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The figurative sales of iPhones and BlackBerries

The most interesting juxtaposition in market data happened this week.

Apple announced 9 million units of the iPhone 5s/c sold in their opening weekend while BlackBerry recognized 3.7 million smartphones sold in the three months ended August 31.

I will state these data points with a different emphasis:  while Apple explicitly reported, both in a press release and in an SEC filing, Sales of 9 million units, BlackBerry reported recognition of revenues on 3.7 million units.  At the same time BlackBerry also reported sales to end users of 5.9 million units.

So, did Apple sell 9 million iPhones in three days? What about units ordered and not delivered? Which of these units will show up in the company’s income statement? Conversely, did BlackBerry sell 3.7 million or did it sell 5.9 million smartphones in three months?

The answer is dependent on what constitutes a sale. I suggest re-reading the Sold and Shipped: A Brief Introduction post from last year. Understanding is complicated by many factors, not least of which could be intentional signaling by management. We may never come to a perfectly matched comparison of the two companies’ situations but our job as analysts is to see through the signals and obfuscating language and interpret a pattern. A pattern that extends over a time and helps us learn.

My observation is one of contrast. The juxtaposition this time is that Apple emphasized sold and not shipped while BlackBerry sold more units to end users than it recognized revenue. These signals reflect precisely the inverted fortunes of the two companies.

For BlackBerry the higher sold than shipped recognition was due to a product launch failure. Units which were shipped (and recognized as revenue) last quarter did not sell and the company is not only writing off the inventory but has drastically reduced its deliveries of new units in order to drain inventory. The company explains:

During the second quarter the company recognized hardware revenue on approximately 3.7 million BlackBerry smartphones. Most of the units recognized are BlackBerry 7 devices, in part because certain BlackBerry 10 devices that were shipped in the second quarter of fiscal 2014 will not be recognized until those devices are sold through to end customers. During the quarter, approximately 5.9 million BlackBerry smartphones were sold through to end customers, which included shipments made prior to the second quarter and which reduced the Company’s inventory in the channel.

The company is essentially saying that due to the unusual circumstances of a product launch failure, they will change how they account for their business. They don’t have the confidence that units shipped will actually sell and will not recognize them since they fear they will have to write some off. They are signaling: They are being far more conservative, not reporting shipments alone because those shipments could essentially be value free.

When seen as a pattern, the new figure on recognized revenue units needs to be shown relative to the history of recognized revenue units.  

Screen Shot 2013-09-27 at 9-27-9.59.29 AM

You can see the instability in volume recognition in the graph as a clue. Product launches cause erratic changes in what was previously a seasonally stable business. This is, essentially, the company being thrown onto its back foot. It is staggering from an unexpected blow and resetting expectations.

Now note the contrast with Apple. Apple provides every quarter shipment data on all its products. This is consistent with generally accepted accounting principles and consistent with reporting from other companies.[1]

Apple also offers “channel inventory” data on select products. This inventory data, when coupled with shipment data, offers insight into how many units are actually purchased by end users. If Apple runs a tight ship then its inventory is relatively low but if it has a reliable customer base that of its channel is also low. Moreover, if it can predict sales well then it avoids overfilling the channel and having to take a hit while draining it.

In that context the way the company reported the 5c/s launch is signaling optimism:

On September 23, 2013, Apple Inc. […] announced that it has sold over nine million new iPhone 5s and iPhone 5c models, just three days after the launch of the new iPhones on September 20.

Apple expects total company revenue for the fourth fiscal quarter to be near the high end of the previously provided range of $34 billion to $37 billion, and expects gross margin to be near the high end of the previously provided range of 36% to 37%.

The SEC filing language above refers to the following press release:

Apple® today announced it has sold a record-breaking nine million new iPhone® 5s and iPhone 5c models, just three days after the launch of the new iPhones on September 20

“This is our best iPhone launch yet―more than nine million new iPhones sold―a new record for first weekend sales,” said Tim Cook, Apple’s CEO. “The demand for the new iPhones has been incredible, and while we’ve sold out of our initial supply of iPhone 5s, stores continue to receive new iPhone shipments regularly. We appreciate everyone’s patience and are working hard to build enough new iPhones for everyone.”

The reporting of sales after a launch weekend has been a staple of Apple’s communications about product for a long time. Therefore the evaluation of this performance should be made in comparison with previous launches.

But it’s not necessarily a statement of end user purchases. Nor is it a statement purely of shipments. The term “sold” as used in a press release is not an accounting term and it is not something which is meant to be audited.

