This week's Apple earnings offered a report of solid performance and guarded optimism about future iPhone sales, which may be impacted later this year by issues around the current coronavirus epidemic in China.
But what seems to have surprised many on Wall Street are the strong results from Apple's wearables division, a result that only strengthens the logic behind Apple possibly getting into the augmented reality smartglasses game in the near future.
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"Turning to wearables…we had another incredible quarter, setting an all-time record in virtually every market we track around the world, and this product category is now the size of a Fortune 150 company," said Apple CEO Tim Cook during the earnings call.
"Demand for AirPods continues to be phenomenal, particularly for our recently launched AirPods Pro… Apple Watch had a great start to fiscal 2020, setting an all-time revenue record during the quarter. It continues to have a profound impact on our customers' lives and it continues to further its reach as over 75% of the customers purchasing Apple Watch during the quarter were new to Apple Watch."
Cook's comment about Apple's new AirPods Pro product is particularly enlightening given that some wondered how consumers might react to an even higher-priced version ($249) of the already somewhat pricey (compared to the free, wired earphones included with iPhones) AirPods model ($159).
"Wearables, home and accessories established a new all-time record with revenue of $10 billion, up 37% year-over-year with very strong double-digit performance across all five geographic segments and growth across Wearables, accessories and home," said Luca Maestri, Apple's chief financial officer. "We set all-time records for wearables in virtually every market we track, even as we experience some product shortages due to very strong customer demand for both Apple Watch and AirPods during the quarter."
And while Apple didn't address the ongoing rumors of an Apple wearable in the smartglasses category, Cook was as enthusiastic as ever about augmented reality as one of the company's product pillars.
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"I think, when you look at AR today, you would see that there are consumer applications, there are enterprise applications. This is the reason I'm so excited about it," said Cook. "You rarely have a new technology where business and consumer are both key… I think it's going to pervade your lives is because it's going to go across business and your home life. I think these things will happen in parallel. There are already companies that are deep into enterprise business that are working on applications for the enterprise. And of course you can see -- you go on to the App Store, see thousands of apps that are ARKit-enabled at this time and even more coming."
As with many Apple products, there's usually a healthy amount of skepticism during the early stages. When the Apple Watch first dropped, many experts framed it as a frivolous miss by the tech giant, and some even predicted that Apple might eventually shelve the product in order to stick to its core competencies. Similarly, when the first version of AirPods debuted, the bad reviews and jokes about it looking like Q-tips hanging out of your ears — almost trying to embarrass consumers into avoiding them — were rampant. Of course, now AirPods are everywhere and lead the wireless earphone space.
With such high-margin wearables success in its rearview mirror, it seems inevitable that Apple will take the next step and introduce an even higher-margin wearable in the form of smartglasses that perhaps first work as a notifications device and later as a vector for ARKit-created apps.
As for the potential supply chain issues facing Apple in the coming months, Cook was fairly direct about the potential turbulence ahead.
"In terms of the coronavirus... first and foremost, our thoughts are with all of those that are affected across the region. And as I've mentioned, we're donating to groups that are working to contain the outbreak," said Cook.
"We are also working very closely with our team and our partners in the affected areas, and we have limited travel to business-critical situations as of last week. The situation is emerging and we're still gathering lots of data points and monitoring it very closely. As Luca had mentioned, we have a wider than usual revenue range for the second quarter due to the greater uncertainty."
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