Spaceship Apple Comes Down To Earth

  • Posted: 19 October 2011 02:41 AM #16

    Quick, back-of-the-envelope check…

    Looks like if the Q4 sequential revenue growth(-1%)  was same as sequential units growth (24%), they would have met the high-end of the blogger estimates…so that alone seem to account for the “miss”.

    I guess I don’t understand how lower iPhone4 sales that Apple claimed was the culprit would produce this disparity (units growth vs revenue)...I would have thought the two numbers moved in tandem?

    Can anyone explain?

         
  • Posted: 19 October 2011 02:46 AM #17

    iphoned - 19 October 2011 05:25 AM

    The other weird thing in the earnings is that units are up in double digits sequentially, while revenue is nearly flat.

    In Americas, units are up 15% while revenue is down 5%.  In other geos (like Japan) the differences are even more dramatic.  Are people suddenly buying cheaper versions of the iPhone and iPad?  That seems odd.  What could account for this?  (I know they tested reduced-price iPhone in some geos, but not in the US, and it couldn’t possibly account for the disparity across all GEOs..)

    I find this baffling…does anyone have any plausible explanations?

    Units apply to the Mac only. Revenue is for all products and services sold in the region.

         
  • Posted: 19 October 2011 02:52 AM #18

    DawnTreader - 19 October 2011 05:46 AM
    iphoned - 19 October 2011 05:25 AM

    The other weird thing in the earnings is that units are up in double digits sequentially, while revenue is nearly flat.

    In Americas, units are up 15% while revenue is down 5%.  In other geos (like Japan) the differences are even more dramatic.  Are people suddenly buying cheaper versions of the iPhone and iPad?  That seems odd.  What could account for this?  (I know they tested reduced-price iPhone in some geos, but not in the US, and it couldn’t possibly account for the disparity across all GEOs..)

    I find this baffling…does anyone have any plausible explanations?

    Units apply to the Mac only. Revenue is for all products and services sold in the region.

    I see. Thanks for clarifying. That makes sense.  It is weird how they justapose CPUs for Mac only with all product revenues on the same line…threw me off…but thanks again.

         
  • Posted: 19 October 2011 02:56 AM #19

    Roman - 19 October 2011 05:40 AM

    2) iPad disappointment - much bigger problem as I see it.

    I’m fully with Sponge on this one. Here there is NO product transition to speak of. The 11.12M unit number underwhelmed BOTH independents (avg 13.13M) and Wall St (11.39M). Supply issues seem to have been resolved. iPad’s market share is huge, and presumably getting rapid adoption in the enterprise market, much faster (so we’re told) than iPhone. So expectations were deservedly high. I have to be honest, I was extremely underwhelmed on iPad numbers: the only real “miss” for me in the quarter as far as Apple’s long-term health is concerned. I do realize that the holiday quarter can change all that. 20M would be nice, but seems so much harder to achieve now.

    Roman:

    Apple could have added another couple million units to the global channel ahead of the holiday season. They chose not to take that step and for perhaps good reason. The growth in the underlying eco-system has not kept pace with the growth in the unit sales. This is a warning.

    Back to the 50% growth. Two years of 50% sustained revenue growth puts FY 2013 revenue at close to one-quarter trillion dollars. I’ll take it. To sustain 50% aggregate revenue growth means the iPhone and iPad will still need to perform. I expect that to happen.

    But the continuing key to success is product refreshes. There’s no way to get past it or around it and the 1% growth in retail store revenue shines this out like a spotlight at midnight.

         
  • Posted: 19 October 2011 03:00 AM #20

    iphoned - 19 October 2011 05:52 AM

    I see. Thanks for clarifying. That makes sense.  It is weird how they justapose CPUs for Mac only with all product revenues on the same line…threw me off…but thanks again.

    It is confusing. That table hasn’t been updated since the Mac was Apple’s primary product.

         
  • Avatar

    Posted: 19 October 2011 03:08 AM #21

    DawnTreader - 19 October 2011 05:56 AM

    Back to the 50% growth. Two years of 50% sustained revenue growth puts FY 2013 revenue at close to one-quarter trillion dollars. I’ll take it.

    ...which will likely put it at #3 in the Fortune 500 list behind only Walmart and Exxon (by revenue). That is actually pretty astounding.

    2015 is an interesting year to watch I think. Smartphone and tablet growth will start to mature, and market shares will have been largely established. PCs will be a much smaller market (though we’ll see if Mac can continue to grab share due the iOS ecosystem). More importantly, I hope there will be at least 2 new product categories from Apple (TV and something else) introduced by then.

    ...And, speaking of spaceships, one should certainly land in Cupertino by then LOL

         
  • Posted: 19 October 2011 03:27 AM #22

    adamthompson3232 - 19 October 2011 06:01 AM

    Forgive me DT for being slow on this, but I don’t understand this “BUT the continuing key….”. Why is this any different than the past for Apple? And why is it any different than any other company? New products drive sales…unless the new products suck. I just can’t figure which part I’m missing?