However, none of that matters. The signal is what should be observed. By deliberately and repeatedly using the word “sold” Apple is expressing confidence that demand for its products is strong. Sure, there is channel inventory in that 9 million unit number but there are also ordered devices which have not been shipped and thus are not counted as sales. There are also depleted store shelves and people angry about not getting their desired phone model. Apple knows this, Tim Cook is making it clear they know this. They have excellent visibility into the distribution of their products. They have excellent inventory management. They are typically conservative in their financial reporting.

So why would anyone interpret Apple’s release as a negative signal? If you want an example of a negative signal, look at how BlackBerry reported its launch performance.

When interpretation of a signal is very different from the literal statement, it says more about the interpreter than about the company.

Notes:
  1. Though many, e.g. Samsung, Google, refrain from reporting shipments any shipment data at all. []
  • Ilari Scheinin

    I’ve been wondering about that SEC filing. Could “be near the high end of the previously provided range” be taken to mean “is slightly outside and above the previously provided range”? Because if it was within the range, the previously provided estimate would be spot on, and there would be no need to file anything. Or am I just reading too much into it?

    • Mark Howard

      I wonder about this too. They wanted to get away from blowing away everyone’s expectations each quarter, cause it hurt them in down quarters. With this, they are signalling that they really do mean to fall within their projected range, they really honestly do, but just this one time they were surprised by the demand and will come in above it. That’s my interpretation.

      • Chaka10

        Yes. Agree.

    • Chaka10

      That’s how I’m reading it. Apple made an unprecedented earnings pre-announcment. It basically took off the table any risk, in my view, of an earnings miss. Only reason I can think of (and this is speculation, though I like to think it’s pretty well informed) is that Apple is about to blow away earnings, like it used to do, … except this time it’s Apple’s own estimates that would get blown away, and it would come on the heels of Apple’ well publicized efforts to give more accurate earnings, and avoid some of the volatility from big misses vs estimates (up and down). My interpretation of the pre-announcment is that it’s Apple’s efforts to manage a big beat, in a way that is consistent with it’s efforts to improve guidance. Now, when it beats, it won’t be (shouldn’t be) as big of a surprise.

  • Space Gorilla

    I guarantee there will be people, likely in this very comment thread, that will go to great lengths to explain why this latest iPhone release shows Apple is dooooooooooooooooomed!

    • willo

      I´ll give it a try. First off, they old sold 9 millions 5C/5S in the first three days – clearly they should have managed to sell more in the range of 12-18million. Secondly, I have heard from some very connected people that investor mega billionaire Icahn is short on Apple. Thirdly, have you heard about the TouchGate? Apparently, it is very easy to replicate a fingerprint – all you need is a SLR, a 2400dpi scanner, a PCB lab and some expertise. Beside, Samsung will CRUSH Apple now that is releasing a GOLD S4.

      Apple is DOOOOOMED.

  • jim_zellmer

    Operator channel power vis a vis the smaller manufacturers is presumably immense and likely has near terminal cash flow implications: “20 containers are on their way back”…. Apple’s ability to somewhat “route around” operator channels is a tremendous asset. One might recall jobsian commentary on cio “orifices”.

  • tech01xpert

    Is this right: unlike iPhone 4s or 5 launches where people could pre-order the top end phone and receive it on launch day and therefore Apple can count the sale during the weekend number, the iPhone 5s did not have pre-orders and a significant number of iPhone 5s “sales” over the weekend are not counted in the 9 million figure because Apple couldn’t ship them?

    Also, the significant complaints about low channel inventory availability means that there isn’t that much channel fill, right? It’s either one or the other.

    Apple can’t recognize a sale over the weekend on any unsold stock at Apple stores. The obfuscation of 5c versus 5s is causing some additional guessing, but affirming higher guidance on margins and the several 3rd party data points seem to indicate that the 5s vs 5c demand mix is biased significantly higher than the 5 vs 4s demand mix last year.

  • rationalchrist

    “When interpretation of a signal is very different from the literal statement, it says more about the interpreter than about the company.”

    Nail it.

  • Phoney

    Isn’t it just that instead of selling a new phone and heavily discounting one or two old phones at the same time, they’re now selling two new phones, one of which is a bit of an inferior model, which is thus selling a bit like the last-year-models did.

    Meanwhile they’re scooping up really old phones for recycling, pulling people into the store, and taking a cut of that as well.

    Personally I think it’s a much more sensible strategy. I always thought even mentioning that they’re still selling models from 1 or 2 years ago seemed a bit tawdry, despite all the dosh they make from it.

    Apple are so geared on profits (a good thing I guess) that often their product cycles are too long for devoted fans to endure comfortably. I know it’s a strategy to make the most of their manufacturing base and whet maximum appetites, but sometimes I think they’re missing out on some low hanging fruit. I mean how long was it between iMac cycles (the new one is fantastic).

