By far, the largest attention of business media this week was on Apple and its reporting of December ending financial performance. By now, many of you have probably viewed the headlines and bylines. Being designated as one of the most valuable companies on the planet comes with rather high, or perhaps, insatiable expectations. The majority of reporting seems to have tended toward disappointment, and Apple stock literally lost $50 billion in value overnight. Then again, the results in our view, were not all that bad, considering the supply chain lens.
In terms of the highlights, Apple reported new records in total revenue and for iPhone and iPad sales. The problem was that total revenues came in at $54.5 billion vs. a Wall Street expectation that was just a bit higher. Sales of the company’s flagship iPhone grew 78 percent over the September ending quarter. Equity analysts are also expecting in excess of 20 percent revenue growth in 2013. Gross margin at 38.6 percent seemed to also disappoint, given Apple’s margins of 44.7 percent a year earlier, but then again, Apple had a lot to deal with in its traditional holiday surge quarter. Cash on-hand now stands at $137 billion, which is not at all shabby.
In terms of unit volumes, Apple shipped a total over 47.8 million iPhones, an average of 3.7 million per week, compared to an average of 2.6 million per week a year ago. As of December, the iPhone 5 is now distributed in 100 countries., the fastest global product rollout, ever. The company also shipped 22.9 million iPads, an average of 1.7 million per week, along with 12.7 million iPods. In addition, Apple shipped 4.1 million Mac computers.
During the earnings briefing, CEO Tim Cook specifically refused to address any specific rumors related to supply cutbacks but did address the complexities of having a supply chain with multiple supply sources, manufacturing yield challenges, supplier performance and inventory shortages. By our view, the very fact that Mr. Cook, who’s background personifies a highly experienced operations and supply chain executive, has mentioned these challenges is a good indication of what Apple’s supply chain was actually dealing with during the December quarter. Supply Chain Matters has featured and highlighted a number of previous commentaries related to each of these challenges being either rumored or reported to have occurred.
Another important factor has been the ongoing strained relationship with arch competitor Samsung, as result of both company’s ongoing patent infringement litigation. Samsung happens to serve as a key strategic supplier for the iPhone processor chip and other display components, and indeed tends to source a good majority of its own smartphone components internally with its components division. Samsung recently disclosed that it had shipped more than 100 million of its Galaxy S model smartphone since 2010, and further indicated that its new model may include up to eight processing cores.
Of the many articles and commentaries circulating around Apple latest results, we would call reader attention to a commentary penned Darren Hart, Apple Disappointed In Part Due to Supply Constraints, featured on the Seeking Alpha web site. Hart cites specific statements made in the briefing and provides a candid assessment of broad supply constraints across the supply chain. For the iPhone, he notes a continuous supply constraint throughout the quarter and candidly states that Apple sold less iPhones than anticipated due to a lack of inventory or “supply constraints’. He specifically references the relationships with Samsung, and notes various other blog and media commentaries that seem to reinforce that Apple may be turning to global semiconductor chip fab producer TSMC as a new source for ARM processor chips. Supply Chain Matters also noted these indications in early January. Hart also reinforces challenges in ramp-up of the iPad Mini, again noted in our commentary in November 2012.
Hart also hones in on Apple CFO Peter Oppenheimer’s statements that Apple expects to invest $10 billion in capital investments in 2013, $9 billion of which may be utilized to purchase production equipment placed in partner facilities. Hart speculates that some of this capital may be destined for new chip manufacturing equipment at TSMC. In April of last year, Supply Chain Matters also speculated that Apple’s cash could be utilized for major investments in more production robotics within Foxconn, its prime contract manufacturer as well as other supplier facilities.
Thus, from the global supply chain lens, Apple’s latest results were not so much a surprise, but rather a reinforcement that Apple’s supply chain continues to deal with noteworthy challenges. They relate to sourcing, supplier performance, labor cost and social responsibility needs, inventory and other dimensions. The fact that Apple’s supply chain teams delivered the noted results in the December ending quarter is a testament to resiliency and responsiveness. The open question however is that Apple will need to continue its product innovation and pushing the envelope of supply chain expectations. The chain is already showing some signs of weak links.
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