All of Apple's (AAPL) detractors let out a loud, collective cheer that was heard all the way around the world when the company reported sales results for its new iPhone 5 smartphone device that missed consensus expectations. While we did not publish an estimate for Apple's iPhone 5 sales, we were content with the over five million iPhone 5 devices sold by Apple during the opening weekend from Friday September 21st to Sunday September 23rd. We believe that investors need to approach Apple with the cool, calm, dispassionate, fair and balanced perspective that we take professional pride in with regards to our research. And on that note, we can see that although the Apple iPhone 5 only sold over five million for the opening weekend in 2012, it still exceeded the 4 million devices sold for the iPhone 4S in 2011 and the 1.7 million for the iPhone 4 in 2010. We can see that Nokia (NOK) Lumia's sales volumes are lagging the iPhone because the Lumia only sold 1 million devices in the second half of Q4 2011, 2 million devices in the first quarter and 4 million in the second quarter of CY 2012, even though the Lumia had the benefit of Big Daddy AT&T (T) spending $150M to push the Lumia 900 to its customers. That means that Nokia has averaged 3 million Lumias over a 90-day period, and that is pathetic when we compare it to the 5 million iPhones sold from September 21 to September 23.
All of the citizens of Nokia Nation, Android Nation and Blackberry Nation let out an even louder roar once they heard that the mapping app on Apple's iOS 6 operating system on the new iPhone 5 smartphone device had run into technical difficulties. Apple's mapping app was supposed to offer beautiful Apple-designed cartography, turn-by-turn navigation, the ability to "fly" over an area and more. Unfortunately, the mapping app came up short of that expectation. We agree with Zack Epstein that the mapping app is an ugly blemish on an otherwise excellent phone. While we don't believe that this will be as damaging to Apple as "The Burning Platform" was to Nokia or Jim Balsillie's childish hockey fantasies was to Research in Motion (RIMM), we believe that this needs to be addressed expeditiously. Apple had previously used Google (GOOG) Maps, but in the wake of its patent dispute decided to swap out the Google Maps app in favor of its own mapping app. In hindsight, we think that Apple should have waited another year before doing this. Google has 7,100 contractors and employees dedicated to Google Maps while Apple only has 13K FT employees excluding Apple Retail Stores. Legacy Google had over 34K employees while the Motorola acquisition added over 20K.
In our August 10th report on Apple's $50 price cut for the iPhone, we believed that we were the first investment firm in the world to say to Apple "Don't look back, Samsung's (OTC:SSNLF) gaining on you." Even though Samsung was to have infringed on Apple's patents, we believe that it is something that Apple's stakeholders should take to heart. We don't believe that Apple should underestimate the importance of a strong mapping tool. We used to use AOL's (AOL) G-D awful MapQuest system until we found that Google Maps was a much stronger and simpler program. That's actually something that we find ourselves in agreement with Nokia Corporation. Nokia found that mapping related products and services were so useful, it spent $8.1B to acquire NAVTEQ even though NAVTEQ was losing money. Nokia renamed the division as Nokia Location & Commerce. The good news for Nokia's stakeholders is that NAVTEQ's revenue has increased from €361M in the 6 months that Nokia owned it in 2008 to an estimated €1.13B in 2012. The bad news is that Nokia has not made a profit since its 2008 acquisition of NAVTEQ. The ugly news is that Nokia had to take a €1.1B goodwill impairment charge against NAVTEQ/Location & Commerce in 2011 and €20M in restructuring charges in H1 2012.
Sources: Nokia's 2008-2011 Annual Reports and Our Estimates
We are glad to see that Apple has acknowledged this problem and is taking steps to resolve it. We are especially interested in the fact that Apple is aggressively recruiting people who had experience working on Google Maps in order to build Apple's new iOS mapping system. We agree with Darrell Etherington of TechCrunch that Apple offers these individuals the opportunity to build a potentially ground-breaking new product and to change the competitive landscape, rather than rote, repetitive and tedious updates on a completed product. In our opinion, we think it is the same opportunity for the Google Maps developers as the opportunity presented to the Liar's Poker Salomon Brothers bond traders by the other brokerage firms in the 1980s. Plus we think that the Google Maps professionals that Apple is recruiting should be impressed that Apple is looking to hire them as regular employees with intellectually stimulating work and good jobs at good wages rather than being work-for-hire contractors with Google. Although Google has 1,100 full-time employees working on Google Maps, it also has 6,000 work-for-hire contractors working on Google Maps. In comparison, Apple only has 13,000 full-time employees excluding Apple Retail Stores Employees.
With regards to Apple's mobile communications carriers, ComScore released a study in which it said that AT&T had generated 68% of the online sales for the iPhone 5, followed by Verizon Wireless (VZ) at 24% and Sprint Nextel at 8%. Considering that nearly 80% of AT&T's iPhone activations this year have been existing AT&T customers, we believe that the overwhelming majority of its iPhone 5 pre-order customers are currently using the iPhone 4 or earlier devices from AT&T. AT&T stopped selling new iPhone 3GS devices and was the first carrier to adjust its prices downward by $100 for the iPhone 4 and 4S. AT&T received 48% of the iPhone pre-orders in the 9-day period from when it announced the iPhone and when it was made available for sale, followed by Verizon at 35% and Sprint at 17%. We tried to make a pre-order for the Nokia Lumia 920 and 820 Windows Phones at AT&T Wireless's website but it wasn't even available for pre-order! We went to order an iPhone 5 at AT&T Wireless and it says that our iPhone 5 will ship in 21-28 days, whether we ordered the iPhone 5 with 16GB, 32GB or 64GB. Verizon Wireless said it would ship the iPhone 5 devices by October 19th and even Sprint said it would take up to 3 weeks to ship any of the iPhone 5 devices.
In conclusion, while we are never happy to see our portfolio companies miss sales estimates by a wide margin, we believe that some proper perspective is warranted. It is worth reminding the investment community that Apple has sold at least 1 million more iPhone 5 devices during the 2012 opening weekend versus its iPhone 4S device sales during the 2011 opening weekend. Despite the fact that all the techies seem to like the Nokia Lumia 920 and 820 Windows Phones better than the iPhone 5, that has yet to translate into strong sales for the Lumia devices. Despite the fact that there were four Lumia devices to choose from, Nokia has only sold 7 million Lumia WP7 devices in its first 7.5 months that it has been available for sale. That means that Nokia is averaging less than 1 million Lumia devices sold per month. That's pathetic compared to the iPhone 5, which pulled down 5 million sales in the opening weekend even though it was facing supply constraints and had technical difficulties with the mapping app. While Nokia's Lumia linked-quarter sales growth rates seems to be impressive, we believe that so far these sales are coming at the expense of its Symbian and MeeGo device sales. We have seen enough takeaways from Apple's opening weekend to keep with our long Apple, long Sprint thesis. At the same time, we would like to say to Apple "Don't look back. Your competition is looking to pounce on any mistake you might make".
Source: FactSet Marquee