Apple and Google Q3 Earnings: Hardware Rebound Outlook

Tim Cook, during Apple’s Q3 earnings call Q&A session, described 5G as “a once-in-a-decade kind of opportunity,” and expressed the company’s enthusiasm for entering the market at the time it did.

In reality, the timing presented a combination of advantages and disadvantages. Some observers noted Apple’s comparatively late adoption of 5G technology. When the company ultimately introduced 5G capabilities across the iPhone 12 series, many competitors had already released 5G-enabled devices. However, this timing aligns with Apple’s typical approach, which doesn’t prioritize being the first to market.

Currently, 5G networks are still in the early stages of widespread deployment. A significant number of users continue to rely on LTE connections for the majority of their mobile usage. Integrating 5G into the iPhone was largely about preparing the devices for the future. Given that consumers are keeping their phones for longer periods, 5G network coverage is expected to expand considerably within the next three to four years, coinciding with typical upgrade cycles.

The iPhone’s market entry didn’t occur precisely as Apple intended, due to disruptions caused by the pandemic. Manufacturing challenges in Asia resulted in a one-month delay for the iPhone 12 launch, which impacted quarterly earnings. The company experienced a 20% year-over-year decline in revenue, leading to a more than 4% drop in stock price during after-hours trading.

Apple’s diverse product range helped mitigate some of these revenue declines. While the pandemic generally reduced consumer spending on non-essential items, shifts in work patterns boosted sales of Macs and iPads, which increased by 28% and 46% respectively, year-over-year. This highlights the benefit of a varied hardware portfolio, even though it couldn’t fully offset the iPhone’s performance.

This quarter presented challenges in China for the company, and the absence of a new 5G iPhone contributed to this. However, there are reasons to anticipate improved iPhone sales in Q4.

Recent data from Canalys indicates a broad decline in smartphone shipments in China during Q3. A significant factor in this downturn was the ongoing difficulties faced by Huawei due to U.S. government restrictions, including limitations on access to Android and other U.S. technologies. Apple’s numbers remained relatively stable compared to its competitors, and Huawei’s struggles could create a substantial opportunity in the market. With 5G now available on its devices, the next quarter could be very successful for Apple.

Notably, hardware sales had a minimal impact on earnings for both Amazon and Alphabet. Amazon briefly mentioned its new Echo devices but did not disclose specific sales figures. Alphabet’s consumer hardware revenue is reported within its broader “Other Revenue” category, which increased from $4.05 to $5.48 billion during a strong quarter for the company overall.

Alphabet’s CFO, Ruth Porat, attributed this improvement during the earnings call to the success of Google Play, rather than the Pixel line. She noted that “There are signs that user behavior is beginning to return to normalized levels.”

Google has encountered difficulties in gaining prominence in the competitive smartphone market, despite developing the world’s most widely used mobile operating system. The company has recently launched three new phones – the Pixel 4a, 4a 5G, and 5 – all targeted at the mid-range segment. The price difference between the highest and lowest-end models is only $300, and the hardware specifications are not significantly different.

However, it was evident even before these launches that Google had more ambitious plans for the Pixel line. The Pixel division recently underwent significant leadership changes, although these handsets were likely already in development at that time.

CEO Sundar Pichai, responding to a question about the hardware category, indicated the company’s increased investment in hardware, stating, “We are doing doing some deeper investments in hardware, some of which takes two to three years to come together. I’m excited about the roadmap ahead. I think we’ve already shown with the Pixel 4a and Pixel 5 clear value proposition and we’ll build on that.”

2020 was anticipated to be a year of recovery for the smartphone market following a period of stagnation, with new designs and 5G technology expected to drive growth. However, the events of the past 11 months have demonstrated that plans don’t always unfold as expected.