The Exchange

Time for Apple to stop making excuses and start improving results

The Exchange
China Mobile iphone Launch
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Apple Inc. CEO Tim Cook and China Mobile's Chairman Xi Guohua presents an iPhone 5 to a customer at an event celebrating the launch of Apple's iPhone on China Mobile's network in Beijing.

Maybe Apple (AAPL) chief executive officer Tim Cook should change his title to "CEMO" chief excuse-making officer.

Cook spent Monday afternoon on Apple’s earnings call with analysts trying to explain away disappointing results but with little success. In the aftermath, Apple’s share price is getting pounded Tuesday, down 8% in midday trading to under $509, about where it stood three months ago.

Asked repeatedly about the company’s slowing rate of growth and declining profits, Cook and his team pointed to inventory levels, revenue deferral rates, new phone upgrade rules, foreign exchange shifts, iPod sales slippage and so on.

But nothing could explain how business results at Apple, once the hottest growth stock in the world, have nearly stopped growing. Revenue rose just 6% from a year earlier and net income was essentially unchanged in the holiday quarter. For all of 2013, revenue grew just 8% versus 33% growth in 2012 and 58% in 2011. And profit for the year declined by 11%, hardly the profile of a growth company.

To be sure, no one thinks Apple is doomed and quarterly sales of iPads and Macintosh computers grew smartly. But the company is still worth nearly half a trillion dollars, more than any other U.S. stock, and future increases will depend on reigniting much faster overall growth.

Cook, CFO Peter Oppenheimer and other executives didn’t highlight the challenges Apple must overcome to grow faster, but peering around the edges of their excuse-making reveals several major issues.

The smartphone market has matured

Apple has held off selling cheaper versions of the iPhone in the hope there was still plenty of growth at the high end. Going cheap too soon risked cannibalizing higher profit sales. But it now seems apparent Apple has waited long enough.

Cook crowed that iPhone sales grew 76% in Latin America, 65% in Africa and the Mideast and 115% in Eastern and central Europe. But the volume of those sales, which he didn’t disclose, must be absolutely tiny since overall iPhone sales rose only 7%. That's because growth of the company’s phone sales slowed to a trickle in much of Europe and actually declined in North America. The recent addition of China Mobile will help a little bit but probably not much given the pricing of Apple's current lineup (that's certainly the implication of Apple's flat revenue guidance for this quarter). Time for a strategy overhaul.

Apple’s retail strategy is in trouble

Not discussed by Cook or any of his team, Apple’s retail stores saw a decline in traffic for the quarter with 114 million visitors, down from 121 million last year. And while sales grew 9%, comparable to last year, that’s down from 59% growth in 2011. Operating profit was flat, indicating a decline in profit margin as well.

The answer here may already be in-house as Apple hired former Burberry CEO Angela Ahrendts in October to oversee retail. Apple’s stores have been a critical competitive advantage over the likes of Sony (SNE) and Samsung (005930.KS), which depend almost completely on carriers and Best Buy (BBY) for U.S. sales.

Cook needs to cut the excuse making

Apple shares traded down about 3% to 4% after the results came out on Monday. Largely, that was a reaction to the guidance for next quarter, which indicated flat sales and possibly declining profit. But once Cook and company started talking, the stock decline accelerated, dropping as much as 9% at one point.

Some of the excuses weren’t worthy of utterance. Cook complained repeatedly about the harm from U.S. carriers extending the length of time for cheap, subsidized upgrades. But he didn't mention the policies were grandfathered, not taking effect for customers until contracts expired in January 2014 or later at Verizon (VZ) and March at AT&T (T). Also unmentioned was the addition of a fourth major carrier, T-Mobile (TMUS), and the creation at all four top carriers of new, frequent-upgrader plans. He did whine about not having enough 5S models for U.S. customers but also said Apple had plenty of inventory on hand at the end of the quarter, a bit of a contradiction. Bottom line: sales declined for Apple, which should prompt some new thinking.

Cook later repeated a pledge he's been making quarter after quarter, promising Apple will enter new product categories really soon now.

For the benefit of Apple shareholders everywhere, it’s time to stop talking and start producing.

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