Apple Fourth Quarter Results
by Mark W. Hibben
Record Earnings, Analyst Ennui
No matter how well Apple does in the market place, the financial press can never really be quite happy with them. By most metrics, Apple had a remarkable quarter, achieving record revenue of US $20.34B and net profit of US $4.32B compared with revenue of US $12.21B and profit of US $2.53B for the year ago quarter. In so doing, Apple easily beat its own revenue projections at the Third Quarter conference call of US $ 18B as well as the Street consensus of US $18.9B. At the time, the Apple revenue projection seemed to be regarded by analysts as wildly optimistic, and Apple’s share price slid downhill through most of the month of August. Now that Apple has exceeded all but the most optimistic predictions, why aren’t the analysts happy? And why has Apple’s share price lost about 19 points in after hours trading?
Growing Sales, Shrinking Margins
Apple continues to sell more products. Mac unit sales are up 27 % over Q4 2009. Despite “Antenna Gate”, iPhone sales rose to 14.1 million units, up 91 % over Q4 2009. iPod unit sales continue to decline, probably cannibalized by the do-everything iPhone 4, and 4.2 million iPads were sold. Really not bad results, but gross margin was down to 36.9 % vs. 41.8 % in Q4 2009. Analysts like fat profit margins, and they really hate this trend, not surprisingly. Most of the follow up QA during the call revolved around this issue, with questions attempting to locate the source of the margin erosion as well as signs that Apple has a strategy to explain or justify the margin decline.
The responses were disappointing in both areas, amounting to little better than vague allusions to iPad and iPhone sales growth, aggressive pricing, and some unfavorable commodity prices. When pressed to explain whether Apple’s strategy was to pursue market share or “just be the best”, Jobs equivocated, stating that Apple’s goal was to make the best products in every industry that Apple competes in, while aggressively driving costs down. Clearly aggressive pricing for iPhone 4, iPad, and iPod Touch is impacting Apple’s bottom line. Companies only do this when market share is a priority. Jobs also acknowledged that Apple is in a battle for the “mindshare” of developers and consumers in the mobile device arena, and that currently Android and Apple iOS are winning that battle against the likes of RIM, Nokia, and Microsoft. Whether Apple executives admit it, they are very definitely in a battle for market share. That’s what the War for Mobile Internet Supremacy (WMIS) is all about. This time, Jobs doesn’t want to wind up with a 10-20% market share, as the Mac did in the PC wars of the 90’s. The idea that Apple is actually going for market share, rather than being a nice also-ran, is what really has the analysts in a tizzy. For them, Apple and market share is a complete non sequitur. There is every indication that Apple’s market share strategy is working well. A successful market share expansion strategy sacrifices some gross margin on behalf of revenue expansion and an increase in earnings. So far, that’s exactly what is happening in Apple’s case, but apparently there is a belief among analysts and institutional investors that Apple can’t really be dominant in the mobile device arena.
Since I began talking about the WMIS many months ago, I’ve never been willing to predict a winner. I’m still not. Apple has a good strategy, as reiterated by Jobs in today’s conference call. He characterized the choice between Android and iOS as a choice between “Fragmented” vs. “Integrated”, pointing out that there are many variants of Android, making development for all the versions a challenge, and forcing consumers to choose between a somewhat bewildering array of Android devices. He also pointed out that there are multiple Android applications stores, and touted the Apple app store as a simplifying single source for apps. On the other hand, Google has a good strategy too, following in the footsteps of Microsoft by forsaking hardware development in order to focus on operating system development. This results in many more Android hardware choices for consumers in the same way that Windows based PCs offer more choice in the desktop space. The very rapid expansion of Android OS devices appears to confirm the appeal of this approach and it seems that Jobs has a blind spot when it comes to understanding this.
To Jobs, the proliferation of multiple Android variants is unacceptably chaotic and therefore undesirable. He doesn’t understand that consumers might want freedom of choice, even at the cost of a little chaos. There is a considerable danger that in the pursuit of building the “best” mobile device, Apple only can achieve “best” according to Jobs.
Analysts may also have been put off by the appearance at the conference call of Jobs and his tendency to engage in rambling monologues. After dissing Google in the “Fragmented vs. Integrated” speech, Jobs moved on to the subject of coming tablet competitors for the iPad. He seemed to think that all the planned tablets coming out next year will be hobbled by 7 inch diagonal screens, and took great pains to point out that such screens have only about half the surface area of the iPad screen. Certainly, the Samsung Galaxy Tab has a small screen, and so do a few other recently announced products, but I’m not convinced that all the competing tablets that come out next year will have such small screens. The screen size issue seemed to be a red herring. Jobs declared that 7 inch tablets were “tweeners” that were too small to make a satisfactory tablet computer but too large to be a pocket device and predicted that they would be “DOA”.
If these attacks on Apple’s competitors were meant to instill confidence in Apple analysts or investors, I doubt that they succeeded. My subjective impression is that Apple management are running scared and trying hard to compensate. I find this ironic since Apple is in the strongest position of any of the combatants in the WMIS.
The Way Forward
Apple executives and Jobs also took the opportunity to drop hints about the future. More new products were promised, and when asked about Apple’s sizable cash position, there was a hint of a major acquisition in the offing. Since we’re only a couple of days away from another invitation-only product unveiling, I’ll reiterate the predictions I made back in July for the end of 2010 (although not all of these products may appear this Wednesday:
1. White iPhone 4 and permanent antenna fix. It’s definitely time for the White iP4 to make an appearance. I suspect this will feature a re-designed antenna that will be featured on the black iP4 as well, thus eliminating the need for bumpers, more or less coinciding with the end of the free bumper program.
2. A new MacBook Air. Other analysts have picked this up, pointing out that the Air is long overdue for a refresh. I look for an all new design with an Intel Core i3 processor and flash memory drive.
3. iPad could certainly do with a higher res display and faster processor, but I don’t look for these until early next year, when a speed bumped version of the A4 processor becomes available. I’ve also mentioned the possibility that the successor to the A4 could have a Cortex-A9 processor core licensed from Samsung, but I don’t see iPads with this processor hitting store shelves before June or July 2011.
This special event is billed as a preview of the next major revision of Mac OS, so obviously that will be a big part of the show on Wednesday.