How To Compete In A Downturn? Check Out Apple's Quarterly Earnings

Posted by: Peter Burrows on October 21

Help, I think I’m caught in a reality distortion field—or am I? I’m talking, of course, about Apple’s quarterly numbers announced today. Yes, they missed analysts expectations slightly on the top line, and pronounced the fourth quarter outlook as “foggy.” But talk about being prepared for the downturn. As if $24.5 billion in the bank wasn’t enough of a buffer, the company cranked up its earnings even as rivals such as Research In Motion and Dell struggle with compressed margins. And yet Apple by no means gave up ground on market share in order to pad those profits. In fact, quite the opposite. The company is taking full advantage of its still-rising momentum. Here are some highlights:

— Overall revenues for the fiscal year grew 35%. Huh, 35% for a hardware business? While the quarter did not include the last two turbulent weeks, this is still a number from the roaring 1990s—not from these scary economic times.

— A record number of iPod sales for any non-holiday quarter. Growth over last year was a respectable 8%.

— The company beat some estimates for Mac sales, even though many consumers spent much of the quarter waiting for the new MacBooks that arrived last week.

— Truly staggering iPhone numbers. The company sold 6.9 million iPhone 3Gs in the quarter. That’s more than the 6.1 million first-generation iPhone’s that were sold in the year before the iPhone 3G debuted in June. It’s also more units than RIMM sold in the quarter, and according to Steve Jobs makes Apple the third largest cellphone maker in the world by revenue. “I know this sounds crazy, but it’s true,” enthused Jobs during the earnings call with analysts. I’m feeling more confident than ever in the story I wrote some months ago, about Apple’s plans to build more than 40 milliom iPhone 3Gs in the twelve months that end next August.

— Text-book positioning for the future. The $25 billion cash kitty positions Apple for an acquisition binge should it decide to go shopping, or to fund some major new initiative (during the last downturn, Apple launched its retail store chain.). The company also seems to have the sales momentum to enable it to keep EPS in good shape, even as it brings down gross margins. That will put even more heat on rivals. The company plans to bring those gross margins down from around nearly 35% last quarter to around 30% or 31% this quarter. Jobs’ message for competitors was clear. Asked during the analyst call about the priority for the iPhone business going forward, Jobs said “I think we have to not leave a price umbrealla underneath us…We’re very committted to making the iphone a great value for our customers, next year and beyond.”

— Maybe the biggest story of all is the continued success of the AppStore, which is expected to dole out the 200 millionth iPhone app tomorrow, just 102 days after the online store opened its doors. “We’ve never seen anything like this in our careers,” Jobs said. “We’re far along in creating a virtuous cycle” in which more apps beget more iPhone sales, and vice versa. Having covered tech through the PC Revolution of the 1990s, for me the phrase “virtuous cycle” is synonymous with the Wintel standard that propelled Microsoft and Intel to soaring heights in those days. I asked Jobs two months ago whether the success of the AppStore at that point made him think the iPhone could develop into a similarly dominant platform. At the time, he said that yes, he felt it might be heading in that direction. I wonder if he’s now convinced.

— Leadership. That’s what Jobs showed by getting on the earnings call with analysts. It’s something he hasn’t done in years, if ever. It’s exactly the sort of symbolic gesture that was needed to provide what’s truly in short supply these days—investor confidence. It wasn’t just what Jobs said, but how he said it. While he clearly had his eyes open to the possibility of a downturn, one could sense his utter confidence in how well the company is performing and will perform. It was the kind of statement that’s been so painfully absent in these recent weeks from top business leaders.

Finally, and it’s been said many times before, it struck me listening to the call that Apple is in some ways a model not only for other tech companies, but for the US economy. Here we’ve got a company that is earning every bit of its success, with technical innovation, hard-headed business pragmatism, and extremely hard work. It’s found a way to prosper in a world despite the pressures of commoditation and globalization. It’s refused any easy ways out—like jumping into what other people say may be a good idea, such as Netbooks or music subscriptions. And while too many Americans have been looking to the stock market or real estate market or derivatives to achieve their financial goals these past few years, Apple is focused squarely on its day job. In fact, it turns out that Apple lost only $80 million on that $24.5 billion in cash and short-term investments. There’s a lesson in there somewhere for the rest of us—though the rest of us may not be capable of pulling off the performance Jobs & Co. have made a habit of delivering.

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