Cook: AR “Is One of Those Huge Things That We’ll Look Back At and Marvel”

Apple’s Jun-17 results highlight that its iPhone and Services business remain solid, despite the headwind of consumers holding off on upgrading in anticipation of a new iPhone this fall. For Apple, this is a good place to be as the company starts down the five-year road to redefine its business around Services, AR, and AI.

We’re optimistic that Apple will be a central player in the next wave and maintain its track record of being a disruptive force, all while maintaining profitability. With Apple’s latest results, we are updating our AAPL model.

Jun-17 Results.  Apple reported Jun-17 quarterly results fractionally above the Street’s – and Loup Ventures’ – expectations. Shares are trading up 6% in the aftermarket for three reasons (in order of importance): 1) Investors and we were expecting guidance below consensus estimates for the Sep-17 quarter due to the timing of the next iPhone. Based on guidance and comments from Cook, it appears the next iPhone will be launching in the month of September, which is good news for Apple. 2) Services growth of 22% was ahead of the Street at 18%, and an acceleration from 17% in Mar-17. We believe there are now more than 800m daily active iOS users, fueling Services growth, a segment emerging and insulated from the quarter-to-quarter fluctuations in iPhone shipments. 3) Adjusting for iPhone channel drain, iPhone units in Jun-17 would have grown 9% y/y vs. the 1% reported and down 1% in Mar-17. As mentioned, this is impressive give some iPhone purchases were postponed due to consumer awareness of the upcoming iPhone hardware upgrade.

AR: Cook finally can share more of his thoughts. Tim Cook has been waiting a year for this. He spent the past twelve months dropping 7 public hints about Apple and AR, prior to announcing ARKit in June. The Jun-17 earnings call was Cook’s first chance to talk about the theme of AR with investors, and he made it clear that Apple believes that AR will be the foundation of an upcoming paradigm shift in computing. Cook addressed the AR use case question in the prepared remarks: “We believe AR has broad mainstream applicability across education, entertainment, interactive gaming, enterprise, and categories we probably haven’t even thought of.” He also reiterated his WWDC comments that Apple will be an early leader in AR, “With hundreds of millions of people . . . as soon as iOS 11 ships.” This is noteworthy, given that we believe these numbers compare to around 10m-20m advanced AR-enabled (Tango) Android phones.

Cook didn’t stop there, he added: “I could not be more excited about AR and what we’re seeing with ARKit in the early going. . . I’ve seen what I would call more small business solutions. I’ve seen consumer solutions. I’ve seen enterprise solutions. I think AR is big and profound, and this is one of those huge things that we’ll look back at and marvel on the start of it. So I think that customers are going to see it in a variety of ways. Enterprise takes a little longer sometimes to get going. . . I couldn’t be more excited about it.”

“I think AR is big and profound, and this is one of those huge things that we’ll look back at and marvel on the start of it… I couldn’t be more excited about it.”  – Tim Cook

Machine Learning: Apple is developing ML capabilities in face detection, object tracking, and natural language interpretation. These skills are similar to other ML platforms, and now Apple competes in a crowded space with Google TensorFlow, Microsoft Azure Machine Learning, Amazon AWS, and IBM Watson. Apple’s unique approach is that its ML platform easily integrates with iOS and ARKit development. We’re doing more work on Apple ML and will report back on how we see Apple impacting the broader ML space.

Autonomy: Consistent with past comments, Cook called autonomous systems “a core technology” for Apple. He added they’re “making a big investment” in it. New comments from Cook included, “autonomous systems can be used in a variety of ways, and a vehicle is only one. But there are many different areas of it, and I don’t want to go any further with that.” Our takeaway is that autonomous technologies shouldn’t be limited to an Apple car. That being said, we believe the company wants to build an Apple branded car but understands that it’s a massive undertaking and a long shot. We believe that Apple is running parallel approaches to the market (the second approach being a licensing approach).

AAPL Near-Term Outlook. Over the next few months, investors’ anticipation of “buy on the next iPhone rumor, sell on launch date of the new iPhone” will likely grow. In addition, typical optimism around the potential of the next iPhone driving 5-10% y/y unit growth will slowly be replaced by anxiety about the tail of the next iPhone in Mar-18 and Jun-18. This could cause some bumps in the near-term.

AAPL Long-Term Outlook. Over the next few years, Apple will be a central player in the next wave and maintain its track record of disruption while maintaining profitability. We believe shareholders will be rewarded.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.