Apple did well with its Q1 2020 earnings given the circumstances and that nearly 15% of its revenue comes from China, on which it depends for both supply and demand for its products. Apple generates about 85% of its revenue from product sales and less than 15% from services. iPhones generate the bulk of this revenue. iPhone revenue was down 7% this quarter, but this shortfall was in part made up by sales of new products — the iPhone SE, iPad Pro, and MacBook Air — as well as services and wearables/accessories.
Impact Of COVID-19
Apple relies on a mix of direct and indirect distribution. Analysts have put estimates of direct revenue around 30%, so half or more of that could come from the stores. Apple retail stores have been closed since mid-March. At a minimum, consumers are delaying purchases. And you can’t underestimate the degree to which in-store experiences influence online sales in Apple’s case. The touch and feel and brilliance of smartphones is best experienced in person, even if the eventual purchase is online or through a partner. No one goes deeper than Apple’s own staff on convincing consumers to buy.
The launch of the SE at $399 is well timed, but it’s hard to say what impact it had on the quarter this early, as is the case with the other new product launches such as the iPad Pro and MacBook Air, as well. With its newer smartphones pricing at about $1,000, Apple will have the potential to reach new customers as well as pull in upgrades from those existing Apple customers holding on to older models. Samsung also launched lower-priced models this spring.
More broadly, since the shutdown here in the US, 47% of retailers have seen a shift from stores to online. And 41% of consumers said they are buying more online, but only a few stores are benefiting: Amazon, Walmart, Target, etc. Overall, about 20% of commerce in the United States is eCommerce. By 2024, Forrester forecasts that one-quarter of total US retail sales will be online. For consumer electronics, that’s 57% that will be purchased online. (Please see my colleague Sucharita Kodali’s webinar (and series) on the state of retail during this pandemic.) What does this mean? Stores are very important for Apple but not as important as for other retail categories.
Non-iPhone Sales Drew New Customers
In terms of non-Mac, non-iPad revenue such as wearables or smart speakers, consumer demand was strong despite viewing these products as falling into the “nice-to-have” rather than “need-to-have” category. This category delivered $10.01 billion, up 23% year over year. More impressive, 75% of wearables customers were new to this category.
Services Delivered Best-Ever Quarter
Finally, Apple generates about 14% of its revenue from services, but it doesn’t break this revenue number down by type of service. Apple grew services revenue by 16% this quarter to deliver $13.34 billion, setting an all-time revenue record in many categories including iCloud, Music, App Store (double-digit increase), AppleCare, and Apple TV. Paid subscriptions were up double-digit percentages to a total of 515 million paid subscriptions — up 125 million from year ago and plus 35 million from last quarter.
A few comments on categories:
- Payments. According to Forrester, 12% of consumers use Apple Pay and 8% Google Pay. In surveys conducted by Forrester since the shelter-in-place orders took effect, 19% reported using contactless payments for the first time and 11% digital payments for the first time.
- Streaming media. Some consumers have indeed cut the cord to save money, but Netflix is a bright spot in this category. Last week, it reported signing up 15.77 million new customers globally — well past the 7 million it expected.