Prosperity Gospel: How Apple set investor expectations after an insane quarter of growth

It seems Apple investor relations could have taken this earnings call off. I mean, Apple is killing it. 

Versus the same quarter last year, Apple’s revenue was up 54%. Gross margins sit at 42.5%. 

And hardware growth—how are these numbers even real?

• Mac: +70%

• iPad: +79%

• iPhone: +66%

These are mature product lines. The Mac is 37 years old, for heaven’s sakes. Absolutely insane growth.

So the earnings messaging is easy street, right? Throw a ticker tape parade, pop the champagne corks, call it a day. 

Not exactly. 

When a company has outlier growth it doesn’t expect to repeat, it has to be careful that the explosive growth rate doesn't become the cognitive anchor point for the next quarter’s expectations. At the same time you want to keep investors excited about your long-term prospects—if that excitement is warranted. 

During the April 28 earnings call, Tim Cook and CFO Luca Maestri used three messaging points to help reset growth expectations for the next quarter while maintaining a rosy long-term outlook. 

COVID-19 artificially lowered the growth baseline in the prior year quarter

A year ago, the world was in the early innings of lockdown. This set a lower baseline for sales, and pent-up demand helped skew the growth numbers higher than they would have been in a more normal, year-over-year comparison. 

Cook explained:  

Keep in mind that the compare that we're running to would be the quarter, the Q2 of last year is the quarter that China would have entered a shutdown first and then the rest of the world entered the shutdown in middle part of March. And so, part of the growth is compare -- is the comparison point. 

The global chip shortage will hamper Apple’s ability to meet product demand

The world needs more semiconductor chips than it can currently produce. And the shortage will affect Apple’s ability to meet demand. 

Maestri, in his prepared remarks:

However, we believe that the sequential revenue decline from the March quarter to the June quarter will be greater than in prior years for two reasons.

[..]

Second, we believe supply constraints will have a revenue impact of 3 to $4 billion in the June quarter. 

Also Maestri, answering an analyst question:

Yes, and the constraints come from the semiconductor shortages that are affecting many, many industries, and it's a combination of the shortages, as well as the very, very high level of demand that we are seeing for both iPad and Mac.

Cook, later:

But I would point to Luca's point earlier about the shortages and those shortages primarily affect iPad and Mac.

So we expect to be supply gated, not demand-gated.

Cook, again:

The shortages that Luca spoke about in the color that he provided on the future, affect primarily the iPad and the Mac. And so, we'll have some challenges in there, and challenges in meeting the demand that we've got.

The long term outlook is bright 

When Cook and Maestri spoke optimistically about Apple's growth prospects, they generally framed it in longer-term market trends. 

See how Cook walks the tightrope here so well:

The shortages that Luca spoke about in the color that he provided on the future, affect primarily the iPad and the Mac. And so, we'll have some challenges in there, and challenges in meeting the demand that we've got. 

[...]

And then, iPad, you've got remote learning and work from home as well. And the product that we just announced is really killer, the iPad Pro with the M1 in it. And so, there's a lot of great things of the strength of the product cycle in addition to the trends that we're seeing in the marketplace. And where this pandemic will end, it seems like many companies will be operating in a hybrid kind of mode.

And so, it would seem that work-from-home and the productivity of working from home will remain very critical. If you look at wearables then, the watch had a fabulous quarter. And I still think we're in the early innings on the watch. The number of new -- people that are new to the watch is almost three out of four.

And so, this is a long way from being a mature market. And so, -- and then the services by itself has really accelerated. And so, all in all, we feel very, very good.

It’s a see-saw set of messages precariously perched on tempered expectations in the short term and favorable market trends in the longer term. 

It's tough to message effectively when you have to tell two stories that, in some ways, compete with each other. As usual with Apple and its messaging, it executed very well.