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The 3 Things Wall Street's Missing About Apple

The 3 Things Wall Street's Missing About Apple

If Tim Cook is a passionate visionary, he'll resist the expectations of Wall Street. The only way Apple can remain strong will be to build great products that enrich our lives. One mobile OS to rule the world? That's a trip to the pit of doom. The point is to make customers happy. To gain new ones. And later, they'll buy more Apple products.

By Chris Maxcer MacNewsWorld ECT News Network
01/24/13 5:00 AM PT

I wonder if some of the Wall Street whiners need to listen to Apple's Q1 FY13 earnings call with investors again. Of course, I have to remind myself that most of these investors are not actually investing in Apple, that they are not investing in the company. Instead, they're investing in the chance that they'll be able to turn a profit based on the stock price and their ability to buy and sell at all the right times. I bet most of them would love the chance to run Apple just like Apple runs Apple. Exactly.

Meanwhile, despite the idea that Apple's stock fluctuations matter a whit to a company with US$137 billion in cash in the bank, there are only three things that truly speak to the health of Apple's business, and all of them came straight out of the mouth of Apple CEO Tim Cook during the earnings call:

  1. Marketshare preservation is not a priority -- making the best products is always the priority.
  2. Apple doesn't fear cannibalization.
  3. Apple's product pipeline is "chock full" of "incredible stuff."

These are the things that give me hope, that renew my faith in Apple: That despite all the news and opinions that claim Android phablets are taking over the world, Apple isn't trying to be reactive. Apple isn't trying to chase a trend or a style. To hear Cook and Peter Oppenheimer, Apple's CFO, patiently reiterate Apple's core values and method of approaching their business . . . was gratifying. I didn't detect a hint of "the sky is falling and we're making changes to shield the Cupertino headquarters" talk.

In fact, the best moment came when Oppenheimer said -- and I'll paraphrase because the financial talk is so boring -- "Look, dude, I'll repeat myself again for you slowly, even though you asked me twice and this must be the third time I've said this in the span of minutes: Instead of giving you Wall Street whiners an earnings forecast number that we have a reasonable belief that we can hit, we're going to start giving you a range that we'll likely fall into."

So Apple used to give out a number . . . then in the next quarter Apple would wildly exceed it. The game for the investor crowd was figuring out by how much Apple would outperform its earlier conservative guidance. As near as I can tell, by making the change to a guidance in the form of a range, Apple is undercutting the value of speculation and the ability for investors to muck around with Apple's stock price by manipulating rumor reports into buy-sell decisions. I like it. It's freaking brilliant, actually.

The Basics

Apple posted record revenue of $54.5 billion and record quarterly net profit of $13.1 billion. What's that mean? Apple did better in the most recent 13-week quarter than it did in last year's 14-week quarter. More importantly, this is fantastic profit for the quarter. Compare it to the profit of most other companies. Apple is still primarily a hardware company, despite iCloud and apps and iTunes, and Apple has enviable operating margins.

Granted, Apple's profit margin dropped from 44.7 percent to 38.6 percent, but I don't find that surprising given the new products that Apple created -- Retina Displays, a new iPhone 5, new iPods, super slim new iMacs. The early runs of any new product are more expensive at the beginning of their product cycle. This profitability is still a long way from freak-out time.

While Macs declined by about a million units, Apple couldn't produce enough of the new super slim iMacs during the quarter to meet customer demand. Sounds positive to me. Cook indicated that if Apple had been able to have more units available, customers would have snapped them up. Makes sense to me.

While overall iPad sales were up by more than 7 million to reach 22.9 million, the iPad mini clearly was selling faster than Apple could stock it. Again, a relatively high-priced $329 iPad mini was so popular that Apple couldn't produce enough to meet demand . . . even when Amazon was offering the dirt-cheap Kindle Fire tablet with a similar form factor. That sounds like positive news to me, too.

Yet I considered all this to be business as usual. Expected. Solid gains, plus a drop in Mac sales. In the post-PC era when all the new buying action is on tablets (iPad), Apple is still doing at least as well, if not much better, than other PC vendors. Plenty of research has supported and forecasted the declining purchase of new PCs lately. So let's get beyond the fun and expected stuff and get to the heart of what really matters.

