When No News is GREAT News: Analysis Apple Earnings Call

By Mark Sigal
April 23, 2009 | Comments: 2


"We are extremely pleased to report the best non-holiday quarter revenue and earnings in our history," said Peter Oppenheimer, Apple's CFO.

So much for the recession prompting consumers to stampede away from Apple's "high-end" products, as the prognosticators predicted (and the stock market priced into Apple's stock).

For a company that only surprises when it delivers less than good news, no news is GREAT news.

And Apple's earnings (you can read the full detail dump HERE) don't event reflect the $900M of quarterly non-GAAP revenue that fails to show up due to Apple's highly conservative subscription-based accounting model, which, were it to be counted, would drop an incremental $460M to the adjusted net income line.

So what's the moral of the story here, other than no news is great news?

  1. Apple's supposed Achilles heel of consumer orientation has proven to be (once again) its strong suit. In fact, interim chief Tim Cook explicitly affirmed that consumer spending is actually holding up better for Apple than the business and education segments. This is great news, inasmuch as recent history shows not only that it's consumers - not businesses and schools - who are willing to pay a premium for differentiated products, but innovation increasingly flows from the consumer segment to the enterprise, and not the other way around, as was the case before the dotcom bubble.
  2. The best way to navigate a downturn is not to head for the bunkers, but rather, to innovate. Nowhere was this truth more evident than when Cook noted that in 17 out of the last 18 quarters Apple has exceeded the market rate of growth, adding that Apple's product pipeline is fantastic. While the call offered nothing provocative (read: new) in terms of what they are baking, know that the forthcoming iPhone 3.0 OS is a big deal, something that I blogged about HERE (analysis of OS 3.0 developer preview) and HERE (3rd party hardware accessories impact).
  3. Apple's platform/ecosystem play underlying iPhone/iPod touch is materially ahead of the competition. Not only are the "show me" numbers the crap your pants, "YOWZA" variety (installed base of 37M combined iPhone/iPod touch units, 1B app downloads, 35K apps released vs. 15K just one quarter ago), but the company is light years ahead of the competition. Don't be fooled by the me-too storylines on Google Android, Palm Pre, MS Mobile and RIM Blackberry. Apple is rocketing into the stratosphere while the competition is still (mostly) in diapers in this all important differentiation area, something that I blogged about in, 'iPhones, App Stores, Ecosystems.'
  4. Having a Diversified Channel Strategy is as Important as having Great Products. We all know the potency of iTunes and App Store as virtual sales channels, and the call underlined yet another great quarter delivered through those channels. But Apple now has 50K retail storefronts pushing its gear across the planet, including Wal-Mart, third-party retailers, mobile partners' retail storefronts and their own 252 Apple Stores (the touch point from which 50% of the Mac sales are first time Mac owners). The only potentially negative data point captured from the detail here is that "same store" year-over-year sales numbers in Apple Stores dropped from $7.1M (in the year ago quarter) to $5.9M this quarter. Apple explained this as a hybrid of weak economy + third-party channel expansion but it certainly bears watching, as having your own retail stores is "game changer" when it works and a "costly albatross" when it doesn't.
  5. There is no substitute for good old fashioned "boring" execution. One thing is clear from Apple's earnings calls, their product planning, roll outs, marketing events and the sheer audacity of pursuing a platform play that marries hardware, software, service, media and developer tools. These guys sweat the details, walking the talk as well as they talk the talk, down to the level of sound commodity component sourcing controls, operating margins, cash, inventory management and conservative financial accounting. They are the exact opposite of the analog of not wanting to know "how sausage is made."

So what else stood out (by not standing out)?

  1. Steve Jobs Pledged End of June Return: To the question of whether Steve Jobs is returning as CEO at the end of June, as pledged, Cook and Oppenheimer were evasive, but when pressed, Cooked turned to Oppenheimer who stated, "We look forward to Steve returning to Apple at the end of June." What RETURNING means, and whether it is permanent remains to be seen (I am a skeptic).

  2. Apple and Netbooks: While Tim Cook took this question head-on, me smells a wordsmithing exercise. What he essentially stated was that the space is not something that Apple would deem worthy of putting the MAC BRAND ON, alluding that they somewhat play in the space vis-à-vis iPod touch. The addition by subtraction means that when they role out a device targeted at web browsing on steroids, it will be derived from iPod touch/iPhone, not the Mac. Count on it.

