Yesterday Apple disclosed earnings for its fiscal Q1 period ending in December, along with a lukewarm forecast for the current quarter, and Wall Street did not like what it heard. In the aftermath of these results, investors have driven Apple shares down over 8 percent as we pen this commentary. In the quarter involving all-important holiday related buying, customers bought less than expected iPhones, Apple’s most profitable product. More importantly, there is much clearer evidence that the consumer electronics giant is focusing on a strategy of product margin adherence vs. volume, which will place far greater pressures on its supply chain ecosystem.
In terms of the numbers, Apple revenues grew 5.7 percent to $57.6 billion while profits were unchanged at $13.1 billion. Closely scrutinized gross margin was 37.9 percent in the December quarter compared with 38.6 percent in the year ago period. While the company indicated that it sold 51 million iPhones in the quarter, a 7 percent increase from last year’s same period, the consensus expectation by many equity analysts was for 55 million iPhones. According to quantitative analyst firm IDC, industry-wide smartphone sales grew 24.2 percent in the quarter thus Apple did not capture significant share in this wave. Sales of the premium iPhone 5s far outpaced those of the plastic encased iPhone 5c. That was reflected in the company’s reported average iPhone selling price (ASP) of $637 in FQ1 from $577 in FQ4 and $582 in FQ3. In the earnings briefing, Apple’s CFO noted that iPhone 5s sales were impacted by supply constraints during the quarter.
On the brighter side, sales of 26 million iPads in the quarter considerably up from the 22.9 million sold in the year earlier quarter. It was probably a reflection on consumer acceptance of the newer models of iPads introduced in November, especially the iPad Mini with Retina display. I suppose we can all speculate that sales might have been greater given an earlier announcement in the year.
From our supply chain and B2B lens, observations and conclusions are becoming clearer:
- Throughout the quarter there were continued rumors that Apple was dynamically adjusting production forecasts, reducing iPhone 5c output in favor of higher 5s needs. While Apple’s supply teams performed dynamically, adjusting to market demand sensing needs, supply constraints surrounding the 5s, most likely the troublesome fingerprint scanner had an impact.
- International based sales now make-up 65 percent of Apple’s total revenues. The current thrust into China and Japan through new supply contracts with large influential carriers like China Mobile will add additional challenges in channel distribution and product margins. As an example, while iPhone sales through Japan’s DoCoMo increased 44 percent year over year, a weak yen resulted in Apple’s sales rising only 11 percent.
- Top industry players in smartphones, Samsung, Apple and LG are all currently challenged on margins and profitability ensuring continued hyper competition in the coming months. IDC recently reported that “markets like China and India are quickly moving toward a point where sub-$150 smartphones are the majority of shipments”
- Supply Chain Matters interpreted last year’s production sourcing and ramp-up of the iPhone 5c as an indicator of a lower-cost supply chain output strategy. Apple’s election to price the 5c higher than market consensus, coupled with sales performance of the completed holiday quarter now indicate that the higher volume, low cost strategy is no longer favored. That was clearly reinforced by CEO Tim Cook’s statement to analysts: “Our objective has always been to make the best, not the most.”
- Silicon Valley and other industry watchers are now concluding that Apple might have lost its way in product innovation. This past quarter’s performance coupled with statements from company executives all point to far greater pressures on Apple’s supply chain ecosystem to crank-up new product innovation and time-to-market in 2014. Rumors are rampart on new larger screen versions of iPhones, iPads and other products. With all of this prototype development occurring, the supply chain must continue to dynamically respond to daily and weekly changes in this hyper competitive market.
- Finally, activist investor Carl Icahn continues to accumulate Apple stock, the latest buys being on Apple’s current stock price decline. Icahn will continue to pressure Apple management to return more cash dividends to existing stockholders including the tapping of the company’s current $159 billion in cash reserves
Needless to state, Apple’s supply chain teams will be in the center of many initiatives and market response actions in the coming year, challenging its stature as the number one rate global supply chain.
What’s your view- can Apple’s supply chain again rise to current challenges?
Share your observations and comments.
Bob Ferrari
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
