The Two Things That Worried Me From Last Night's Apple Earnings Call


Unlike a lot of people, there was a lot of stuff which I liked about Apple's results yesterday:

- 47 million iPhones. This is bad how?

- 23 million iPads. That's phenomenal. A 50% increase from the prior quarter. I still maintain the iPad Mini is vastly under-appreciated and will continue to do exceptionally well in the coming years

- Lower gross margins at 38% (compared to 44% a year ago). So you want Apple to grow and you're mad that Android is taking share, but you don't want margins to drop slightly? What business school did you attend?

- Apple can't innovate. We've heard this argument since 2006 - a year before iPhone was introduced. It will be correct until the day Apple introduces a new product that shows that argument to be silly.

I like Tim Cook as a CEO.  Liked him at $700 and like him now.  The stock price doesn't equate to whether someone's a good manager.  Over time, if the manager (and his/her team) continue to execute, the stock price takes care of itself.

With that said though, as an Apple bull and fan, I have to say there were two things that really concerned me in yesterday's earnings results:


My question is: why the stall?  Maybe iTunes revenue shouldn't be going up linearly with device sales but I would expect an uptick. Why is it flat? I've yet to hear a convincing answer in response.

Some have told me that, since a family can share a number of devices in a household tied to one credit card, there shouldn't be a big increase in iTunes.  But again... flat?   It says that Apple's iTunes revenue per device is dropping over time, not even staying at a constant level.

Maybe old iOS devices are not being used as people upgrade.



But it's a concern.


However, Apple's greater China revenues were 13.4% of its quarterly revenues announced yesterday.  That's down from 20% earlier in 2012.  China, as percentage of Apple's overall geographies, is half as important today compared to less than a year ago.  Why?

Apple has an attitude among senior management of "never letting them see you sweat." But I think Tim Cook's recent trip to China and Phil Schiller's interview with a Shanghai newspaper were two clear indications that Apple is sweating about China.

They are a prestige brand but they could do so much more if they could sell their phones to more people. That's why I fully expect them to come out with a lower cost iPhone specifically geared to China this year.

Android is cleaning up in the smart phone space in China. Not that helps Google (GOOG) at all. The way all the Chinese handset manufacturers are using it offers no valuable data or revenue to Google.  But Android's gain is coming at Apple's expense.

In 2009, Ron Johnson - then head of Apple Retail - touted how they were going to open 25 Apple stores in the next year. Nothing happened. Why? There's never been a coherent answer, probably because it was an internal screw-up on Apple's part.

In Schiller's recent Chinese interview, he said 25 new Chinese stores are coming.  Good. There's no reason they shouldn't have before.

And hopefully Cook met with China Mobile and a deal is in the offing there as well.  These things should help pump China back up more (along with the iPad Mini which should do really well there).  But it's got to be much more of a focus for Apple than it has been in the past two years.

[Long AAPL]




He sent me this link.

According to it, iTunes revenue - measured as "sales on the iTunes Store, the App Store, the Mac App Store, and the iBookstore, and revenue from sales of AppleCare, licensing and other services" through fiscal Q4 of last year.  It went from $3 billion in Q112 to $3.5 billion in Q412.


The number for Q1 was

iTunes/Software/Services (d) 3,687


So, it seems iTunes' revenues are increasing steadily, as I would have expected.

Given that, it's odd though the way Peter then described the iTunes revenue last night:


2. Horace also rightly notes that the big "holiday" quarter in China is our calendar Q1 and not the calendar Q4 as it is in the West.

He sent me this link.

Notice that the big quarter last year for China in terms of overall Apple revenues was fiscal Q2, where it reached 19%.  Last night, Apple reported fiscal Q1 which was 13%.  Even though last night's China mix of overall revenues was 13.4% for fiscal Q1, you can see from Horace's graph that that's clearly an improvement over the year ago period of 9%.

As I recall, last year's fiscal Q1 was the first quarter that the iPhone 4S was available in China, which could have given that period a big boost.  In this year's fiscal Q1, I believe the iPhone 5 came out in China in December so this quarter at least got a bit of a bump (so not quite apples to apples).

Horace is correct though that fiscal Q2 is the big one for Chinese New Year, so let's see how it goes for Apple.

Q2 of 2011 wasn't that big a year for Apple's Chinese revenues - the 9% of Apple revenues was the same as Q1 that year - but one could argue that Apple was still really ramping up its Chinese sales then perhaps.


Also From Forbes:
