AAPL Earnings Report: Tim Cook’s Instructive Response on iPhone Sales

| Analysis

During Monday's Apple Q1 2014 earning report, analyst Toni Sacconaghi at Sanford Bernstein asked Tim Cook a very tough, pointed question about the Mac versus iPhone growth. Mr. Cook's response was instructive.


The general question, an apparent zinger, consisted of a very logical series of sub questions, and it went like this:

If we look at your prior four quarters, fiscal 2013, Apple grew it's iPhone units about 20 percent. But the market grew in the forties [percent] ... the iPhone is going to grow at a fraction at what the market is ultimately going to grow at ... I know your belief and philosophy historically has been that you want to make the best product -- and that's the most important thing.

But in Macs, you've actually succeeded in making the best product and being able to gain share ... in 30 out of the last 31 quarters. But in iPhone, that is not happening. And so my question is, what is different about the smartphone market that is not allowing you to hold or gain unit share, despite, apparently, having the best product. And do you propose to do anything different going forward? I think it's great to have an aspiration ot make the best products, but I think that's in the spirit of growing at least in line or faster than the market.

Now that's one heck of a question, with attitude, all kinds of assumptions, weaving a story, dropping a bombshell, then suggesting that Apple may have to do something different. Tim Cook is on the spot here because this question characterizes, it would appear, the general feeling by observers that Apple isn't growing at some desired rate. That is, as usual, investor goals are often at odds with Apple's goals.

Mr. Cook's response is instructive.

Toni, as I've said before, our objective has always been to make the best, not the most. And we feel we're doing that. If you look at what we did this year, we announced two iPhones rather than one ... those items grew year of year.

If you look at the emerging markets, that I believe are key ... in Latin America, we grew at 76 percent, year over year, in the Middle East and Africa, we grew at 65 percent. In central and Eastern Europe, we grew at 115 percent. In China we grew at 20 percent, however, as you know we just added China Mobile, the largest carrier there.... In Japan iPhone units were up 40 percent...

In North America we did not do as well. This swayed our results. The North American business contracted somewhat, year over year.... It took us some about of time to build the mix that customers were demanding. As a result we lost units for part of the quarter relative to the world.

The other thing that happened in North America was that some carriers changed their upgrade policy. This affected last quarter and will have some effect of the current quarter. This affected some customers who were used to upgrading earlier than the 24 months would allow and stretched the time out. That's a major factor....

As I look at it, I feel very good about where we are.

Tim Cook went on talk about the prospects in China and  to suggest that revised numbers will change the picture, compared to what everyone is saying now.


So there are several elements here. First, unit share growth is not like a bathtub -- where you just keep adding water and the tub magically fills higher and higher. There are global complexities. Manufacturing issues. Long term philosophical issues. This Q & A session has to be looked at by attentive journalists rather than simply clamoring for more and more unit share.

Secondly, Mr. Cook so much as admitted that the original partition of 5c and 5s manufacturing was misjudged. It took some time for that mix to get sorted out in North America. It makes one wonder if the two phone release was a good idea.

Thirdly, the PC market is contracting while the smartphone market is growing. So it makes sense for a quality Mac to gain share, while even a quality iPhone is subject to Apple's vision and standards -- plus the effects of cut-rate competition. So Mr. Sacconaghi's analogy was imperfect.

In any case, this discussion was instructive. Apple just isn't going to jigger with the iPhone quality or formula to achieve the kind of fantasy growth investors demand. Even so, there is overall growth and fabulous revenues. These are the realities that Apple works with, and it's fairly clear by now that beating on Apple for something different, demanding specific kinds of growth, isn't going to be productive. That part deserves a rest.

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Also release cycles - seldom do iOS devices debut simultaneously with their competitors, and it seems to me the other guys always report their market share numbers when Apple’s numbers have leveled off for their current iterations, and just prior to new releases that sell off the charts.

Market share is more now than ever a continuously shifting metric - attempting to make long term representative assessments based on factors that are constantly in flux makes statistical data beyond the short-term true prognostication. Year over year growth of a customer base’s only value lies in its longevity, something the market takes less and less into account. This is how bubbles burst. . . wink


Two things - the quote from Tim needs a bit of proofreading - though I’m guessing that Tony’s name is ‘Tony’, and not ‘Toni’,

Excellent article, though. (Please pardon my quibble.)

