'Very troubling': Analysts question the way Apple describes its data
From 2007 until now, the iPhone was a miracle product that set its own rules. It had a monopoly on the iPhone experience and the iOS software inside it. That made Apple immune to price competition from Android, and consumers bent to its power: the iPhone costs about $700 on average, globally. Even more in the UK, where the new iPhone SE costs £834 on some plans (about $1,200). If you want the unique iPhone experience, that was the price to pay. Plenty of people did. iPhone is the single best-selling phone of all time.
For nine years, the model has performed flawlessly.
But in the last few months, the tide has turned against Apple:
- Last week, Apple reported its revenue was down 13% to $50.6 billion for Q2
- Earnings per share were down 22% to $1.90, below expectations.
- iPhone sales collapsed by 16%, down to 51.2 million.
- And AAPL stock is down 30% from a high of $312 per share to around $93 today.
More iPhone sales declines are expected, until the iPhone 7 launches in late September.
Now analysts have started questioning how Apple's management guides them through its sales data. We asked Apple for comment but did not hear back.
After the call, Ben Thompson - who writes the respected Stratechery email newsletter - said CEO Tim Cook's comments on the portion of iPhone customers who upgrade into newer models was at best confusing. Cook said last week the upgrade rate "is lower than the accelerated upgrade rate that we saw with iPhone 6," implying that the new rate was slowing, or that fewer existing customers were buying new phones. Thompson told his email subscribers:
Actually, no, we didn't know that, because Cook insistently claimed the exact opposite last year on every single earnings call.
... I find any possible explanation for this inconsistency very troubling: either Cook was purposely overselling the upgrade narrative last year, which would not only be duplicitous but also dumb, given that he would only be setting up Apple for a fall this cycle; or even as late as last year Cook was out of touch with how the iPhone upgrade cycle actually works, or how it may have changed over time. I strongly suspect it is the latter explanation.
That was a rare show of a lack of faith. Tech analysts generally only offer varying levels of fulsome praise for Apple, which has - to be fair - posted 13 straight years of quarterly revenue increases, until now.
Thompson isn't alone.
In January, Pacific Crest analysts Andy Hargreaves and Evan Wingren said in a note to investors that they were losing confidence in Apple's characterisations of its sales data:
Confidence in Management Commentary Is Low
Despite significant and credible concern about iPhone unit declines in the 6s cycle, management was adamant that units would grow in its FQ4 (Sept.) conference call. To our fault, we read management's commentary as an indicator that underlying demand in countries that are difficult to track was much stronger than we expected and would allow Apple to sustain a higher level of ongoing iPhone sales than we thought.
Management's confidence now looks highly likely to be misplaced, which suggests that it was either ignorant of the challenges it faced or deliberately overstating underlying trends. The former seems unlikely, which suggests that management has taken a much more aggressive tone as growth in the high-end smartphone market has slowed. This reduces our confidence in Apple's commentary going forward.
To be clear, these criticisms are minor. The data they are complaining about are not stats that Apple officially reports in its SEC disclosures. Cook's commentary is merely colour, intended only to help analysts interpret the official data. And analysts are not saying any of that data is wrong.
Further, the statements from Cook in question are vague and open to interpretation. It may be that these analysts have misunderstood what Cook was trying to say.
And in the larger scheme of things, these are details. The stock turns on its EPS and its topline revenues, not the arcane characterisations used in Cook's conference calls.
This is extraordinary. Until very recently, analysts only cheered the company on. Apple isn't used to such criticism. It may have to grow a thick skin for the next few months.