    • handleym

      “that often their product cycles are too long for devoted fans to endure comfortably”

      Oh for crying out loud. The NORMAL consumer updates their phone every two years or so. This is obvious when they’re on 2yr contracts. For non-contract countries, as am empirical fact it’s about 2 to 3 years.

      Even obsessives don’t upgrade their phone more than once a year.

      The ONLY people who find annual refresh cycles “too long to endure comfortably” are a few loudmouths on the internet whose lives revolve around whether Team Android or Team Apple is currently winning the Spec Race. No sane person cares about what these people think.

      And the length between this iMac and the last is 10 months — the previous one was released November 30 2012. ie annual updates, just like Apple usually does. Everything I said about phones applies just as much to computers.

      Your mental model (“but sometimes I think they’re missing out on some low hanging fruit”) strikes me a severely broken. You are either assuming that

      – people will buy macs more often if they are updated more often (a dubious claim) OR
      – people will buy a Windows machine rather than wait 3 month or whatever for the Apple update to that HW (a likewise dubious claim).

      • obarthelemy

        2 issues:
        1- bragging rights, which still seem to drive quite a bit of demand. Today’s leading performance will probably be fairly meh a year from now,
        2- competitors’ reaction: competitors now have a window to come up with a counter product. For example, the camera seems not class leading for the first time in a long time. I’m sure Samsung et al are busy tweaking the designs of their next flagships to poke where it hurts.

        But, bi-yeary is probably too much of a logistical/organizationnal/marketing challenge, and September certainly is the best month to launch.

      • handleym

        You seem to have a massively broken understanding of how phones sell in the real world, as opposed to the tiny world of internet fanboys.

        If I walked down the street and asked random people about the specs of their phone, how many do you think could tell me a single damn useful number?
        So much for “bragging rights drive sales”.

        Likewise for competitor’s reactions. Samsung’s going to copy, no matter what the schedule. Why bother worrying about it? You follow this year’s gold phone with an “emerald” phone in six months, you just know that Samsung, based on what it sees in Macrumors, is going to introduce its own “jade” phone (for the Chinese rather than the UAE market?) at the same time as you launch, anyway.

      • Ayuh

        “So much for “bragging rights drive sales”.”

        “Bragging rights drive sales” is hooey. “Bragging rights” at best drive advertisements which don’t really drive anything since most people are sick of ads are go to buy their device with their minds made up or mostly made up. The only thing “bragging rights” drive is the profits of the media outlet carrying the ads.

        Ayuh

      • Deborah Norton

        I would say you don’t know a thing about sales or marketing. It’s all about sales and marketing. Since when hasn’t it been about keeping up with the Jonses’! Only difference today is it’s now keeping up with the Justin Beibers etc. I totally agree with the person who posted that if you asked people on the street what operating system their phone had 98% would say “Who cares”.

  • Chaka10

    “So why would anyone interpret Apple’s release as a negative signal?”

    There seems to be a wide failure (or maybe even refusal) to recognize just how much risk Apple has taken off the table for investors in the last few weeks since the product announcement (risks real and perceived):

    1. margins (including specifically from the 5c);

    2. consumer demand for new iPhones;

    3. risk of cannibalization by the new 5c of flagship 5S (with consequent margin impacts, tie back to i above);

    4. market share — growing in US, UK, Japan, France, and forecast to grow in China;

    5. strength of Apple’s position with carriers — it’s added a long holdout, DoComo, which precipitated a pricing (subsidy) war in Japan (CHL in the wings);

    6. launch risk on iOS 7 — the success of the iOS 7 total refresh of the UI has masked how easily a launch of that magnitude could be a disaster (ask BB, MSFT…);

    7. technological innovation — Touch iD, A7;

    8. some patent litigation uncertainty (remember the injunction risk?);

    9. management uncertainty — this last part is most galling. The rumor-mongering on TC’s job security and confidence of the board!!! He and his team deserve a raise, not criticism; and

    10. [what am I missing?]

    Every risk factor, at every turn, has been addressed. So what remains to pick on? Channel stuffing in a blowout launch? The gall to even raise that “says more about the interpreter than about the company”, indeed.

    … And there still more to come.

    • poke

      Let’s not forget the interviews. They’ve opened up to an unprecedented degree with this launch. Cook, Ive and Federighi have taken the time to explain in clear and certain terms what it is that Apple does, why it does it and what it hopes to achieve by doing it. There’s really no excuse left when it comes to completely misinterpreting every move they make over and over again despite being wrong every time.

      • http://beautyandthesoftware.blogspot.com/ Adrian Constantin

        Since Jobs took over in late 90’s Apple have always explained their strategy openly, in plain English, for everybody to understand. At each launch they have explained in the keynote and subsequent interviews why they have launched the products and how they are thinking about the future of the product. Which is surprising for a company valuing secrecy so much.

