Apple Scrambled For ‘Proper Supply’ of iPhone 5s in Q1, CEO Says

Apple results in Q1 ended Dec. 28 were a mixed bag in which revenue grew from a year ago and iPad sales were strong, but profit was flat and iPhone sales, despite growing from a year ago, were weaker than some analysts had expected. Its North American business also “contracted somewhat” from Q1 last year and that “weighed” on its results, said CEO Tim Cook on an earnings call Monday. Apple shares closed 8 percent lower Tuesday at $506.50.

Apple sold more of the iPhone 5s than it had projected in Q1, but it took the company “some amount of time in order to build the mix that customers were demanding,” said Cook. Apple “lost some sort of units for part of the quarter in North America” and it took the company “almost all the quarter to get the iPhone 5s into proper supply,” he said.

Q1 North American iPhone sales were also hurt by upgrade policy changes by some carriers, said Cook. That will also “have some effect” on Q2 results, he said. The policy change “restricted customers who are used to upgrading earlier than the 24 months that they're allowed and sort of stretched the time out to be a hard and fast 24 months,” he said.

Cook dodged analysts’ questions on the call about plans to address perceived weak demand for the iPhone 5c, its other new smartphone, saying he wouldn’t comment on future device introductions. “We don’t think Apple has created a meaningful new product category” with the iPhone 5c, and “all the carriers we have spoken with stated the same view,” wrote BMO Capital Markets analyst Keith Bachman to investors Tuesday. Apple “needs to create a more impactful ‘medium’ price iPhone, presumably with a lower price than the current $549 unlocked price,” he said.

"Despite supply constraints” on the iPhone 5s, Apple sold 51 million iPhones in Q1, up from 47.8 million in Q1 last year, said Chief Financial Officer Peter Oppenheimer. He didn’t say how many of the iPhones sold were the 5s or 5c. Sales growth for iPhones was “very strong” in Japan, helped by the addition of NTT DoCoMo in September, he said. The iPhone has a 69 percent market share of the smartphone market in Japan, he said, citing Kantar data. Apple also had strong year-over-year iPhone growth in China, Latin America, the Middle East and Russia, he said. Apple “remains the leading smartphone manufacturer” in the U.S., with the iPhone accounting for 41 percent of smartphone subscribers in the three-month period ended in November, he said, citing comScore data. Apple just started selling iPhones via China Mobile’s store network in China in mid-January as part of a recently announced deal (CD Dec 24 p11) with that company, he said. China is an “incredibly important market” to Apple, and iOS devices already carry 57 percent of all mobile Web browsing in the country, he said. Combining business, government and education institutions, the iPhone has a 59 percent share of the U.S. commercial smartphone market, he said, citing IDC data.

Last week was “the best week” for iPhone activations that Apple had in China, said Cook. “We're just selling” in 16 cities with China Mobile now, and that number is “projected to” grow to more than 300 cities by the end of the year, he said.

Total Apple Q1 revenue grew 6 percent year-over-year to $57.6 billion. “No technology company has ever generated that much revenue in a single quarter, and we're especially pleased to have generated that record despite foreign exchange headwinds, the year-over-year decline in iPod sales, and the higher revenue deferral rates” from iOS devices and Macs that Apple discussed the prior quarter, said Oppenheimer. Those three factors caused revenue to slip about $2.5 billion in Q1, he said. Profit was flat at $13.1 billion.

The company expects Q2 revenue of $42 billion-$44 billion, it said. That was weaker than the consensus analyst estimate of $46 billion and BMO’s forecast of $44.6 billion, said Bachman. The analyst was “not encouraged” by Apple’s comments about “channel fill” and higher revenue deferrals in Q1 hurting Q2 revenue growth because that “implies that the December quarter was not as good as it looked,” he said.

That iPhone unit shipments missed analysts’ estimates by 7 percent was among the “biggest issues” with Apple’s earnings report, said Piper Jaffray analyst Gene Munster. Another was Apple’s implication that iPhone shipment growth “may be close to flat” year-over-year in March despite the addition of China Mobile, Munster said.