Apple Earnings Review: Sometimes When You Lose, You Really Win
Apple reported better-than-expected fourth-quarter earnings after the close Monday.
Let's do a quick rundown of the numbers before we get into the fun stuff:
- Earnings were $8.26 vs. the Bloomberg consensus of $7.92.
- Revenues were $37.5 billion, above expectations of $36.8 billion as well as the top end of guidance.
- iPhone sales were a whopping 33.8 million units vs. Street estimates of about 32 million.
- iPad sales were 14.1 million units, below expectations of 14.5 million.
- Gross margins were 37%, at the high end of guidance and in line with expectations.
- For fiscal Q1, Apple expects revenues of $55-58 billion, the midpoint of which is above expectations of consensus of $55.7 billion. And note, that consensus number was rising, as shown in the charts I posted yesterday.
- Apple forecast Q1 gross margins of 36.5-37.5%, below the 37.7% that Wall Street had been expecting.
Sometimes When You Lose, You Really Win
Sales of Apple's iPhone units were up 26% year-over-year, and nearly 6% above expectations.
But 26% growth isn't fast enough to gain market share on a global basis. Research firm Strategy Analytics just reported its third-quarter industry numbers, and pegged global unit growth at 45%, with Apple's share falling to 13.4% from 15.6% the year before.
Apple's key rival Samsung (OTCMKTS:SSNLF) is still number one, with 35.2% share, up from 32.9% last year.
But look at this screen grab from Apple's website:
There's still a two- to three-week wait on iPhone 5S orders -- and the short supply impacted Apple's sales in the quarter.
If Apple had hit, say, 35 million units in the quarter, its year-over-year growth would have been 30%; 36 million would have brought it up to 34%.
However, there may be a benefit to pushing some sales out to the December quarter in the name of smoother quarter-to-quarter results, especially since Apple was still able to beat expectations.
And now let's look at what's going on with the lower-priced (but not low-end) 5C.
Unfortunately, Apple did not break down sales between the 5S and 5C, but I believe this picture tells an important story:
So Apple can't keep its most expensive phones in stock, while the less-expensive ones remain plentiful.
That says an awful lot about Apple customers' ongoing willingness to pay up for the best and most complete mobile device ecosystem -- and that's more important than market share.
Sometimes When You Win, You Really Lose
From a pure market share perspective, Samsung is indeed the winner -- no question about it.
But look below the surface.
In the first two quarters of the year, Samsung reported that its smartphone growth was driven by high-end models. And then in the third quarter, it saw some stagnation in the high end while its mass-market phones took the lead. I discussed this phenomena yesterday. That trend is also expected to continue into the fourth quarter.
This slowdown at the high end came despite the release of the Galaxy Note 3 phablet, and is possibly indicative of Samsung, as well as the rest of the Google (NASDAQ:GOOG) Android complex, putting out too many phones, which dilutes the cachet of individual high-end 'flagships.'
And that's why you see the likes of HTC (OTCMKTS:HTCXF) and the Google-owned Motorola flaming out.
Samsung's not exactly falling apart, but it is becoming increasingly reliant upon the brutal snake pit that is the low-end smartphone market -- an area in which Apple is not competing.
But What Does It Mean?
Apple's vision and mission are fully intact. It's not going to bend to the wills of the masses to build market share, something that was made clear by two recent product planning decisions:
1. The iPhone 5C was much more expensive than previously thought.
2. Apple priced the new iPad mini with Retina display at $399, a full $70 over the original iPad mini.
Remember, if Apple caves and starts competing on price, it is destined to lose because it will give away what really matters: differentiation.
Apple products are expensive, and that's part of the value proposition. They appeal to people who want the best, and high prices reinforce the idea that something is the best. And if it means 26% unit growth instead of 40% of 50%, so be it.
Marketing guru Seth Godin posted an interesting commentary on the luxury goods market:
The ring in the blue Tiffany (NYSE:TIF) box or the speaker cables that cost more than a car -- these are purchased as (perhaps perverse) testaments to the (take your pick) power/taste/wealth of the person buying or owning it.
Discount luxury goods, then, are an oxymoron. The factory outlet or the job lot seller or the yoga studio that's selling the "same thing but cheaper," isn't selling the same thing at all. They don't offer scarcity, social proof, or the self-narrative of a splurge. What they sell is, "you're smarter than other people, but you know, you're also a little bit of a fraud because this isn't actually a luxury good, because it's a better value." Circular, but true.
Apply his logic to the smartphone market and you'll get what Apple offers:
1. Scarcity. Apple has completely differentiated software and hardware.
2. Social Proof. Apple is a cool brand.
3. Splurge Factor. Most Apple products are expensive.
Many people regard Samsung as a cool brand and it does make some very, very expensive phones (some pricier than Apple's), but there's no scarcity factor because there are so many other expensive Android phones out there.
Okay, enough pontification of the psychological joys of buying Apple stuff, let's look at the elephant in the room.
The iPad Disappoints, Again
Make no bones about it, the iPad numbers aren't so hot.
Units were flat year-over-year, while revenues dropped by 13% due to a higher mix of iPad minis. Those unit sales were about 3% shy of expectations.
Now some of the weakness could be explained by expectations for an October refresh. But don't forget that the iPad was also a big disappointment in fiscal Q3, as unit sales dropped 14% year-over-year.
And incidentally, last quarter, iPhone sales beat expectations by 17% -- ahead of the expected refresh.
We also have to worry about next quarter's iPad numbers because again, the iPad mini with Retina display starts at $399, which could be a stretch for many shoppers.
I am a long-term bull on the iPad business, but sooner or later, the business has to show some growth. And Apple is facing a tough comp this quarter, as in fiscal Q1 of 2013, iPad units grew by 48% year-over-year.
For iPads to show year-over-year growth, they'll need a sequential increase of 62%. And to show year-over-year growth of 20%, Apple would need a sequential increase of 95%. CEO Tim Cook said the new minis could face supply constraints, but even with full inventory, the company has some big hurdles to clear here.
Is that really feasible with such high pricing on the new mini?
1. Apple is clearly not taking Carl Icahn seriously, as I predicted. It said it would review its share repurchase and dividend programs in the new calendar year, which means Icahn's wish for a $150 billion buyback is not coming true any time soon.
2. Apple stock sold off initially on the weak gross margin guidance, but the stock came back a bit once it was explained that the disappointment was a result of revenue deferrals related to giveaways of OS X Mavericks, iWork, and iLife software. This may be correct from an accounting perspective, but I regard these types of issues as anti-investor as they are a source confusion with no material benefit in terms of information dissemination.
Yeah, Apple's doing okay. Totally.
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