Apple (AAPL) reported earnings after the market close. The Apple stock ended the regular session at $550.50. In the after-hours it has touched $501, down about 8%.
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As I listened to the conference call, just like I have listened to every conference call since before the launch of iPhone, I could not help but conclude that the incredible multi-year iPhone run has ended. Here is why.
Apple only sold 51 million iPhones during the quarter. This compares to consensus of about 56 million iPhones. This is one of the biggest misses in recent memory.
There were two big surprises on the conference call. First, iPhone sales declined year over year in North America. Second, an admission by Apple that it was adversely affected by changes in upgrade policies by phone carriers.
Back in July of 2013, from an analysis of Samsung earnings it was obvious that there was a saturation in high end phones. I described the analysis in my column on Forbes titled, Samsung Earnings Outlook Suggests Saturation In High End Phones. However, Apple continued to report great iPhone numbers until today’s earnings report. The day of reckoning for iPhone had to come, I just did not know when.
Big subsidies by phone carriers on iPhones have in part been the engine behind the ever increasing iPhone sales. Going forward, the phone carriers are going to become more stringent on subsidies. T-Mobile’s (TMUS) no contract plan has been so successful that other carriers such as AT&T (T) have been forced to copy it. Apple now admits that carriers’ policies will adversely impact Apple in the present quarter. It is going to get much worse for Apple as no contract plans gain bigger market share.
The big hope for Apple has been emerging markets where the smartphone market is not as saturated as in the developed markets. An analysis of the earnings report shows that Apple’s lower priced iPhone 5C has not been as successful as expected. iPhone 5C was specifically focused at the emerging markets. Apple iPhone average selling price (ASP) rose to $637 in FQ1 from $577 in FQ4. Since the gross margins did not go up, and the volume is lower than expectations, the only explanation is that the mix is highly tilted toward the higher priced iPhone 5S.
Apple simply does not have the right product that can generate huge volume in emerging markets; iPhone 5S is directed at the high end. High end consumers in emerging markets are limited in numbers due to low average disposable incomes.
Apple CFO attributed short fall in the projections to inventory replenishment to the tune of over $2 billion year over year. My interpretation of the inventory issue is that the sales are soft.
Apple is not going to win many converts from the Android camp given that its ASP of $637 is about $300 higher than the ASP of Android phones.
A question was asked on the conference call as to why the China Mobile (CHL) was not generating sales as expected. Responses from both CFO Oppenheimer, and CEO Cook, were positive spins but did not answer the question. However, as I analyze the entirety of Apple’s report, I gain more confidence in my previous analysis that China Mobile sales will not meet bullish expectations. Just like I had the conviction to call Samsung’s day of reckoning back in May 2013, now I have the conviction to call that the incredible multi-year iPhone run is over. Going forward, iPhone will no longer be the kind of growth engine for Apple like it has been in the past.
Disclosure: Subscribers to The Arora Report have long positions in Apple and T-Mobile.
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