Back to the Core

If you want to understand how Apple is going to handle an entire year, you've got to understand the core of the company. The thing is, Apple is unique. It's a very large company that also runs like a single business unit. Profit isn't broken out between operating units so that each department fights to allocate the most revenue in order to gain more budget and investment for the next year. It's all Apple. This is why when Cook talks, it's important to listen.

Despite the turmoil in the world, Apple isn't deviating from its core values. Apple is remaining true to its roots, despite the death of Steve Jobs. This is important. Apple could be wavering under a "new" CEO -- right -- but I don't get the sense that Apple is wavering at all.

The China Conundrum

It seems the basic logic of China these days is that Apple must create a cheap, low-end iPhone with a big screen in order to be successful there -- and Apple must be successful in China. In fact, if Apple is not successful in China, Apple might as well fire everybody and sell off its real estate.

First of all, Apple doesn't have to sell in China at all to be profitable. The fact that China is Apple's second biggest market -- that's important, and Apple knows it. However, Apple also knows that having the most of anything is not necessarily the best way. It's not even the most profitable way.

Apple doesn't have to have the most smartphones in action to be profitable and meet the needs of its customers. In fact, in response to a question asking about Apple's interest in marketshare preservation, Cook basically said, "The most important thing to Apple is to make the best products in the world that enrich customers' lives." He said Apple isn't interested in revenue for revenue's sake.

Apple understands that if you build it, they will come. Create a great product first, and the reward will come through revenue next. Imagine if Cook had said something like this: "Hey guys, we're going to change up our game plan for 2013. Instead of creating wonderful products, we're going to create cheap units that will run iOS with big screens. Our customer satisfaction is going to dive, but right when they're fed up and ready to buy a new smartphone, we'll swoop in with something new and shiny and full of promise to win back their attention for another cycle. We think we can gain a lot of marketshare with this new strategy."

Yikes.

Anyone Want an iPad Mini?

Apple has talked about cannibalization before, but mostly tended to spin conversations toward the halo effect of the iPhone, which delighted customers, got them interested in Apple, and led them to buy MacBooks, iPads and Apple TVs. In the call, Cook said, "We don't fear cannibalization." That's pretty important. He also noted that when you do fear cannibalization, competitors will just come in and take away the business anyway.

Cook said, "I see cannibalization as a huge opportunity," adding that what Apple tends to see is sthat when new customers buy Apple products -- like the cannibalistic iPad mini -- they tend to like their experience and end up buying more Apple products.

I know this buying behavior is true with me, and from what I've seen, it's held true with about 90 percent of the people I run into -- even those who shy away from spending on electronic purchases.

This is a fundamentally important statement from Cook. It's good news for Apple's long-term viability, because it will help ensure many new customers for years to come.

Tantalizing Future

Cook hinted that Apple's product pipeline was "chock full" of "incredible stuff." Didn't we all expect this? What if Cook didn't say a word at all? Might that mean that Apple was going to try to double-down and just fix things in 2013, like clean up iOS and get rid of fake stitched leather in applications? Nope. Cook hinted that new products were on the way.

When Apple TV watcher Apple analyst Gene Munster pried about the Apple TV, it was clear that Cook wanted to talk about it more but felt he could not. It's just not the Apple way to hand out strategic product details. What Cook did say implies that he personally wants to get this Apple TV concept figured out, despite content delivery challenges, and despite production challenges we can only imagine. I found that gratifying, too.

To me, it sounded like there was a hint of passion in the tone of Cook's voice, and to me, passion for creating great products and wanting to release them to the world . . . this is the stuff you want to hear in the voice of a CEO. And this is what makes Apple as healthy as ever.


MacNewsWorld columnist Chris Maxcer has been writing about the tech industry since the birth of the email newsletter, and he still remembers the clacking Mac keyboards from high school -- Apple's seed-planting strategy at work. While he enjoys elegant gear and sublime tech, there's something to be said for turning it all off -- or most of it -- to go outside. To catch him, take a "firstnamelastname" guess at WickedCoolBite.com.


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