Three things you need to understand about Apple's Q3 2018

Apple just finished its Q3 2018 financial results call and, while much of it is pro forma, there's always at least a few interesting things that slip in. This quarter was no exception.

The smartphone market is mature but it's still massive

Expectations aren't about what you've done in the past or what you just did today but about what you can do in the future. If you launched your Lambo from 0-100 in 3 seconds, good for you. What's next? If you got it to 200, fine. Great. But why haven't you gotten it to 300? Law's of physics? What are those! We demand growth. Infinite growth.

Everyone on earth have an iPhone? Why don't they have two. And why haven't you opened stores on Mars yet?

Apple's been adding new hardware features like better cameras, new software features like Animjoi, and new services like Apple Music, to make iPhone more valuable, extract more value from customers, and encourage more and faster upgraders and switchers.

Still, Apple's CEO, Tim Cook doesn't seem too worried about the law of large numbers:

I think the smartphone market is very healthy. I think it's actually the best market in the world to be in for someone that is in the business that we're in. It's an enormous sized market and whether it grows, from our point of view, whether it grows 1 or 2 percent, or 5 or 6 percent, or 10 percent, or shrinks 1 or 2 percent, it's a great market because it's just huge. And so that's kind of the way that I view that.

iPhone revenues are up 20 percent for the quarter over last year. We're really pleased with that. And if you look at the, sort of, the cycle which I'll define as Q1, Q2, Q3 for ease, you'll see that we've grown like mid-single digits and on an average weekly sales point of view. And, of course, double-digit on ASP. And so I think it's really healthy. In terms of replacement cycles, as I've mentioned I think on a previous call, some replacement cycles are lengthening. I think that the major catalyst for that was probably the subsidy plans becoming a much smaller percentage of total sales around the world than they were at at one time. And so I think some are lengthening. But I think for us the the thing that we always have to do is come out with a really great, innovative product. And I think that iPhone X shows that when you deliver a great, innovative product there's enough people there that would would like that and it can be a really good business. And so that's how I look at that.

In terms of our installed base, which is something very important for us, as it is one of the key drivers of services, our active installed base on iPhone grew double-digits over last year during the quarter. And so we're thrilled with that. And you can you can see that carrying through to the services line and the growth that we have there. In terms of batteries, we have never done an analysis internally about how many people decided to get a lower priced battery than buy another phone, because it was never about that for us. It was always about doing something great for the user. And I think if you treat the users and the customers well, then you have a good business over time and that's how we look at that.

Mac and iPad numbers were down BECAUSE they were out

The moment the numbers hit and iPad and Mac were obviously down year-over-year, you could hear the vultures squawking overhead. And by squawking, I mean Tweeting. In full on Schadenfreude mode.

But here's the thing. Last year, by Q3, Apple had launched new Kaby Lake MacBook Pros, 12-inch MacBooks, and iMacs, and new A10 iPad Pros. Both lineups were locked and loaded.

This year, so far, Apple has only launched new Coffee Lake MacBook Pros with Touch Bar. And only a couple of weeks ago.

To spell that out, last year customers had a ton of new Macs and iPads to spend money on. This year, not so much.

It's what makes the direct compare so dangerous. It's easy if you're lazy, but it's so embarrassing if you don't dig any deeper.

Here's Apple's CFO, Luca Maestri:

We were very happy to see double-digit year over year growth in our active installed base of Macs, to a new all-time high, with nearly 60% of purchases during the quarter coming from customers who are new to Mac. Our year over year sales performance was impacted by the different timing of the MacBook Pro launch, which did not occur until early Q4 this year as opposed to June last year with the subsequent channel field during the June quarter.

And:

iPad units sales grew for the fifth consecutive quarter and we gained significant share of the global tablet market, based on the latest estimates from IDC. We recorded double-digit iPad unit growth in both our Greater China and rest of Asia Pacific segments, with a new June quarter record for iPad sales in mainland China. Almost half of iPad purchases in the quarter were by customers new to iPad and our active installed base of iPads reached a new all time high. Our overall performance compared to last year was impacted by the introduction of new iPad Pro models in June of last year, which resulted in both a different mix with higher ASPs and channel field a year ago.

The Watch has its own halo

Apple still doesn't break out Watch sales the way it does iPhone, iPad, and Mac, and it's continued use of Bezos-numbers consternates a lot of analysts. (Others simply track their own numbers.) What's interesting with Watch, though, is that the more it grows, the more it finds its own appeal: Be it fitness tracking for people who want to get or stay in shape, life saving for people who have accidents or previously hidden conditions, or notifications for people who can't carry their phone at work but still need to stay in touch.

And since Apple Watch only works with iPhone, it's beginning to have its own halo effect. In other words, people who want watch are also switching to iPhone just to get it.

It's not too different from people switching to get on iMessage with their friends, or the App Store to get some of the early or exclusive releases, or because privacy now is beginning to feel like security back in the Windows 98 and XP days. When you round out the ecosystem, each piece starts to have its own gravity.

Or, as Tim Cook put it:

Well, but on your point, though, it is clear from communications I've had with users that some of them were attracted to iPhone because of the Apple Watch and so the Apple Watch led them to the iPhone. The reverse of that is also true — is that somebody got the iPhone and then decided, you know, I really want something to coach me in fitness and to curate some of the communications and so forth like the Watch does so well. And so it's not always a linear path. I see these things as being somewhat fluid and different for each user.

Your move, Q4.