With Apple’s Numbers, Timing Is Everything

Time to panic. Apple has produced another “miss” with their just-released Q3 2012 results. It’s their second such “miss” in less than a year. The sky is falling. Sell — Wall Street already is. Run.

Well, unless you’re a rational human being. Then maybe walk. Or stop. Look. And listen.

Why did Apple produce another miss this past quarter? It’s pretty straightforward, actually. They didn’t sell as many iPhones or as many Macs as most analysts were projecting. That’s important to note — Apple didn’t miss with regard to their own projections, they missed Wall Street’s projections. (The same thing happened last year, more on that below.)

To be fair, Apple did only beat their own revenue projections by $1 billion. Yes, $1 billion is a lot of money. But this is Apple. The company has developed a reputation for lowballing their guidance then destroying it. While beating revenue goals by a billion dollars would be a huge win for just about any other company, for Apple, it’s not what we’re used to. In other words, it’s all relative. With that in mind, I do think it’s fair to call this quarter disappointing.

And while Apple would never be caught saying that on the record, I’d bet they consider it a bit disappointing as well. You could hear it within the answers of CFO Peter Oppenheimer and CEO Tim Cook during their conference call today.

There are a few things at play here.

First and foremost, Apple has been growing at an insane rate the past few years. Revenues have routinely been up over 50 percent year-to-year — sometimes far above that number. This is already the most valuable public company on the planet. If the sky is the limit, they’re well into space. The growth had to slow down at some point. It just had to. They can’t be worth more than all the wealth on the planet.

As the second chart on this page shows, growth does appear to be slowing quite substantially. Apple is still growing — which is still remarkable — but at a much more modest pace. There’s probably still room for another surge or two in there. But there will likely be fewer and fewer of the mega-growth quarters. That is, unless Apple breaks into some completely new businesses. Not out of the realm of possibility, mind you. But to keep the growth rates up where they have been, they’d likely need that new businesses to be in the oil and gas space.

The second factor that led to Apple’s depressed numbers were related to broader economic issues. In other words, things out of Apple’s control. Over and over again today, Cook and Oppenheimer cited the economic weakness in Europe hurting their business there. The same was true for “natural resource-based economies” like Australia.

Further, they kept bringing up the fact that the strengthening position of the U.S. dollar to other currency has hit their numbers hard as well.

But the biggest factor that contributed to Apple’s more modest numbers this quarter is of their own doing. It’s all about timing.

Cook and Oppenheimer both specifically cited the decision to launch the new MacBooks towards the end of the quarter as a reason for the stagnant Mac numbers. Cook noted that before WWDC (where the new MacBooks were unveiled), Mac sales had been down below the rate of previous years. But since then, they’ve been way up, which led to an even quarter year-over-year with regard to the Mac.

Along those lines, Oppenheimer said they expect Mac sales to regain momentum next quarter, as the new MacBooks will presumably keep selling at a robust pace (the Retina MacBook Pro is still supply-constrained, but that will likely end in August, Cook noted).

But the Mac is now just the third most important product when it comes to Apple’s bottom line. The first, the iPhone, is far more important.

Apple sold 26 million iPhones last quarter, which was below the 29 to 30 million that most analysts were expecting. It was also well below the 34 million Apple sold last quarter. Quarter-to-quarter, the iPhone is responsible for about half of Apple’s overall revenue (and even more of the profit). With that in mind, 26 million iPhones sold versus 30 million is meaningful. That’s the true reason that Apple missed Wall Street expectations. (And the great iPad growth couldn’t offset the miss, because the iPad is still a lower-revenue product.)

Why were fewer iPhones sold last quarter? Apple gave a few answers, but the one they kept going back to was sort of odd: speculation about new products. In other words, rumors about a new iPhone coming soon may have led to less people buying the current variety.

It’s an interesting, if sort of silly, excuse. On one hand, I’m sure it’s partially true. But on the other, I think Apple also has to blame itself more than a bit.

Apple, as a company, are creatures of habit. They tend to release products on yearly cycles at the same time every year. If people are holding off on buying a new iPhone because they think a new one is coming, Apple is at least as much to blame for this as tech pundits are.

Apple did throw a bit of a curveball last year when they released a new iPhone in the fall instead of the summer — and you saw what happened as a result: Wall Street totally screwed up expectations for Apple’s Q4. That was the last time Apple “missed”. But it ultimately didn’t really matter because the change-up turned their Q1 into an absolute blowout.

I suspect we’ll see the same thing this year. Apple missed this past quarter, but the true shock could come if they miss next quarter as well. The guidance Apple gave indicates they’re thinking small (well, for them — it’s all relative, remember) as they prepare for a “fall transition”. Apple may well hit/beat their numbers next quarter, or they may not. Regardless, they’ll likely be fairly depressed again. But that’s only because everything is aligning for a mega Q1 holiday quarter. Again.

We know iOS 6 is coming then. A new iPhone seems to be a sure bet. New iPods seem like a good bet too. New iMacs and another Retina MacBook may be in the cards as well. And then there’s the heavily-rumored “iPad mini”. If legit, that could be the biggest blockbuster launch Apple has seen yet.

That device, mixed with a new iPhone (maybe with a new form factor and LTE capabilities), and the fact that it will be the holiday shopping season is scary to think about.

Such a quarter would obviously be great for Apple, but it will have come at the expense of the previous two quarters. Again, it doesn’t really say anything about the overall business other than timing really is everything. With their current release schedule, Apple is front-loading the fiscal year (or back-loading the calendar year, if you prefer). If that continues, you’ll keep seeing Apple have years that start off with a bang and then sharply fall until the next Q1 big bang.

In many ways, it’s not different from many traditional retailers which rely heavily on holiday sales to hit yearly goals. But Apple has previously been more even, with steady growth throughout the year. But again, that’s where the growth ceiling comes into play mixed with the move towards the Q1 front-loading. (Mainly the fact that the iPhone — again, Apple’s most important product from a bottom-line perspective — used to be released in the summer.)

Long story short, despite its miss today, Apple remains fine. Better than fine, really. They’re simply experiencing some expectation issues due primarily to timing. Maybe they consider that a problem, or maybe they don’t — maybe they’re simply releasing products when they’re done. Still, from a purely fiscal perspective, it may be wise to vary their release formula. That would keep Wall Street on its toes and keep analysts off-balance. But something tells me that Apple cares more about releasing products on their own schedule, when they’re ready, and less about what Wall Street thinks short-term.

At the end of the day, they’re still going to hit their insane numbers on a yearly basis. At least until they truly do hit their growth ceiling. It’s hard to know when that will happen, it depends on future products and consumer interests.

As for bloggers/journalists/pundits spoiling Apple’s numbers, Cook ended the call with the right answer. “I’m glad people want the next thing. I’m super happy about that,” he said, noting that he wasn’t going to waste any energy trying to stop speculation. Product speculation isn’t hurting Apple’s bottom line any more than Apple’s own methodical release cycles are. And neither are actually hurting sales at all — at worst, they’re simply delaying them. Q1 2013 is going to be massive.

[image: flickr/nilsnh]