Apple’s Second Miss A Warning?

Apple’s most recent quarter missed analyst estimates, and as a piece on Forbes pointed out, this is the second time this has happened under Tim Cook’s watch. But is this a warning? Are these misses a sign of a looming problem? Yes, Apple is still making substantial amounts of revenue and profit. Sales for everything except the iPod are up over the previous year. Apple continues to gain ground in terms of unit sales and marketshare in all of their key product areas. But are there parallels to RIM here? Actually, I’m not convinced, in part because of what Apple “missed”.

Estimates are Guesses

Apple didn’t miss a hard target defined by rigorously applied formulas with largely invariant results. Apple missed a target defined by a bunch of people who sit around and basically guess, with some hard data, about where they think the numbers should be. Or in some cases, where an analyst hopes the numbers will be. This isn’t like a test where there are N questions, each with a clear and obvious correct answer, and Apple got some questions wrong. These numbers are not objective. They are subjective. These estimates include a degree of bias, sometimes unintentional. This bias occurs because the estimates are based, in part, on information that may or may not be accurate (such as unofficial supplier numbers provided by anonymous sources).

These estimates are also not provable, nor can they be independently verified. These aren’t math formulas or science experiments where others can view the data and the methods and replicate the results. The use of anonymous sources for data, proprietary formulas and a degree of guesswork means that the average person has no way to know for sure how the estimates were reached. Some of them are based as much on “I think they will…” vs. “I know the following facts…”.

I am not a big fan of analyst estimates, and I never have been. Analysts tend to focus too much on “numbers” and often ignore intangibles. Intangibles are generally unpredictable, and will follow a pattern just often enough to fool people into thinking there is a reliable, consistent and invariant pattern. Some analysts also tend to fall into the usual “casual statistics” traps of things like correlation being causation. What makes these estimates worse, in my opinion, is that they have just enough math and semi-rigorous elements to give them the appearance of precision and accuracy. The “look” scientific. In reality, it is an illusion.

But Are Things Good?

Let’s ignore the “miss” part, because quite frankly, I don’t believe it is relevant. Let’s look at the hard numbers. Revenue and profits are up from this time last year. The company is tracking toward a bigger year for revenue and profit that 2011. Granted, revenue is down compared to the previous quarter, as are unit sales of the iPhone. The one unsurprising decline continues to be the iPod, which is expected given the rise of smartphones that replace them. Mac unit sales aren’t up very much, but that could be offset by the iPad: notebook sales overall are feeling the effect of modern tablets, so Apple isn’t going to be the exception.

I mentioned RIM, and posited that there could be parallels. RIM was, up until recently, still profitable. Like RIM, Apple has missed recent analyst estimates. However, unlike RIM, Apple continues to see every number increase. Apple is still growing, and they have a far broader base of income than RIM. RIM’s income is from carrier fees for their network, handset sales and app sales. Apple makes money on a much broader hardware line (iPod, Mac, AppleTV, iPad, iPhone plus accessories for all of them), software (the iWork family, Final Cut, etc), app sales, media sales and electronic books. As technology companies go, Apple is far more diverse than RIM, and as such, is somewhat less susceptible to changes in any one area. So yes, Apple has missed analysts estimates like RIM, but the similarity ends there.

Strengths and Weaknesses

Overall, Apple’s results are quite good. The iOS platform continues to gain ground in all key markets, and it continues to see impressive growth in the enterprise market. Mac sales were fairly modest, showing only a 2% increase. But this slower growth could be attributed to increased growth in the iPad, which has become an alternative to entry-level notebooks. The AppleTV has seen tremendous growth over last year, more than doubling in sales. The total volume is still modest, and Apple still considers the device something of a “hobby”, but it also can’t be ignored.

A concern for some has been slower-than-expected iPhone sales. Tim Cook attributed this, in part, to “the economy” as well as the rumours swirling around the impending iPhone 5 (or whatever they are going to call it). I don’t buy “it’s partly the economy” argument, because that would have impacted the sales of every device they have. You can’t say “its the economy” when one product is selling a bit slower than expected, but another continues to see growth in unit sales. I can buy the argument that rumours about the next iPhone are slowing current purchases. We’ve seen this before with the iPhone (and other popular products).

In Reality, So Far, So Good

Even with the slight drop in some numbers compared to Q2, I would say that everything is “so far, so good” for Tim Cook. The company continues to see year-over-year revenue, profit and sales growth in all of their key areas. The products continue to be pretty good, although we are still seeing products that were developed under Steve’s watch. The next iPhone will probably be the last of the current devices Steve had a meaningful impact on, and the only other one might be the rumoured television. I expect that, starting with the next edition of the iPad, and next year’s round of Mac products, we will see the first devices that were guided primarily by Jonathan Ive.

We won’t really know until around this time next year the true impact of Steve’s loss on Apple. There is still a little momentum left from the Steve Era, but that should have expended itself by the end of this year. Let’s see how 2013 goes before trying to write a report card on Tim Cook, Jony Ive and the rest of the Apple team without Steve.

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