What to expect from Apple's Q2 results today

What to expect from Apple's Q2 results today

Speculation is rife that when Apple announces its fiscal second quarter results today at 5 pm EDT, its revenue, profits, gross margin, and earnings per share or some combination of them will be less than expected, or less than they should be, or both.

Unless Apple surprises the industry watchers, the results will likely set off a litany of familiar criticisms - Apple is failing to innovate, being too secretive, not being concerned enough with quality, arrogant, losing out to more innovative competitors. And it could trigger a further drop in Apple's stock price, which reached a peak of $705.07 in the past 12 months but closed yesterday at $398.67

But the short-term focus on unit sales, revenue, profits and margins can lose sight of much else: the larger context of Apple's (and other tech companies) historic ups and downs, Apple's strengths in designing, maintaining, and ultimately replacing popular brands, and its unique corporate character and structure focused on creating better products.

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Some analysts currently are forecasting that Apple will sell 35 million to 38 million of its high-margin iPhones in the January-March quarter, about the same or 1% to 8% above the same quarter one year ago

Apple's guidance for the January-March second fiscal quarter is for revenues of between $41 billion and $43 billion, slightly above the $39.2 billion in the year ago quarter, and well below the $54.5 billion of fiscal 2013 Q1. For almost the first time, the consensus by both independent and professional stock analysts is very close to Apple's guidance. The trend is clear in these two charts, comparing revenue and earnings forecasts with actual results over the last 12 quarters, pulled together by Philip Elmer-Dewitt, editor of Fortune's Apple 2.0 blog.

As DeWitt notes, Apple's guidance has been much closer to actual revenues than the far more optimistic expectations by both professional stock analysts and independent Apple watchers and bloggers.

"The forecasts from the 61 analysts we polled -- 38 professionals and 23 amateurs -- are as tightly packed as we've ever seen them," DeWitt writes. "The consensus among the pros is that Apple will report sales of $42.41 billion; the indies are at $42.9 billion. The median estimate is $42.7 billion, up 9% from last year's $39.2 billion." [See DeWitt's full blogpost.] 

Apple for the first time declined to offer guidance on earnings per share. The professionals in DeWitt's survey together yield an average earnings estimate of $10.01 per share, or 19% below last year's $12.30. The independents' average estimate is $10.55, or a 14% drop year over year. The median EPS estimate is $10.10, a drop of 18%.

One analyst, Ben Reitzes with Barclays Bank's investment banking division, is already looking to the next quarter, and not seeing much of an improvement. "[W]e expect Apple to provide guidance below consensus for the June quarter with regard to revenue and gross margins," he writes in recent report. Reitzes reiterated Barclay's view that Apple needs to be, and will be, more open with investors about a range of issues, including its gross margin targets (since a small change in gross margin has an outsized impact on earnings per share), returning more cash to investors, and product plans.

"One of Apple's biggest challenges in 2013 will be that it has chosen not to participate in the market for 5-inch smartphones - and there is tangible evidence that this category is for real," Reitzes insists. "Apple has stood firm that its iPhone is ideal for one-handed use, which is true in our opinion. However, one handed use is arguably less important as phone calls become less and less crucial - the larger form factor has caught on for navigation, texting, videos, books and web access. Also, the larger screen seems to be more popular outside of the US and the phablet has significant momentum in China."

A number of Apple's suppliers, including Cirrus Logic and Foxconn, have reported lower than expected revenues or profits or both in recent weeks. In many cases, these results are being interpreted as representing a fall-off in orders from Apple. And that fall-off is then interpreted as evidence of slowing or even falling iPhone and iPad sales.

"Hon Hai Precision Industry, better known as Foxconn, reported an almost 20% drop in earnings in the past quarter," posted John Koetsier, at VentureBeat. Foxconn is Apple's main assembler for phones and tablets. "The problem, apparently, is lower than expected iPhone sales."

Koetsier linked to a Reuters story on Hon Hai's results, but the story itself, while it asserts that Hon Hai's results were "hurt by disappointing demand for the iPhone," only quotes a Wall Street analyst to that effect, not any Hon Hai executive.

In February, a report by NPD's DisplaySearch unit on LCD screen shipments found a sharp one-month decrease in the January OEM shipments of 9.7-inch display units and concluded that these shipments had "collapsed." The report sparked widespread speculation in the blogosphere that the retail market for full-size iPads had likewise collapsed, [See "iPocalypse now?: iPad sales "collapse" and the Web freaks"] in part due to the unexpectedly strong sales of the smaller iPad mini. Apple so far has not released separate sales figures for the two tablets.

