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by Jason Snell & Dan Moren

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By Jason Snell

Apple’s financial results: iPad, Apple silicon, and secret sauce

It was another record holiday quarter for Apple, followed by the traditional executive chat with financial analysts. Amid the avalanche of numbers and words, there are always things that jump out and make me take notice. Here are a few of them.

The iPad hits the heights

It’s not like the iPad hit an all-time revenue high. There have been seven better quarters in the history of the iPad. It’s just that they were all between 2012 and 2015. This most recent iPad quarter was the best since the holiday quarter six years ago. As viewed through the lens of the four-quarter rolling average, the iPad is showing signs of a real uptick out of its late-2010s trough.

iPad sales chart

The quarter’s 41% year-over-year iPad growth also marks three consecutive quarters of greater than 30% growth, with growth in 11 of the last 15 quarters. I realize that some portion of the iPad’s growth in the past year is because of the pandemic, which has driven a lot of device sales due to the need to do remote work and school.

But I want to give credit to the iPad itself, here. Apple has spent the last few years giving the iPad product line a lot more clarity; the high-end iPad Pro line has more in common with powerful laptop computers all the time, while the low-end iPad has benefited from hand-me-down features like support for Apple Pencil while continuing to drop in price.

The iPad heyday of 2012-2014 was a sales spike driven by enthusiasm for a new product category, but wasn’t the transformative moment Apple might have hoped it was. After a few years muddling along, the iPad seems to have found its footing.

Your move, PC market

Because the release of financial data is of greatest interest to the investment sector, and Wall Street prizes growth over anything else, Apple’s record results releases are often jarringly met with concern rather than enthusiasm. Sure, you generated more than $100 billion in revenue, but are you growing?

Not only did this quarter show growth in pretty much every Apple product category and region, but Apple also made specific emphasis on its growth opportunities in its conference call with analysts. And the biggest growth opportunity might be a surprise one, because it’s Apple’s 37-year-old personal computing platform.

Here’s what Tim Cook said:

If you look at Mac, the M1 I think gives us a new growth trajectory that we haven’t had in the past. Certainly if Q1 is a good proxy, there’s lots of excitement about M1-based Macs. As you know, we’re partly through the transition, we’ve lot more to do there, we’re early days of a two year transition, but we’re excited about what we see so far…

And of course our share on the Mac is quite low for the total personal computer market. And so there’s lots of headroom there.

Here’s the message: The move to Apple silicon is going to spur Mac growth like never before. Apple’s M1 Macs were incredibly well received, but it’s still just the beginning of the transition. Cook is telling investors, and everyone else, that Apple expects the move to Apple silicon to put its competition in the PC market to shame and fuel a major boost to the Mac.

It’s a pretty bold statement for someone as restrained as Tim Cook tends to be.

A piece of the magic

Katy Huberty of Morgan Stanley is a longtime attendee of the quarterly earnings conference calls. She isn’t going to make the rookie mistake that almost every analyst makes: attempting to get an Apple executive to announce future products. Instead, Huberty asked Cook for some insight into how Apple decides to enter a new market with a product. (“Thanks for not asking me any specifics,” Cook said.)

Here’s Cook’s response to Huberty:

We ask ourselves if this is a product that we would want to use ourselves, or a service that we would want to use ourselves. And that’s a pretty high bar.

And we ask ourselves if it’s a big enough market to be in, unless it’s an adjacency product which we’re looking at it very much from a customer experience point of view.

And so there’s no set way that we’re looking at it. No formula kind of thing. But we’re taking into account all of those things. And the kind of things that we love to work on are those where there’s a requirement for hardware, software, and services to come together, because we believe that the magic really occurs at that intersection.

This isn’t exactly revelatory, but it’s informative: Apple’s own internal tastemakers need to determine if it’s something they’d actually want to use, and they gauge the size of the market to see if it’s worth entering. (Unless it’s an accessory to another product, anyway.) But it’s more art than science.

I was struck by the last portion of that statement, though. For essentially all of Apple’s nearly 50 years, the company has steadfastly held to the philosophy that the best tech products are made from a fusion of hardware and software. The integration of hardware with software is Apple’s secret sauce, or “the magic,” as Cook puts it.

But look at the change to that recipe! It’s now the integration of hardware, software, and services. Which, if you’ve been following Apple for the last few years, makes perfect sense. Services is now in the mix, but the larger point remains: Apple is a company that believes it can make the best products by painstakingly integrating features that other companies just buy off the rack.

There was a time when Apple seemed pretty solid at hardware and software, but utterly at sea when it came to services. In the past decade it’s gotten a lot better at it, and it’s clear from Cook’s comments that Apple’s culture has adapted to the idea that services can’t be an afterthought.

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