Our readers know that Supply Chain Matters has provided extensive commentary relative to Apple’s supply chain. Apple reported fiscal Q3 earnings this week and that warrants some added commentary and observations.

In terms of the numbers, business media headlines reflect better than expected results but cautionary observations.  Of course, expectations were already beaten down given the precipitous decline in Apple stock in one year.  Total revenues grew 1 percent year-over-year but fell 19 percent sequentially.  Revenue was reported as $35.3 billion and profitability declined 22 percent. 

Wall Street was more impressed by the fact that Apple sold 31.2 million iPhones in the quarter, compared with 26 million a year earlier. This represents heightened concern that Apple remains in a head-to-head competitive battle with arch rival Samsung in the smartphone market. The average selling price of phones dropped by $32 from the March quarter to $581, which is a reflection that consumers are opting for the lesser expensive models. Currency rate fluctuations also had an impact on ASP.   Executives noted that iPhone sales were strong in the U.S. in Japan but slid in China and other Asia-Pacific regions.  Selling volume for iPads dropped 14 percent, and those of the Mac dropped 7 percent from the year earlier, a cause of a reflection of a lag in the new product introduction cycle.  The ASP for iPad was sequentially  down $12 to $437, an indicator of consumers opting more for the iPad mini. Executives attributed the fall in iPad volumes to planned shifts in channel inventories prior to new products being released later in the calendar year. The closely watched gross margin number fell slightly to 36.9 percent. Guidance for the forthcoming 4th quarter was modified slightly downward to a range of $34-$37 billion.

The real emphasis for Apple and its supply chain is reflected in the coming two quarters.  This year’s holiday buying season will be a crucial one for the company.  We have previously highlighted for our readers that Apple has delayed crucial new product introductions to later in the year.  The Wall Street Journal recently disclosed that the company is working on iPhones and iPads with larger screen sizes while numerous information leaks emanating from lower-tier suppliers point to the eventual release of a lower-cost version of the IPhone to attract emerging market and other cost sensitive consumers. In the earnings briefing, Apple CFO Peter Oppenheimer stated that the company is “on track to have a very busy fall”.  Many Apple fans are of the belief that product innovation is alive and well.

Near-term, Apple’s supply chain ecosystem is now ramping-up for perhaps its biggest test since the initial introduction of the iPhone.  That may include simultaneous product introductions of two new iPhones, iPads and perhaps other products across global-wide markets on a simultaneous basis.  All with little room for error or delay. Both FedEx and UPS may remain concerned about the sudden drop-off in international air freight of late, but planners can take some solace that Apple may provide the needed boost as it marshals its global supply base later in the year.

Longer-term, Supply Chain Matters remains of the belief that Apple’s supply chain will continue to execute a segmentation strategy, that being a supply chain supporting premium, high-margin consumer devices and one supporting lower-cost, lower-margin consumer devices.  The first signs of this segmentation became evident in announcements of added contract manufacturing capabilities.  Rumors persist regarding other component supplier shifts in the works.

CEO Tim Cook inherited big shoes to fill in terms of Apple’s legacy of product innovation. But, the challenges facing Apple and its supply network in the coming months will test this CEO’s astuteness not only in shepherding a new phase of product innovation, but toward insuring global supply chain responsiveness meets new product introduction challenges across global markets. A major shift toward simultaneously supporting both premium and lower-cost products will unfold a new variant of supply chain segmentation.

Bob Ferrari

Disclosure: The author is a current investor in Apple stock