    As for retail stores, sales per average store compared to total company sales growth has been inferior for many quarters. I notice it every quarter. Perhaps I need to chart it but it hasn’t been a growth rate driver for a long time. Obviously accretive growth would be welcome on this but why is it all of a sudden so bad when it was ok for the past several quarters (at least)?

    AT:

    Retail store sales have never displayed this level of weakness. Remove the back-to-school Mac sales from the numbers and the highly trafficked China stores and the numbers won’t look pretty. Making matters worse, the 1% revenue gain includes the sales from stores opened within the past year.

    The emergence of a franchise value and a strength of eco-system isn’t becoming apparent. For example, if I’m in the market for a new TV or stereo system, I’m partial to certain brands. I’m really not concerned whether it’s the latest and greatest. I’m concerned with product quality, reputation and ease of warranty service. Those should all be components of the Apple retail store value to the consumer.

    The iPhone 4 is a competent and competitive handset even following the release of the iPhone 4S. I would expect (and my models were indicating), there was real revenue value being created for the brand and sustaining revenue from product purchases based on more than product refreshes.

    I recently purchased a new car. I chose not to purchase a 2012 because the new 2011 at a more attractive price met my needs. I chose to forego the additional bells and whistles for the new model year for best combination of brand and product price. I’m not seeing this developing as quickly as my models suggested in Apple’s product sales.

         
  • Posted: 19 October 2011 03:53 AM #23

    AT:

    I did see the retail store trend a couple of quarters back, I found it a bit odd. The September quarter really drove the trend home. I agree the retail stores are a real value on a number of fronts. I do see Apple moderating margins to gain share within its product sphere and acknowledging competition.

    I’m not overly alarmed by the September quarter results. I don’t think the December quarter guidance is a step up because of the 14th shipping week in the period. The questions I thought might be answered in the September quarter results have been moved to the December quarter.


    All this is in the context of anticipated 50% revenue growth in FY 2012.

         
  • Posted: 19 October 2011 05:07 AM #24

    DT, your analogy to feeling like a goalie who guessed wrong is apt, except your $10 call is even worse than that, because the goalie HAS to make a guess.  Unlike a goaltender during a penalty kick, there was nothing compelling you this quarter to guess in the extreme one way or the other. 

    Now you are compounding your error by attributing some of the blame to Apple performance, when in fact almost all of the blame is yours (and the rest of us who missed the obvious point that iPhone sales go down before a refresh).

    Then in your response to comments about your post you get defensive by pointing to your 55% growth rate, but Robert you titled your entry “Spaceship Apple Comes Down to Earth”.

    With all due respect to your tremendous leadership of the board for years, I’d recommend you take a few days off.

    As to your specific points of concern:

    iPhone:  It had an amazing Q3, and will have a great Q1.  The dark side of the immense press and buzz that Apple now generates for the launch of each product is that there is going to be substantial drop offs before each expected release of a new generation product.  We should build this into our financial models, but its not a cause for concern.

    iPad:  While I still anticipate the iPad to be a huge seller, the ramp up to that is going to be more exponential than linear.  There are still a lot of folks who don’t think they want one.  I made the mistake last year of thinking that iPad demand would quickly explode, and since then I have been adjusting my expectations.  That said, Q1 will be amazing for the iPad, because it is the ultimate Xmas gift.  But all of us need to then not make a mistake about Q2.  iPad numbers will be modest in advance of the iPad3, both because of a refresh wait, and the non-linear demand growth for the product category.

    Apple Stores:  This is my one “risk factor” for Apple, although not a real concern…yet.  While Apple Stores are a huge plus now, there is a risk that if Apple does not keep coming out with new hits, foot traffic will decline and the cost of the stores will be a drag on earnings.  For example, I expect Apple Store numbers to be very pathetic in Q2.  But I can’t get real concerned about this yet, because the product hits keep coming, and Apple is in a great position to keep them coming. 

    Bottom line:  Apple’s spaceship someday is going to come down to earth, but I see no signs of that happening yet, and the performance this quarter has not changed my opinion of that one iota.  And at the current PE relative to growth far lower than what I expect, AAPL remains a screaming BUY, more so now than ever.

         
  • Posted: 19 October 2011 08:27 AM #25

    I still think the main reason why we missed the iPhone numbers is because it is a very different market from the other products that Apple is selling in. Perhaps there is some truth in what Palm said when it said that Apple does not understand the phone market and cannot expect to just walk right in.

    The phone market in developed economies is mostly a subsidised model with a long term contract (1-2 years). A telco customer is locked in for the duration of the contract and faces hefty penalty charges for early termination. (Remember Apple sold the the first iPhone without any subsidies and had to pretty quickly revert back to the Telco subsidised model). The subsidised model may be the reason why phone companies like Nokia, Motorola etc were continuously releasing new models virtually every month. They knew phone contracts were expiring regularly and the consumer needs a new product to be continually hooked.

