Kate Huberty of Morgan Stanley opened the Analyst Q&A for the Apple Q1, 2014 Conference Callwith a big one: “Revenue guidance embeds a sequential decline that’s bigger than the decline in the March 2013 quarter and, I think, implies iPhone units may not grow [year over year]” (quoted from the Apple Q1 2014 webcast, a link to which has been provided here).
Peter Oppenheimer, Apple’s CFO answered Huberty’s question as follows: “The biggest reason for the largest sequential decline in revenue relates to changes in channel inventory, and I’ll go through some detail, but let me, actually, go through somethings about the underlying [assumptions] about our guidance to indicate that our business is stronger than the guidance would imply”. (ibid)
Oppenheimer goes onto explain how Apple’s iPhone channel partners, AT&T Wireless, Verizon Wireless, T-Mobile, Sprint, etc, all “overstocked” inventory in the prior quarter. I think this topic is a big deal and indicative of the lackluster performance of high speed wireless data services, as a product, for wireless carriers.
Of course there is another reason at work here, as well, namely intense competition within Apple’s target market segment for smart phones — the high end. Nokia wants this business, as does Samsung, and Motorola.
The intensity of the competition for this market segment is so high as to, in my opinion, prompt Google to rethink its interest in 1) hosting the Android O/S, while 2) also playing the role of a major Android OEM.
So Apple’s guidance is fairly forecasting a substantial drop in revenue for iPhone sales for the March, 2014 quarter.
Let’s get back, for a moment, to the question of the actual profitability of wireless data services for carriers. Indicators including this forward-looking guidance from Apple’s Q1 2014 webcast, AT&T’s recent announcement of a decision to drop pricing on family pooled data plans, etc, all point to two important factors investors might want to keep in mind:
- Carriers like the recurring higher dollar revenue model of long term smart phone subscribers. They each have built versions of the same product model, subsidizing the cost of smart phone purchases, for consumers, in exchange for long term service contracts. Consumers are very challenged to break these contracts (largely as the result of contract features built in by the carriers), but, as of late, are going the distance to break them, as they require, to pursue better deals
- But the giveaways, service discounts, etc., which are required of each of the carriers, to prod consumers to move forward on offers, are quite pricey. These incentives have taken a toll on carrier profits. Per this quarterly webcast, evidently a number of them are pulling back on their enthusiasm and cutting orders for smart phones.
I hope the changes in the net neutrality ruling will change this picture, as carriers gain the freedom to charge higher fees of services requiring faster pipes. But recent comments from the present administration indicate a determination to revisit the ruling.
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