People have looked at Apple's (NASDAQ:AAPL) earnings statement and the transcript from the call and have decided that Apple is in trouble. The stock price plunged $44 last Tuesday, and another $7 by Thursday's close, ending below $500 by some pennies.
Clearly the earnings news did not meet expectations, particularly the iPhone numbers. At 51 million sales for the December quarter, Apple had its best season, but still fell short of analysts' average expectations of roughly 54 million.
As Apple's iOS devices race against the growing Android hordes (see here), they are losing market share to the Google (NASDAQ:GOOG) sponsored free operating system, as Samsung (OTC:SSNLF) moves to the largest selling phone maker worldwide. This hurts Apple which gets over half its revenue, and even more of its profits, from the high-margin devices. Microsoft (NASDAQ:MSFT) also competes in this area, but to date their numbers barely register on the charts.
But the earnings news was taken as bad, and the stock has been shocked. To some pundits, the reason for the failure is simple - the iPhone 5c.
Several very critical articles have popped up:
- Cook admits Apple blew the call on the iPhone 5C (here)
- Apple Goofed on iPhone 5C Projections (here)
- Fate of Apple's iPhone 5c in question (here)
And even Mark Hibben, in an excellent article on Apple Earnings, has a long section on "The 5c Failure." He writes:
I think the basic problem was that the iPhone 5c was a sales no-show. From the very start, it was never sold out, indicating that demand was weak.
This is mild compared to others.
"They just missed it. Demand has not been good," said Gene Munster, an analyst at Piper Jaffray.
Or even worse Computer World writes:
"Cook signaled a couple of things on the call," said Ezra Gottheil, an analyst with Technology Business Research, in an interview after Apple wrapped up its conference call with Wall Street on Monday. "He essentially said, 'Oops, the 5C was a mistake.'" [emphasis added]
"It was the first time we'd ever run that particular play before, and demand percentage turned out to be different than we thought. We sold more 5S than we expected," Cook said, tacitly admitting that the other model, the lower-priced iPhone 5C, under-performed. [emphasis added]
For several years, Apple has operated on the model of introducing the new iPhone at the same price as the previous year's new model, and moving that model and the two year old model each down $100 in price. Thus, last year, the 5 was introduced at $199, the 4s went to $99, and the 4 to free (prices are subsidized with new contract).
This year they did something just a bit different. They introduced what essentially was the old iPhone 5, but with new, brightly colored plastic bodies (and an improved cell radio).
5c - a bust? - BALONEY!
I was brought up on the lower east side of Manhattan, and there we say what is on our minds. Here I reserve my language from what I might say in the streets.
Only three things are certain in life: death, taxes, and that after every Apple announcement (earnings or otherwise), the nattering nabobs of negativism will descend to find something disastrous to try to sell the public. Baloney!
The "iPhone 5c is a disaster" meme is based on a double premise:
- They did not sell well, and therefore
- The public has rejected them.
These are based on the very real fact that Apple administration did not correctly predict the mix of the 5s to 5c and in the middle of the quarter had to have manufacturer Foxconn reshuffle assembly lines to make more of the 5s model.
The problem here is that the logic is inherently faulty. Apple had three phones for sale in the quarter. Who among us could successfully and reliably have predicted the ratio of sales? In fact, even with the earnings release, we have disagreement as to the exact mix.
However, just because the prediction of the ratio was not accurate, does not mean that the product is a failure. For that we have to look at the real numbers. Yet this is precisely what Gottheil foolishly suggests in the phrase 'Oops, the 5C was a mistake.'
No, the prediction of the mix was not correct. This does not mean the whole project was a mistake.
The same with "…Cook said, tacitly admitting that the other model, the lower-priced iPhone 5C, under-performed." "Tacitly admitting…?" Not at all. Perhaps it was the 5s that over-performed? The logic here is definitely twisted by a severe negative attitude.
Let's look at some numbers, and see if we can come up with a more rational analysis.
To begin with, the only really hard facts we have are that Apple sold a total of 51.025 million iPhones, for $32,498 million, which gives an ASP of $637. Since the 5s sells from $649 to $849 unsubsidized, we can guess there were some other phones in the mix.
After that we have only guesswork, although we can use some data that can guide us. We have two types of sampling data, usage statistics, and survey data.
Both Fiksu and Mixpanel provide services to app and/or web developers that help them keep track of unique visitors. Anonymous data is recorded by their system, and this allows them to provide statistics about users, both for the individual client app, but also for the worldwide internet community as a whole. Both have interactive charts for iPhone Models.
Consumer Intelligence Research Partners (CIRP) bases its findings on its survey of 500 US Apple customers that purchased an iPhone, iPad, or Mac in the US in October-December 2013.
Each system has its strengths and weaknesses. CIRP gathers data from real Apple customers, and the questions are not so limited as the data from the other two. On the other hand, CIRP data is limited to the USA.
The first two have the advantage of huge numbers of data points, but are still subject to possible bias. If there is a bias, however, it is likely to affect both models more or less equally. So they probably offer a pretty fair analysis of relative usage in the wild. The questions that can be asked, however, are very limited.
For Fiksu, I recorded the stats for the five day period up to 28 Dec., then averaged them to iron out any noise in the data. Mixpanel provides weekly data so I simply recorded that. From these averages, I divided the 5s by the 5c to get the ratio of the two models (in red).
It is interesting to note, that all the ratio figures for all the providers, are more or less in line with each other, ranging from 2.19 to 2.77 5s models for each 5c sold. CIRP shows a significant decrease in the ratio after the initial launch, but that could be sampling error. It seems strange to me that there would be a higher ratio of 5c models sold in the US than world wide, but once again, there could be a bias in the one or other of the data sources.
Given the data, I think we can use a figure of 2.5/1/0.5 for sales of 5s/5c/4s. This is a rough figure, but I think it is likely close enough to reality for our purposes here. In percentages that would be 62.5/25/12.5. With this, we can estimate the actual number of units sold for each model, given the known 51 million figure.
Units Sold (m)
The point here is that the 5c sold somewhere around 13 million units! I am sorry, but I have trouble looking at this as a failure. Let's remember that mighty Samsung only sold 9 million of its top of the line Galaxy S4 in the same quarter, and this is the current model, while the 5c is a year old model.
To me this ratio may not be exactly what was expected, but the final number is hardly a "Failure."
In fact, it might be exactly what is best for Apple. If the 5s is viewed as being so far superior to the 5c for the $100 price difference that people who might have bought the lower priced model move up to the 5s, then this is a plus for Apple since the 5s has higher margins. The 5c is still there for those who want to save that $100, or who perhaps like the colored shell.
If that is the case then the 5c beautifully serves its purpose.
Since the iPhone contributes over half of Apple's revenues and profits, it is natural that investors take concern if there are any headwinds to iPhone sales. It is equally important, however, that they separate the real issues from the flimsy-issues-du-jour that are always floating around Apple's stock.
The latest earnings were hardly stellar, with both positive and negative components to the reports from Apple. However, we should really focus on the real issues - not fanciful ones. The iPhone 5c is a valuable part of Apple's product plan, and contributing significantly.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.