Second point:  The way the marketshare numbers are reported often includes phones that are not really smartphones.  So, if a phone runs android, but don’t connect to the Google Play store - like lots of them in China, that still gets included in the ‘smartphone’ category, even if the phone barely connects to the ‘net.

It would be interesting to see someone do a really well researched comparison, with well defined categories.  Those results might not enable them to do much link baiting, though.

John Martellaro

llg4nlp: Mr. Sacconaghi’s first name is spelled “Toni.”



It amazes me no end the lack of sophistication that a lot of analysts exhibit especially when they try to talk about market share.  Do they seriously believe that Apple can dominate all the segments, top to bottom, of the smartphone market?  Do they have no conception at all of the implications that widely different per capita incomes have on the sales prospects of high end products across various countries?  Do they ever demand that Mercedes Benz contest the Civic-Corolla market?  Or even the Accord-Camry segment?  I give up!


The smartphone market is expanding but I have a feeling it is expanding at the bottom. What would be a clearer picture of the market (as is the case with computers) would be to talk about “mobile phones” as a whole, and segment on price points and categories.


@LeF. I am afraid what you are suggesting would tax the cognitive abilities of said analysts.

Lee Dronick

Good point LeFrancoy, and good response Aardman.


These market analysts are punishing Apple for the pricing of the 5c. Many had predicted a lower price point. Now the sales of the 5c are taken as disappointing due to the price. But the pre and post analysis has a fatal flaw: Apple never said they would compete at the low end. The 5c was intended to fill the price slot once held by the “discontinued” last year model. It is basically the 5 with a poly shell. Perhaps Apple went with the multi-colored shell to improve profit margins on these sales.

Apple hits their own projections but misses analyst’s consensus projections. Punish Apple. Apple projects lower than analysts. Punish Apple. Apple used to low ball projections and blow them up with sales. Punish Apple. Dance their or get whacked each quarter. I don’t know how many times these blockheads are going need to hear say “We aren’t going to make a stupid cheap phone” before it sinks in.

The smartphone market has matured and Apple is doing well. Could it be better? Yes. Selling cheap dumbed down smartphones is not the right path and Apple knows this.


I agree that the analysts’ expectations are unreasonable, but as a customer, I also have expectations that are unmet. Perhaps I am a bit unreasonable (or impatient) too, despite Apple’s “strongest ever quarterly earnings.” To me, the 5c’s lack of capabilities made the slightly lower price unattractive, as it probably did to other Americans. The hockey puck Apple TV still hasn’t got me to open my wallet, which it would with more channels and a way to play DVDs—so I can toss my big clunky Sony.  I’m still hoping for a 6 inch iPod Touch (not smaller or bigger) so I can replace the gray-screen Kindle that feels so right in hand and fits in my (hoodie) pocket. Apple could make the device—not the screen—smaller too—but not thinner.  And Apple seems laggardly in revving existing lines, like the Mac Mini, which hasn’t seen an update since Oct 2012. The Mac Pro took forever to be available, leaving European customers with no Apple option for it.

Apple may be doing well, but I feel they could be doing even better. Will the products in the pipeline will be blockbusters, since they seem to be diverting Apple resources from progress on existing products?


Many years ago, there was a company called eMachines. They sold about the same number of computers every year as Apple did. The difference was that in a good quarter they made about one dollar of profit per computer sold, while in a bad quarter they lost about one dollar per computer. Their market caps was about $700 million. So for just $700 million dollars, Apple could have bought the company and doubled their market share. (I think either Acer or ASUS ended up buying them). So what would have been the point of that?

Apple could do the exact same thing today. They could buy Huawei, or one or two of the companies counted as “others” and greatly increase their market share. Wouldn’t make much of a dent in their bank account. What would be the point of that?

Constable Odo

Investors are only interested in one thing.  Greed of money.  They want Apple to sell as many iPhones as Samsung does and anything less is considered a failure on Apple’s part. They just want Apple to move units, good quality or bad.  I consider it a fool’s race but Apple shareholders will continue to get screwed over because Apple has some unusual standards it operates by and Wall Street doesn’t like it one bit.  I honestly don’t understand why the metric of market share means so much to investors because high sales numbers in itself doesn’t mean success or longevity of a company.

Of course, those investors don’t actually care about companies’ long-term health.  They don’t really care if the company collapses in a year as long as they’ve got their money and moved on to some other company they can bleed.  The stock market is not being used for strengthening companies with good long-term potential.  It’s just being used as a casino where even companies with weak fundamentals can reward shareholders in a very short time then simply flop back into obscurity.

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