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Apple Earnings Review: Sometimes When You Lose, You Really Win


Apple reported better-than-expected fourth-quarter earnings after the close Monday.


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?

Random Notes

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.

Twitter: @Minyanville

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