Halfway through Apple's 2013 fiscal year, speculation is intense about when Apple will announce and release the next iPhone and iPad models. There are almost as many opinions as there are analysts.

Several of them, interviewed for a Computerworld story, predict a late June or early July debut for the next iPhone, usually dubbed "iPhone 5S." The current iPhone 5 was announced in September 2012 and the previous iPhone 4S in September 2011.

But as Computerworld's Greg Keizer noted, Apple has yet to release the review of its software development kit for its next operating system version, iOS 7. The preview SDK typically gives app developers about three to four months to work with the new OS version, reading new apps and tweaking existing ones before the new iPhone is released.

In a recent online discussion among a group of experienced Apple watchers, John Gruber of Daring Fireball and Rene Ritchie, editor-in-chief of iMore, several participants said they had heard from sources that iOS 7 was "behind schedule," and that Apple software engineers had been shifted from the Mac operating system, OS X, to work on the mobile platform.

Given this very typical Apple response - being able to shift resources quickly to apply them where needed (more on this below) - a project can be "behind schedule" without ultimately being late. It's analogous to a driving to a destination, to arrive at a given time: if you're forced to drive slower than planned on one stretch, you can drive faster on another to make up the difference, or skip a stop for lunch.

Interest in iOS 7 is keen for several reasons. Competition from Android-based smartphone makers is intensifying and their visual user interfaces are becoming more sophisticated and user-oriented. Last fall, long-time iOS development chief Scott Forstall was edged out in the wake of the badly-received initial release of Apple Maps. The core OS was handed to OS X development honcho Craig Federighi, while long-time industrial design guru Jonathan Ive took over the platform's user interface and user experience design. Finally, iOS is essential to and intimately wedded with Apple's expanding cloud services for mobile products and users.

The wild speculation that Apple is beleaguered, floundering, on the verge of defeat, is a result of a lack of historical awareness and of misunderstanding Apple's essential character, argues Horace Dediu, an independent analyst and founder of market analysis firm Asymco, in a recent interview for Korea's Chosun Daily.

Asked about the current "Apple shock," Dediu explains that "during Steve Jobs' time the company suffered many such shocks."

"The stock fell many times far further than it just did for trivial and irrational reasons....Share prices are not always good indicators of potential and markets are not always efficient."

Many observers, including Wall Street analysts, writing about Apple today are new to covering the company, he says. "I would guess 80% of the observers have not observed Apple's prior painful episodes first hand," Dediu says. "For them this is the first time a "dominant" Apple has slowed. The amplification of so many voices raising alarm makes it seem truer, but it isn't.

Moreover, he argues, "the [Apple] failures being cited are not significant."

"In terms of increased competition, before Samsung there was Nokia and Motorola and the mobile operators and Microsoft and Dell and many others long forgotten," Dediu says. "They were all about to "defeat" Apple."

Finally, the alarmists miss something fundamental about Apple. "You have to appreciate that the greatest thing [Steve] Jobs ever created was not a product but Apple itself," Dediu says. He expands on this idea in a related post

"Unlike almost every other large company it's not organized in "divisions" which have responsibility for "a business" in the sense of profit or loss," he explains. "At Apple most people or teams are assigned a function like "design", "engineering", "sales" etc. When a product is being built, they are assigned to that effort. When the product is complete, they go to another product. The nearest comparison to this structure is a military organization. There you have Infantry, Armor, Aviation, etc. These groups are assigned (in a combined fashion) to a particular effort or battle and then go back to the barracks when done."

In the Chosun Daily interview, Dediu argues that "Innovation is not invention."

"Innovation is the application of invention in ways that solve new needs. I'm always amazed at how misunderstood this term is even though the definition is easy to understand:

'innovation differs from invention in that innovation refers to the use of a better and, as a result, novel idea or method, whereas invention refers more directly to the creation of the idea or method itself.'

"Not all inventions are applied and not all innovations depend on internal inventions. Innovation is applied invention just like engineering is applied science," Dediu says. He compares Apple to animation movie maker Pixar, which is set up so that "it makes blockbusters and nothing else."

"That means it does not make many of them and not always regularly and that the ideas may not be original, but the results are always very popular," he says. "Pixar is not like any other studio that makes some hits and some flops. Pixar is also a functional organization. It's not an accident that they were both built by the same person and that they are both successful after he left."

John Cox covers wireless networking and mobile computing for Network World.



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