  3. A Verizon iPhone Future? Cook put the kibosh on this big time, saying that Apple's strategy is to have one phone for the whole of the world and that means GSM, NOT CDMA, which Verizon's network is based upon. As a Verizon customer (and a happy one at that), I am bummed but it speaks well to Apple's understanding of the power of a unified platform versus a fragmented one. This is a company all about raising the bar versus achieving ubiquity by lowering it.

  4. Better App Discovery Tools with App Store: One analyst asked whether Apple has plans to improve the discovery mechanisms within App Store along the lines of Genius Bar or something similar. Oppenheimer deflected, saying that they have great tools like categories, popular, recommended, etc. This one is enough of a "YEAH BUT" that I am dropping some detail below.

Specifically, I would argue that while things look beyond rosy for Apple with App Store, the risk is that all of those roses can start leading to thorny situations.

Case in point, the low-pricing drivers within the App Store app visibility model (i.e., you pretty much need to be free, free-mium or 99 cents to gain Top 100 status) combined with an unpredictable app approval model/timeframe, combined with a lack of tools within App Store for vendors to communicate things like pending bug fixes to consumers combined with a lack of 'review filtration' tools (akin to the more utilitarian Amazon model - read four star reviews, read most helpful reviews, people who liked this, like that) creates a vicious cycle that is prompting some developers to conclude that "Apple is creating an ecosystem of the kind of customers I don't want." (read excellent post by iPhone app developer Garrett Murray on this topic HERE).

Now, while the knee jerk is to conclude "SO WHAT," inasmuch as that, with 35K apps, there are plenty of eager developers to replace the disgruntled ones, the truth is more complicated.

One is that at some point, Apple needs to segment its approach between how it works with "99 Cents Only" types of developers versus how it works with "Nordstroms" type of developers.

Why? First, some history. When the PC industry was still in its infancy, what distanced the Mac from its DOS-based PC cousins was the emergence of Desktop Publishing as a force that uniquely leveraged the Mac's graphical user interface, mouse based controls and print/output functions.

My analog here is that relative to the Mac, metaphorically speaking, no one has created the game-changing equivalent of desktop publishing for the iPhone/iPod touch, and we/Apple need them to, but such a "swing for the fences" developer needs better ways to market, update and engage their constituency base than the (somewhat) one size fits all approach of App Store.

Two is that vis-à-vis the platform/ecosystem, Apple has created incredibly fertile soil for such a revolution to occur, but a core piece of this will be developing vertical segments (medical, industrial, point-of-sale, entertainment, enterprise), and these segments have their own channels, customer engagement practices and partner/value chains, requiring more elasticity in Apple's approach than App Store alone offers.

Putting a bow around this last point, consider this. Love or hate Microsoft, one truth is irrefutable. In addition to (em)powering countless thousands of tiny ISVs, tens to hundreds of billion dollar companies have been built on top of Microsoft's platform and tools.

Five years hence, will iPhone/IPod touch be known as the engine of growth for tiny startups, billion dollar global-reach developers, or both?

That chapter has not been written yet, so no news is...no news.

Related Posts:

  1. PC 1.0, iPhone 3.0 and the Woz: Everything Old is New Again
  2. ANALYSIS - iPhone 3.0 Developer Preview: Block the Kick Strategy
  3. iPhones, App Stores, Ecosystems: On Recipes for Successful Developer Platforms
  4. Punishing the Wizard: On Apple and Steve Jobs
  5. The Scorpion, the Frog and the iPhone SDK

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You know... I really wish I could afford the ATT phone plan. I would love to own an I phone and see what the hoopla is all about.

I remember when Apple was almost gone. I think Bill Gates invested his money to keep them afloat. Now he is even that much richer because of his competitor.

Apple is really staying with AT&T because they get more leverage with the exclusive deal and therefore they prove to be a better partner. Look for T to offer significant subsidies on 3g enabled macbooks and especially on the upcoming itablet/larger iPhone/mactablet (whatever it will be called). Both are benefiting from the relationship so as long as that continues we won't see this change.

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