On Apple’s earnings

There’s a lot of angst surrounding Apple’s earnings announcement because of the stock’s sell-off. While I have turned bearish on Apple, I still believe the numbers for the quarter will be good. The question for me is guidance.

Apple is releasing after markets close in North America and right now people are all over the map on Apple. There have been a lot of stories about Apple’s suppliers cutting delivery shipments because of low demand. Yet, when you look at the Verizon earnings announcement and extrapolate some of the numbers there, shipments of Apple iPhones look pretty good. The real worry regarding these backward-looking unit sales numbers has to be product mix and margin because as a premium retailer Apple wants to sell the highest ticket, highest margin products the most. What they do not want is cannibalisation of the higher margin and higher priced items by lesser products.

None of us knows where Apple is going to come out here despite all of the hype in the lead up to the earnings report. Here’s how I put my thinking on Apple’s quarter last month:

Quick post here. Apple’s sales estimates were downgraded, as I posted yesterday. The reason for the downgrade was channel and supplier checks which revealed lower sales volume than initially believed. Apparently, Apple has told suppliers to cut volume because demand is less than anticipated. As I mentioned a few weeks ago, Apple’s new strategy, which is a dodge between price, margin and volume,  is much more dependent on good volume. And Apple had a very bullish Q1 forecast for sales volume. Unfortunately, it looks like the volume is not as high as anticipated. And the potential for even Q1 to disappoint is larger as a result. While I am not surprised that Apple is experiencing margin compression as the Wal-Mart post below shows, it would be surprising if Apple missed its own Q1 forecast. That would be a first and a sign that the problems at Apple are deeper than we thought.

So, I am expecting a good quarter from Apple as we always see when they release new products. If there is any weakness it will be in term of margins and product mix. Where my concern lies is in the Apple product cycle. This MarketWatch article gets it right in talking about a boom-bust cycle for Apple of late, something I believe has wholly to do with the advent of Android as a serious competitor. In the past, Apple could release products and ride those innovative products through a full year’s product cycle without any hiccups due to the fact that they faced few competitive threats. But now, Android offers not just a major competitor in Samsung, but also a platform with a relentless product cycle of other manufacturers releasing product all year long.

So the problem for Apple is that its product cycles are too long and this leads to market share erosion. Apple has now moved to a multi-release product cycle as I previously wrote was rumoured. I don’t think this will be nearly enough. Android will take share, and this will pressure Apple’s revenue growth, margins, and earnings in 2013. My expectation then is that Apple has a decent or a good quarter, makes its numbers but releases disappointing guidance as it sometimes does. However, in contrast to in the past, this guidance will not be seen as a lowballing beat-the-number ploy on Apple’s part. Low guidance will be seen as a sign of weakness, margin compression and slowing growth.

That’s my thinking. Let’s see what we get. In the meantime here are some Apple-related links.

Apple bruised by iPhone’s boom-bust cycle – MarketWatch

“While the iPhone has minted a fortune for Apple Inc. since its introduction six years ago, the popular smartphone lately has taken on boom-bust characteristics that have made investors especially jumpy.”

Why Apple needs a new hit product now – Therese Poletti’s Tech Tales – MarketWatch

“Of course, the speculation on future unannounced products, is all guesswork at this point. So in the interim, Apple investors have to decide which camp they fit into, and hope for something awesome in the not-too-distant future.”

Verizon numbers hint Apple may have shipped more than 50M iPhones last quarter

“The latest iPhone activation data from Verizon suggests Apple may have shipped more than 50 million iPhones during the 2012 holiday season.”

Apple expected to report first fall in profits in a decade | Technology | guardian.co.uk

“Tech firm’s period of ‘hyper growth’ begins to stall with Wall Street analysts saying demand for iPhone 5 lower than predicted”

Apple Trailing China’s Coolpad Shows Need for Cheap IPhone: Tech – Bloomberg

“China Wireless expects sales to rise 40 percent this year to 28 million phones, helped by low prices and new products such as fourth-generation handsets. Apple, whose smartphone has made it the world’s most-profitable company, slipped to sixth place in China from fourth as it struggled to lure consumers earning an average of $577 a month.
“Apple, with its current stable of products, is unlikely to rank high as long as the general level of affluence in China is low,””

New Worry for Apple – WSJ.com

“Enter the cost-conscious iPhone buyer.

Verizon Wireless revealed Tuesday that it activated 6.2 million of the Apple Inc. devices, more than many analysts had expected. But it also said fewer than half of those customers paid up for the latest model, evidence of strong demand for smartphones among people who aren’t buying top-of-the-line gadgets.”

Apple’s iOS retains top spot in US with over 51% share of smartphone OS sales for Q4 2012

“Accounting for over a 51% share of all smartphone OS sales in the U.S., Apple’s iOS continues to be the market leader.”

US Mac shipments didn’t shrink in holiday quarter, they grew 5%, Gartner says

“Gartner on Monday contradicted its rival IDC and claimed that domestic Mac shipments actually grew for Apple by 5 percent year over year in the holiday quarter.”

Amazon’s Kindle Fire gains marketshare at expense of iPad over holidays, research shows

“A study of web usage over the holidays in North America saw Apple’s iPad marketshare fall 7.14 percent, while competing devices from Amazon, Samsung and Google gained a total of 5.5 percent over the same period. “

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