Apple crushed it
Despite the prolonged lockdown and a second wave of store closures in the US, Apple delivered a strong earnings result (for the quarter ending June 2020). Revenue was up 11% this quarter, with 60% of that coming from the international market. The revenue growth was driven by an uptick in sales of non-iPhone hardware (Mac, iPad, Wearables) – likely due to the work and study-from-home transition. Sales of the iPhone (which was 44% of revenue) went up 1.7% but was weighed down by the store closures.
At a high level, you can categorize Apple’s revenue into two categories: products and services. In a previous post, we outlined the importance of the services business for Apple (App store fees, cloud storage, payments, music and other subscriptions). For Apple to continue revenue growth in an increasingly smartphone-saturated world, the company needs to extract more revenue per Apple device owner. Services are also important for Apple to continue to expand its margins. As you can see in Figure 1 below, the gross margins of products are on a declining trend, while gross margins for services continue to increase (67% this past quarter).
The majority of the services revenue comes from the fees that Apple extracts from app developers in the App store (the company takes a 30% cut from most digital purchases through the Apple app store). There might be pressure for the company to continue to drive this revenue growth, by becoming even more strict about enforcing other apps to use Apple’s own in-app payments (which allows Apple to extract its fees).
The biggest news from this earnings release however is the announcement of the 4 to 1 stock split that the company’s board has approved. This means that if you own one share of Apple at the end of the business day on August 24th, 2020 (the record date), then you will receive an additional three shares.
The announcement and the earnings outperformance have caused the stock to rally. Overall, YTD, the share price has increased 44%.
Facebook’s earnings and global payments strategy
The company earned US$18.7 billion in revenue (up 11% from the same quarter a year ago and above analysts’ expectation of US$17.34 billion). This 11% increase is above expectation but is slower than its average last four quarters’ revenue growth of 25%.
If you look beyond the topline numbers, the average revenue per user (or ARPU, which is how much Facebook makes per user on its platform) is declining globally, except in North America, which is its most profitable market. In this last quarter, Facebook generated US$36.49 per user in US & Canada, which is 3.3X higher than what it makes in Europe and 12X higher than in Asia Pacific, even though the company has 4.5X the number of users in Asia Pacific than in US and Canada.
See Figure 2 for the company’s quarterly ARPU growth. As its platforms are becoming more mature, the growth rate has been slowing down in the past 5 quarters. It is likely that COVID-19 contributed to this slowdown, so much so that the emerging market regions (Asia Pacific and the rest of the world) have contracted.
Currently, 98% of the company’s revenue is from advertising. It is trying to expand beyond its core ads business and unlock revenue potential in the emerging market (where ~48% of its user base is located). Facebook is trying to do this by expanding into ecommerce and payments.
- Ecommerce: Facebook is trying to monetize the entire conversion funnel (from inspiring potential buyers through advertising to executing sales through its digital shop platform – in partnership with Shopify).
- Payments: Facebook looks to facilitate money movement through its own payment system – an integrated payment system that can be used across its different platforms (Facebook and Instagram) and messaging services (Messenger and WhatsApp). This effort is especially important to unlock revenue in emerging markets as a lot of small businesses conduct their business over Messenger and WhatsApp in these regions.
In order to enable commerce and payments in emerging markets, Facebook will look to partner with local companies (as opposed to trying to do so alone, which has oftentimes resulted in regulatory blowback). This is why the investment in Jio is key. India has the largest WhatsApp user base in the world. Facebook wants WhatsApp to be the payment facilitator as Jio brings millions of kiranas online. It appears that the company is using the same playbook in Southeast Asia, where Facebook invested an undisclosed sum in Gojek (Indonesia’s super app).
The company has remained very cash rich. It has US$58.2 billion in cash and investments, even after paying the US$5.8 billion Jio investment.
Amazon’s profitability defies expectations
Amazon is one of the biggest winners of the global lockdown. In Q2 2020, its revenue is up 40% compared to a year ago, to US$88.9 billion, beating projections by more than 9%.
Analysts were also impressed with the profitability. Despite the heavy investments in safety and efficiency to cope with COVID-19 (the company had invested an additional US$4 billion), Amazon doubled its net profit (US$5.2 billion vs. US$2.6 billion in Q2 last year). What is even more impressive is that its international business (Europe, Japan, and India), normally not a profitable segment, delivered US$345 million in profits. See Figure 3 for the operating margins of Amazon’s different business segments. Note how much more profitable the AWS segment is.
Google’s revenue growth hit by COVID-19
Google has been able to post a positive quarterly revenue growth for the past 22 years – until this quarter. The company posted a revenue of US$29.9 billion (down 8% compared to the same period last year). This decline is in contrast to Facebook’s performance.
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