Apple Numbers: Q1 2018 “Surprise”
by Jean-Louis Gassée
Doomsayers and rumormongers surpassed themselves this past quarter as they noisily called Apple’s most innovative and most expensive iPhone X a dismal failure. On May 1st, actual numbers told a different story.
Apple must be a psychotoxic company, attracting and then unhinging the fragile minds of journalists, bloggers, and analysts. The contingent of bloviators sound like a gaggle of eunuchs circling the king’s bed, stomping their feet and bawling in high-pitched voices: ‘You’re doing it wrong!’. Unconcerned, the monarch continues, enlarging the scope of his dominion.
The decades-old routine rose to its highest pitch with the advent of the Smartphone 2.0 era, when Steve Jobs unveiled the first iPhone to chuckling predictions of doom. Since then we’ve been treated to a replay of the Mac vs. Windows, “closed vs. open” defeat and facile predictions of failure under the banner of academic authority because “modularity always wins”.
The tradition continues with the iPhone X. We’ve been bombarded with “news” items that prepare us for the grand-scale failure of the device: Forbes’ Ewan Spence declares iPhone X Defeated As Tim Cook Steals Victory Away With The iPhone 8; weak holiday sales means Apple will slash its production target by half according to Nikkei Asian Review; suppliers are jumping ship with such abandon that KGI Securities’ analyst Ming-Chi Kuo predicted that “the iPhone X will be ‘end of life’ in the summer of 2018”.
On May 1st, Apple’s quarterly report evaporated the auguries.
In the report conference call, Tim Cook declared that the iPhone X has been the best-selling iPhone every week since its launch:
“…this is the first cycle we’ve ever had where the top of the line iPhone model has also been the most popular.”
Strategy Analytics echoed Cook’s enthusiasm, calling the iPhone X the world’s best-selling handset in Q1 2018.
Nonetheless, some dismissed the increased iPhone sales as “up just 3% from the same period a year earlier”, using what Hans Rosling calls an “orphan number”, a number without context. Here, the missing context is the overall decrease in worldwide smartphone sales; according to Gartner, overall sales were down 5.6% in Q4 2017 compared to the same 2016 quarter.
(Bill Gates says Rosling’s book Factfulness: Ten Reasons We’re Wrong About the World — and Why Things Are Better Than You Think is “one of the most important books I’ve ever read.”)
Some of our wiser pundits had mocked the end-of-life forecasts. Hours before Apple released its quarterly numbers, John Kirk wrote a Tech.pinions piece, Warning: The iPhone X Could Be A Problem For Analysts, that presciently unfolded a litany of unprofessional behaviors in the analyst milieu. Just after the report, Daniel Eran Dilger of Apple Insider vigorously trashed the unmoored Cassandras.
A few observations of my own, now that the Apple’s latest quarterly numbers have been released.
First, while iPhone X doomsday predictions depressed AAPL stock price, Warren Buffett bought another 73.5M shares. His Berkshire Hathaway fund now owns about 240M Apple shares that will yield about $700M in dividends this year. (Not entirely besides the fact, Warren Buffet recently got rid of all his IBM holdings.)
Apple also benefited from lower prices as it repurchased $23.5B of its own shares in the quarter.
Second: Apple’s “Manufacturing Purchase Obligations” are up nearly 25%. What’s a Manufacturing Purchase Obligation? It’s all about the supply chain…
Tim Cook got to his CEO post, at least in part, by running a superb Supply Chain Management (SCM) operation. Simplifying but not betraying, a successful SCM means reliably ordering the right components at the right time and at the best price. One way to secure the ideal parameters is to lock in suppliers by guaranteeing gobs of money, sometimes paid in advance. This is a Manufacturing Purchase Obligation (MPO).
How important is the MPO? Legend has it that the LG phone operation that manufactures handsets once went to their sister division to get displays…only to face a closed door. Why? The entire display production had been bought and paid for by a single client: Apple.
I’m indebted to Asymco’s Horace Dediu who noticed that Apple’s MPO makes a reliable pointer to Apple’s future product revenue. For example, when the MPO dropped from $19B in Q2 2015 to $15.5 in Q2 2016, sales also took a dive: $234B to $216B. It was a big event at the time — and it was neatly predicted by the MPO drop. The next year, MPO rebounded to $21.7B and, right on schedule, sales rose to $229B.
This quarter last year, Apple disclosed $21.7B in MPO; this year the number rises to $27.1B. The healthy MPO increase — up 24.9% — portends an optimistic Apple.
(The MPO disclosure is on page 32 of the company’s 10-Q SEC filing. The entire 10-Q can be found here; the most interesting bits — sales by product and geography, operating expenses, income taxes — can be found in Part 1, Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations. It’s spicier than it sounds.)
Finally, we have Apple’s Earnings Release Conference Call (transcript here). Following the official numbers disclosure, the conference call is a carefully choreographed charade that provides little actual information. Their earlier negative comments now forgotten, the analyst-questioners are unfailingly polite and executives answer with equal civility. No sparks and no insights…except for two, one stated, the other significant by its absence.
Commenting on iPhone X sales, Tim Cook let this slip [as usual edits and emphasis mine]:
“…it’s one of those things where like a team wins the Super Bowl, maybe you want them to win by a few more points but it’s a Super Bowl winner and that’s how we feel about it.”
Interpreting: “While the iPhone X has won every weekly game, lately it hasn’t won by as many points as we would have liked.” The sharp rise in iPhone Average Selling Price during the Xmas (not-quite-a-full) quarter — up $100 to $796 — attested to a successful iPhone X launch. For the just-ended trimester, iPhone ASP shrank to $728. This points to a lower percentage of iPhone X’s in this quarter’s mix. Should we temper our expectations for the next six months? Cook doesn’t say. Good coach that he is, he immediately catches himself:
“I could not be prouder of the product.”
So, proudest of the product, but would have liked to be prouder of the iPhone X sales during the quarter. Perhaps the smell of relatively softening sales wafted over the Cupertino security wall and was picked up by someone in need of clickbait…
The “insight not stated” is Siri. Search the transcript and you’ll find no mention of Apple’s virtual assistant. After so much commentary about Siri’s poor performance and the highly visible hire of John Giannandrea away from Google where he served as “chief of search and artificial intelligence”, the silence is a bit surprising. It adds to my perception of the carefully choreographed nature of the quarterly earnings conference call.
Apple’s Developer Conference is only a month away. Perhaps Apple will take the opportunity to trot the new AI/ML czar on stage.
— JLG@mondaynote.com
