had a $25 billion annual run-rate - I wonder what it is now?
   
• AAPL Watch - The Most Successful 'Disappointment' Ever: AAPL mentioned that AAPL Watch sales 'nearly doubled' year-over-year in the quarter, after what was also a very strong holiday quarter for the product - one might expect a post-holiday sales fatigue. One of the analysts even pointed out that many of the original competitors competing in the smartwatch space are either dropping out or re-evaluating it. Cook re-emphasized AAPL's dedication to the product and how difficult it is to curate the right experience on the wrist, thus leading to dwindling competition.
   
• AAPL Has a Huge Wearables Presence: AAPL categorizes its wearables (AAPL Watch, AirPods, & Beats headphones) into its 'Other Products' segment. It was interesting that when asked about AAPL's presence in wearables, Cook mentioned the following for the trailing 12 months: "...when we combine Apple Watch, AirPods, and Beats headphones, our revenue from wearable products in the last four quarters was the size of a Fortune 500 company". That's only going to grow considering the AirPods ($159 a pop) have only had very limited shipments due to heavy supply constraint.
   
• AAPL Pay Adoption Rolling Along: AAPL Pay may not have jumped out of the gates, but mainstream adoption (including my own) continues to increase with additional merchants supporting the technology. AAPL indicated that AAPL Pay transaction volume was up 450% over the past 12 months and it continues to roll out the service in more countries. In Japan alone, where AAPL Pay became available this past October, transit customers are already completing nearly 20 million transactions per month. AAPL Pay is not about the revenue stream as I believe it creates very little, but it is about additional touch-points of user engagement within the ever-sticky AAPL ecosystem.
   
• Retail is not dead everywhere: While headlines in retail suggest that the industry is facing its dooms-day scenario, AAPL continues on its aggressive retail brick-and-mortar expansion plans. It now has 495 retail stores worldwide, and just opened its first ever store in Dubai in late-April. Clearly, AAPL is not seeing the physical retail trends that is forcing others to shutter stores at a record pace.
   
• One-Quarter of a TRILLION Dollars of Cash: AAPL reported total cash of $256.8 billion in cash exiting FQ2 - a sequential increase of $10.8 billion. Of that $256.8 billion, about 93% of it (or $239 billion) was held overseas. It did raise another $11 billion of debt during the quarter bringing its total debt to ~$98.5 billion. Even so, netting out the debt still leaves AAPL with a massive pile of $160 billion of cash. If congress can ever get a tax reform bill passed with a reasonable repatriation rate, AAPL will undoubtedly be a huge beneficiary. 
   
• Huge Returns to Shareholders: Shareholders have not only seen large returns in share price appreciation, but they have also been the beneficiaries of $211.2 billion of AAPL's capital return program, which includes $60.2 billion of cash dividends and $151 billion of share repurchases. AAPL indicated that the Board has authorized an increase in the dividend by 10.5% to $0.63 per common share, and authorized another $35 billion of share repurchases. The capital return program has been extended by a year, and total returns at the end should be $300 billion with the majority of that coming in the form of share repurchases. The aggressive share repurchases signal that Management still believes AAPL's shares are undervalued. If you look at its multiple even at near-record highs, it's hard to argue with that.

Source: Seeking Alpha

So How Did I Do on My Projections?

Pretty well, actually.

• I missed the iPhone number, which effectively made me miss on revenue. I was a bit over on ASP as well.
• On total revenue, I only missed by $617 million, which is a 1.2% variance - not bad.
• Additionally, I was extremely close on gross margin (38.8% projection vs. 38.9% actual), and therefore my EPS number was under by $.04 ($2.10 actual v. $2.06 projection).

View fullsize