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Apple Roundup: Earnings, Analyst View, Retail, FaceTime, More

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Apple (AAPL - Free Report) is not recommended now because of the softening in its key product category. But there’s huge opportunity for the company to grow in the future, as evident from the commentary from Morgan Stanley's Katy Huberty. It needs to maintain its image as an upholder of security and privacy at this point, which is why both the temporary ban on Facebook and Google and the FaceTime bug are important. These and other stories are covered in this roundup-


Apple’s first quarter revenue and earnings both managed to edge past the Zacks Consensus Estimate. Revenues from the three important geographies Europe, Greater China and Japan dropped below year-ago levels while the Americas segment grew just 5%.

The all-important iPhone category was down 14.9% while the much smaller wearables and services categories grew a respective 33% and 19%. At nearly 13% of revenue and 63% gross margin, the growth in services is beginning to make a difference. And what with the huge installed base (900 million iPhones, according to the CFO) and new service offerings slated to launch this year as well as the promise of better security, growth is unlikely to slow down any time soon.

But Apple is still an iPhone company until its other efforts make a bigger contribution to revenue, which explains why the Zacks Consensus Estimates have come tumbling down post earnings (10.9% for the March quarter and 7.6% for June).

MS View

Morgan Stanley's Katy Huberty is optimistic about Apple, even in the event that iPhone sales remain sluggish. She thinks that the release of new service offerings (video streaming and a new media bundle with video streaming, Apple Music and the Texture news app) launching this year, will be catalysts for the stock.

She’s particularly enthused by the media bundle, which she thinks could add about 2 percentage points annually to services revenue growth through 2025, supporting a 5% growth in revenue and 12% growth in EPS through 2023.

But she doesn’t think iPhone sales will be sluggish either: "iPhone replacement cycles now stand at mature levels suggesting a stabilization of growth is in the cards over the next year. Management's commentary that demand improved in January is similarly encouraging."

Retail Chief Angela Ahrendts Departs

The fashion aficionado that joined Apple from Burberry where she was CEO, is now leaving the company for "for new personal and professional pursuits," according to a statement from Apple. She was one of the highest paid employees at the company, drawing $26.5 million in 2018, even more than CEO Tim Cook, who made $15.7 million.

Apple is bringing in veteran Deirdre O'Brien who was previously VP of People. She is now taking an expanded role, putting her 3 decades of Apple experience to also head up the teams running its 35 online stores and 506 retail stores across five continents.

FaceTime Bug

The recently-launched 32-person video conferencing feature for iPhones, iPads and Macs called FaceTime was put to shame by Grant Thompson, a 14-year old from Tucson, Arizona who stumbled upon a bug in it.

The bug automatically turned on the audio of a person being called up even if the call wasn’t accepted. This could potentially publicize private conversation, making it an important security/privacy flaw.   

Thompson and his attorney mother said it took 9 days to get through to Apple and the iPhone maker didn’t take note of the issue until a letter was issued under the attorney’s letterhead and the issue gained mileage on social media.

Apple fixed the problem and said it was "committed to improving the process by which we receive and escalate these reports, in order to get them to the right people as fast as possible."

Meanwhile, New York Attorney General Letitia James and Gov. Andrew Cuomo are investigating "Apple's failure to warn consumers about the FaceTime bug and slow response to addressing the issue" since it jeopardized the privacy of New Yorkers.

Measures Against Facebook, Google

Apple temporarily revoked broad approvals in the form of enterprise certificates to Facebook (FB - Free Report) and Alphabet (GOOGL - Free Report) that allowed them to work on app store versions of their apps, including Maps, Hangouts and Gmail in Google’s case and Instagram and others in Facebook’s case. This also impacted some of their internal-use employee-only apps.

Apple’s action was more like an admonishment of Google and Facebook, which used these broad approvals to side-load other apps for data collection, including from very young teens. Experts say they could have collected information on private messages in social media apps, chats photos and videos from instant messaging apps, emails, web searches, web browsing activity, ongoing location information and any other information that constituted network traffic. Media reports indicate the Facebook data collection was more comprehensive than Google’s though both say it was used for “research.”

The companies stopped the practice soon after Tech Crunch reported the matter and the iPhone maker restored access soon thereafter.

Smaller developers usually have to go through a stringent approval process for inclusion in Apple’s app store, so they will be hailing Apple’s move.

But it’s worth noting that Apple probably can’t afford to take a very tough stand against Google anyway because of the billions it earns to keep Google as the default search on its devices.

German Court Dismisses Qualcomm Case

The regional court in Munich ruled that four out of eight search-related Qualcomm (QCOM - Free Report) patents had not been infringed by Apple. This is the second Apple victory versus Qualcomm, which has earlier managed to get an injunction from the same court against older iPhone models in Germany and China.

Also in January, the regional court in Mannheim ruled that one of two Qualcomm patents had not been infringed by Apple.

Qualcomm is in a bit of a legal mess at the moment because the FTC is also investigating it for abusing its dominant position in smartphone technology. Other such cases around the world have not gone well for the American chip maker.


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