Will Apple ever run out of money?

How the hell did Apple make so much money last quarter?

Jason Snell

The numbers from Wednesday evening made a lasting impression. But there are plenty of good explanations for Apple's success.

EnlargeThe brightly colored iMacs could go away like sliced ​​bread, but there is a small problem. The next quarter is unlikely to exceed this.

In recent years, Apple has soared that it's hard to put it in the right context. Apple sets a new record almost every quarter. And yet this second quarter, which spans the first three months of the 2021 calendar, was special.

I've been reading Apple's financial reports and making charts for them for nearly a decade. And it's the first time I've looked at the numbers on the Apple website and think it's some kind of typo. Perhaps a stressed out Apple accountant struggled a little with the number pad on his keyboard and entered a few extra numbers here and there.

But no, the numbers are correct. Apple made nearly $ 90 billion in revenue in the second quarter of 2021. Not only is that a whole lot of money, but also just a few billion less than the revenue the company generated in the Christmas quarter of calendar year 2019. This quarter was an all-time record for Apple, surpassed only by the Christmas quarter of calendar year 2020 - a new high.

Apple's business is more seasonal than an outside observer might think. People buy a ton of iPads and Macs during the Christmas season - and of course, the iPhone, which hits the market this fall, is generating even more sales. The Christmas quarters are the largest and have been for a long time. This quarter, the second quarter, the quarter from January to March ... it is on the order of such a Christmas quarter. There has never been anything like it. Apple reported the third best quarterly balance sheet in its history.

How did that happen? Many different events have happily come together here. What Apple CEO Tim Cook said in his conference call with financial analysts after the quarterly results was that it was "both the persistent way our products have helped our users navigate this moment in their own lives and the optimism of the world Consumers of better days in the future. "

iMac and iPad have their moment

It's hard to pick one Apple product category to take center stage when everyone has been up, but I think the iPad and Mac deserve the first mention. Mac sales were $ 9.1 billion, up 70 percent over the second quarter of last year and a new record. IPad sales were $ 7.8 billion, up 79 percent from the year-ago quarter.

Obviously, the pandemic plays a big role. Cook said school and office closings have increased the need for home appliances. Presumably the arrival of the M1 towards the end of the first quarter also helped. However, the result is impressive.

As Apple CFO Luca Maestri put it: "The last three quarters of the Mac were the best three quarters in the history of the product. So we are witnessing an incredible demand, which is certainly fueled by working from home and studying from home but also the incredible amount of new products and innovations we've put into the products we've launched over the past few quarters. "

Unfortunately, the iPad cannot claim such records for itself. In the early days of the iPad (2012 to 2014), the iPad generated huge sales for Apple. While the last two quarters of iPad sales were not records, they are the two largest iPad quarters in the past six years. And the last time the iPad sold more frequently in a quarter outside of the holiday season was eight years ago. IPad sales haven't quite hit these highs yet, but they're closer than could have been imagined a few years ago when iPad sales hit rock bottom.

Unfortunately for the Mac and iPad, Apple has issued a warning that the quarter that has just started will not be nearly as successful. But that's not because of the weak demand. Instead, the semiconductor scarcity that affects many industries will limit the number of iPads and Macs Apple can make in a time of high demand.

"We'll do our best, I can tell you," said Cook. As for record sales this quarter? Apple did that by burning up all of its reserves to keep production going for as long as possible. "That leads to using up all of your buffers and compensations," said Cook. "And that happens all the way down the supply chain."

The buffers are now running low. A reduced availability of Macs and iPads - perhaps even the new iMac and iPad Pro models - could be the result.

The iPhone is reliving its glory days

IPhone sales growth has been pretty solid lately, but nothing compared to what happened this quarter: $ 47.9 billion in revenue, up 66 percent from the year-ago quarter. The slower introduction of the iPhone 12 family in the fall likely helped boost later sales, but last quarter sales were still pretty good, and those this quarter are spectacular, especially in a quarter that is typically quite a quarter sleepy iPhone quarter is.

EnlargeApple's iPhone sales in the second quarter didn't even include the new purple model.

Cook spoke of "double-digit increases" in iPhone sales, both for customers who had never bought an iPhone and for people upgrading existing iPhones. In fact, according to Cook, "there were a record number of upgrades for a March quarter."

The pandemic? Probably. The appeal of the new iPhone 12 line look fueling some belated upgrades? Probably. 5G upgrades in countries with more advanced 5G technology like China and the USA? Sure, probably that too. A 66 percent year-over-year sales growth rate isn't possible unless there are a number of reasons.

Margin check

Apple not only made $ 89.6 billion in revenue this quarter. It also generated $ 23.6 billion in profits, making Apple's last two financial quarters some of the most profitable of all.

How do you increase profits? It's no secret - if you have solid margins on the products you sell, you will make money. Apple has always been good at it, and this quarter the margin on products was 36 percent. That is really good. In fact, it's really good.

But if you've ever wondered why Apple is making such a big deal out of expanding its services division, which includes services as diverse as AppleCare and Apple TV +, that's why: Apple's service margins for the quarter were 70 percent. And while the Services division didn't grow at its staggering hardware sales rates, it continued its double-digit growth course with a 27 percent year-over-year increase, bringing in Apple $ 16.9 billion in revenue. And Apple keeps a higher percentage of that revenue as profit than it does with the iPhone, iPad, or Mac. That's why Tim loves Cook Services.

The future is unpredictable

Finally, a word on Apple's avoidance of questions. Analysts, like journalists alike, are always trying to find a void in the armor that allows an interesting tidbit, not widely known, to leak out of any conversation with someone at Apple.

The quarterly conference calls are always an opportunity for analysts to seize their opportunity - and they usually get nothing. Apple does not want to comment on future products or future financial opportunities. In fact, Apple has once again refrained from providing a forecast for the next quarter because it believes it cannot accurately assess what will happen in our Covid-affected world.

I've heard many analysts attempt to trick Tim Cook into accidentally announcing a new product on the quarterly conference call. That never goes well. And I often mock them for it. But I'd like to give a gold star to Jefferies analyst Kyle McNeely for asking a good question about how the Apple retail store closures could have made it harder for Apple to sell more Apple Watches, Airpods, and accessories. Cook's answer wasn't incredibly illuminating - Apple thinks these products can do better with these products when stores are open, even though online sales were better than expected - but I appreciated the question.

Then there's Harsh Kumar of Piper Sandler, who asked Cook what he expected for Mac and iPad sales in the second half of the year. Cook's response: "You know, we don't make any detailed product-level predictions. We're not even making [a forecast] for [total sales] at this point because of Covid, so I'm dodging that question."

Classic Tim Cook. He is so polite that he will even tell you when he will avoid answering your question.