    If Mr consumer is coming off a contract would he buy a new model phone or buy a one year model like the iphone4 knowing the iphone5 was just round the corner. Perhaps this is why there were no additional carrier sign-ups in the 4th quarter. In all likelihood they resisted signing on with the iphone4 and preferred to wait for the new iPhone.. This is where Robert made a mistake in his assumption. He thought there would be new carriers and hence new sales. Unfortunately the carriers know their customers and Mr Consumer, wherever he may be located in the world, is more rational when it comes to buying ‘old’ products on a long term plan.

    I believe most of us know very little about the phone market. I believe Apple is also going through the learning curve. It is a very different market and to make matters worse, in lesser developed countries most sales are made on a pre-paid plan. There is no one size fits all in the phone market. Every country is different and reacts differently.

    Let’s not recriminate ourselves on missing the quarter’s numbers but let us help each other understand this market.

    JMHO.

         
  • Avatar

    Posted: 19 October 2011 08:40 AM #26

    iphoned - 19 October 2011 05:13 AM

    Something bad did happen in Japan though.

    While units are up 48% revenue is down 26%.

    When asked, TC gave a completely mumbo-jumbo answer, after pretending not to understand the question at first.

    ****
    Keith F. Bachman - BMO Capital Markets U.S.

    Okay. And my follow-up is on Japan. In terms of the year-over-year and sequential changes, there was a bigger disparity on units versus revenues, CPU units versus total revenues in Japan. I was just wondering if you could speak to that if you could.

    Timothy D. Cook

    I’m sorry?

    My guess is the Japanese love the 11” MacBook Air, it is pretty much the only SKU which can drive ARPU down.  The other minor factor affecting all the MAC ARPU numbers is the $22 of deferral per unit.

    ***

    ...after the question was repeated TC mumbled something that I have not idea what he meant, and it wasn’t even intelligible for the transcript write to capture :-(.

    Now THAT, is concerning.

         
  • Posted: 19 October 2011 08:51 AM #27

    iphoned - 19 October 2011 05:41 AM

    Quick, back-of-the-envelope check…

    Looks like if the Q4 sequential revenue growth(-1%)  was same as sequential units growth (24%), they would have met the high-end of the blogger estimates…so that alone seem to account for the “miss”.

    I guess I don’t understand how lower iPhone4 sales that Apple claimed was the culprit would produce this disparity (units growth vs revenue)...I would have thought the two numbers moved in tandem?

    Can anyone explain?

    I may be totally off base here, but isn’t a big chunk of this revenue/units short fall due to the iCloud deferred revenue?  Look at the cash flow from operations for the quarter…  10.4B. Isn’t that a phenomenal number for a quarter with so much pent up iPhone demand?  What am I missing?

         
  • Avatar

    Posted: 19 October 2011 09:21 AM #28

    William Shakespeare - 31 December 1969 07:00 PM

    These growing feathers pluck’d from Caesar’s wing
    Will make him fly an ordinary pitch,
    Who else would soar above the view of men
    And keep us all in servile fearfulness.

    A mistake here and there will keep us working hard at making fewer mistakes in the future. I was quite conservative with my estimates, but I was afraid to speak out loudly because everybody was so confident that I had doubts about my work.

    Signature

    Tightwad.

         
  • Posted: 19 October 2011 09:26 AM #29

    Yesterday’s earnings miss due the iphone transition reminds me of the boards prior failure during the transition from the iPad 1 to iPad 2 earlier this year. Both misses were caused by product transitions even though the iPad transition was also impacted by production issues. In the first instance the iPad’s next quarter’s sales rebounded strongly. I expect a repeat of this performance for the iphone in the next quarter, especially in light of the 4 million sales in the first three days along with Apple’s massive guidance upgrade. There is a history of weak iPhone sales during product transitions. We made the classic error thinking that this time would be different.

    Signature

    Inflation robs from the past, deflation robs from the future. Pick your poison.

         
  • Avatar

    Posted: 19 October 2011 09:36 AM #30

    mcharliem - 19 October 2011 11:51 AM

    I may be totally off base here, but isn’t a big chunk of this revenue/units short fall due to the iCloud deferred revenue?  Look at the cash flow from operations for the quarter…  10.4B. Isn’t that a phenomenal number for a quarter with so much pent up iPhone demand?  What am I missing?

    Exactly!

    Please revisit these YoY numbers 3 months from now and see what the curve looks then.

    Part of the Apple Store need to be looked at as a loss leader in that they are essential for building long term relationships and as many people hooked into the Eco system as possible. If they learn in a store and buy online, I don’t care as long as they buy. Also, it becomes more difficult to build flagship stores so by nature of the beast, returns would diminish. Again, don’t lose sight of the big picture.

    Now, about that deferred revenue… Accountants?