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This week, Apple Inc. reported first-quarter profits of $1 billion or $1.14 per share on earnings of $7.1 billion - up 24 percent year-over-year. Wall Street analysts had expected around $.78 per share earnings on sales of $6.42 billion according to reports in the financial press.
So how come Wall Street so consistently underestimates Apple? I think part of the reason could be that most professional financial analysts are technocrat types, the majority of whom can be safely assumed to be Windows-users. They are repeatedly blindsided by Apple's financial performance because they just don't "get" the Mac, or the Apple products success phenomenon in general.
One big element of the Macintosh mystique has always been passion - on the part of those who conceived and established the entity now going by the name of Apple Inc., and of the end - users to purchase Macintoshes and other Apple products. It's a generalization, but I think by and large a fair one, that persons who choose careers in the field of financial analysis are likely not driven by passion, probably have some difficulty fathoming how others could be passionate about something like a personal computer or a digital music box. Consequently, Apple's ability as a non-conformist niche player to survive, let alone thrive and excel in the marketplace it competes in remains something of an enigma even to those who genuinely admire and appreciate the company's achievements and the amount of money it makes.
It is also why, for instance, it would seem perfectly logical for folks who don't understand Apple passion to assume that when a corporate colossus like Microsoft copy-cats an Apple success like the iPod, and comes up with a competing product like Zune, which is "just as good" as the iPod - it should portend real trouble for Apple.
When Zune finally hits the market, and languishes twenty-somethingth in sales during the hot pre-Christmas season (while eight of the top ten sellers in the category are various iPod models), it surely must be a puzzlement to linear-thinking Wall Street rationalists.
And so it will very likely be with the iPhone. The Apple-skeptics can trot out all sorts of reasons why the iPhone will be a flop, and they could of course be right, but I don't think so. Yes, the iPhone is expensive, tied to just one wireless service whose coverage is not universal, doesn't operate on open standards, No 3G, no keyboard, no Outlook, no MS Office support, and so forth, but those issues are not the point. The iPhone is not just another cellular telephone just like the iPod is not just another music player. Other products may well have features superior to what Apple offers on the iPod, and indeed there are features offered on certain Windows PCs that I personally find attractive that are not available on Apple computers, but it doesn't matter. No competing products provide the holistic user experience - or catalyze the passion - that Apple products do. Who knows? Perhaps someday somebody might out-Apple Apple, but it hasn't happened yet, and I'm not holding my breath.
I doubt that very many people actually like Windows for itself. It is no doubt a reasonably satisfactory utilitarian tool for vast numbers of users, but something inspiring passionate affection? C'mon; get real.
On the other hand, very few things in life work as well as a Macintosh computer running the Mac OS (at least most of the time). Being captivated by that is not "cultish" or something anyone should feel obliged to apologize for. For some folks I suppose Apple is a cult of sorts, but my take would be that they're a small minority. For most of us admitted Macheads, it's more accurately delighted appreciation. As one commentator put it this week, "People love Apple because they produce great products that they enjoy using. Its as simple as that."
However, there is indeed a difficult to define intangible quality to the Apple orbit. I thought of that this week watching a TV interview with Steve Wozniak, who was visiting Atlantic Canada on a speaking engagement. While Wozniak had little to do with development of the Mac and no part in the iPod and iPhone, without him there would very likely be no Apple Inc., and he played a big role in setting the tone that still resonates in the company he co-founded. Three decades later, Woz still radiates joyfully passionate enthusiasm for technology and an infectious love of "gadgets," that would probably go right past most of those no-nonsense Wall Street types. On TV Wozniak showed off the vacuum tube (!!) wristwatch he was wearing - nearly as big as a hockey puck, but clearly a gadget he really got off on.
I guess in many respects, Apple passion one of those "if I have to explain it to you; you'll never understand" dynamics, as least if one has actually experienced using the Mac for long enough that the unfamiliarities become familiar. I know that some people have given the Mac a decent trial and still profess to prefer Windows and/or Windows PC hardware (see this commentary for instance ). Some folks are from Venus; others from Mars, I suppose, but I would also guess that if Windows and the chaotic PC hardware environment really to appeal to you, then there's a good chance that passion in general is something you're suspicious or perhaps even disdainful of.
Anyway, it does seem that more people are trying Macs and liking what they discover these days, in part, ironically, because Macs can now run Windows, which has removed the "not compatible" caveat. Apple is now fifth in US PC sales, and has now been in the range of five percent domestically for three consecutive quarters. Globally, Apple had a 2.38 percent market share in the last quarter of 2006, up 17 percent year-over-year from 2.03 percent in 2005. I read somewhere this week (unverified) that some 20 percent Americans now own some sort of Apple product, a figure that should advance further when the iPhone ships.
In the quarter ending December 31, 2006, Apple's portable system sales were up a whopping 65 per cent or 382,000 units over the same period in 2005, outstripping the industry sales growth rate by a factor of three. Even with desktop sales down slightly (four percent, reflecting a continuing stronger preference for notebooks across the industry), Mac sales overall were up 28 percent year-over-year in the quarter, and iPod sales up 50 percent (1,606,000 Macintosh computers and 21,066,000 iPods).
In international sales, which accounted for 42 percent of the quarter's revenue, Apple's European Macintosh sales were up 44 percent in the quarter, and 27 percent year-over-year, with corresponding revenues in Europe up 73 per cent sequentially and 38 per cent year-over-year, although one sour note was a 14 percent sales shrinkage in Japan. I would speculate that Apple's abandonment of the subcompact notebook category, at least temporarily, would be hurting them worse in Japan than elsewhere, and they really need to get the rumored MacBook Pro mini out the door as soon as possible.
Two days after Apple released its record-breaking Q1 (Apple's fiscal year begins in October) financial statement, the Wall Street Cassandras were caterwauling again, expressing disappointment with Apple's second-quarter forecast of profit per share of 54 to 56 cents on revenue of $4.8 billion to $4.9 billion, a conservative projection based partly on anticipated slow sales of OS X in the runup to the release of OS 10.5 Leopard. Apple has already achieved 40 percent of its profit projections for the fiscal year with three quarters left to go. I expect the Apple bears will be surprised again come April.
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Charles W. Moore
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