        There were some notable exception in actions vs. previous public speech, e.g. the apps policy and the App Store came after declaring HTML5 as the preferred option. However I would attribute that to lack of knowledge, learning and course correction, rather than to an intentional plan to mislead. Their usual policy is to keep their mouth shut or avoid the subject when they don’t want to talk about something.

        As a side note, the launch of the iPad is one of my favourites. I can summarize their message as: we don’t really know how this product will be used or how it will do in the market, but our instinct tells us that there is a gap between the smartphone and the laptops and we know that the netbooks do not fill that gap. So we are going to try to occupy that space. A very cautious move, and the proof that they were not just trying to deceive with their caution is that it took a long time for the production to catch up with the demand.

      • poke

        You’re quite right, but there was also a perception of Jobs as a showman, whereas now we’re getting to look behind the scenes more. It’s clearer than ever that everyone at Apple is on the same page. It makes it harder to deny that Apple has a unique culture rather than had a unique CEO.

    • obarthelemy

      I’ll be the contrarian :-p

      1. price: they’re still only tackling the subsidized market.

      2. demand. we’ll see later on. right now it’s good in absolute terms (they’re growing), not so good in relative terms (they’ve lost a lot of unit/value share -though not profit)

      3. granted

      4. share: for every country up there’s a country down, well see global figures next quarter, for now it seems a wash.

      5. cuts both ways: Apple is also very dependent on carriers. And din’t they get dropped by a couple recently ?

      6. Mmmm, comparing BB10’s and Win8’s innovative upheavals to iOS 7’s mild me-too tweaks and coat of paint is a bit rich.

      7. Touch ID is not a first, and 64-bit ARM was announced 2 years ago. Apple’s take on it is early and good, we’ll see how it stacks up shortly when the others release 64-bit stuff.

      8. I don’t think that one is played out, I think in the end neither side will earn much, only lawyers will.

      9. we’ll see how the 5C pans out, the 5S really is very derivative. we’ll also see what Apple’s next innovation is. I understand logistics is important, but I’ve always seen Apple as more of a design-driven company. Mr Cook seems to be recruiting heavily that way.

      10. a reality check: we’ll know how things are panning out at the end of next quarter.

      • failed

        “Mmmm, comparing BB10’s and Win8’s innovative upheavals to iOS 7’s mild me-too tweaks and coat of paint is a bit rich.”

        Haha, me-too products that failed in market held up as exemplars. Cute.

      • Chaka10

        Oh no, not again with the “we’ll see”? Remember the last time you said that, in early May when I predicted the S IV launch would fall flat?

        @Obarthelemy: “We’ll see how this pans out when time comes to walk the talk indeed.”

        @Chaka10: “I don’t think we’ll have to wait long…. The first confirmation of this market dynamic that I look for is the failure of the spec-focused SIV to live up to sales expectations, in particular, such failure notwithstanding Samsung marketing spend/efforts and such failure in the absence of another high-end Android handset to take its place (the HTC One will be successful, but not nearly at the level expected of the SIV). After that, we will see how the fall launch of a new iPhone does, especially in the holiday quarter and the quarter thereafter.”

        … and a month later

        @Chaka10: “Didn’t have to wait long, it seems. Two interesting posts by Tiernan Ray on below expectation SIV demand — see his blog post on Barrons 6/5 and 6/6.”

        We won’t have to wait long this time either. Apple’s F1Q14 will be epic.

      • Davel

        6. Mmmm, comparing BB10’s and Win8’s innovative upheavals to iOS 7’s mild me-too tweaks and coat of paint is a bit rich.

        Bb10 was a huge step for them granted, but they failed. Failed in market acceptance and failed a it was years late to market.

        Wp 8 can be argued as a coat of paint. Windows 8 took windows 7 ui. I have no idea what the underlying code of Wp8 is in contrast to win 8. This too has failed as win 8 was supposed to save pc’s and it hasn’t. Nokia has grown windows mobile share and Microsoft’s hardware efforts have been a dismal failure. They are now bribing users to try their product.

        5. cuts both ways: Apple is also very dependent on carriers. And din’t they get dropped by a couple recently ?

        Yes, Russia and perhaps another minor market. This cannot compare to DoCoMo and CM. I will take that trade any day.

      • mjw149

        I would agree that Windows 8 was more innovative than the ios7, yet:
        1. Windows 8’s metro apps are an island to themselves, and an unpopular one.
        2. Windows 8 had poorly integrated innovation, while ios7 is an incremental release on a completely integrated and superior product (I own both, but facts are facts, the ios 7 built-in apps and app store have been developed longer and are better).
        3. Windows 8’s adoption rate is a laggard. The Windows app store is even worse.

        Windows 8 is still too held back by Windows’ legacy design and business model. I think it would be right there with ios or Android if it was truly rebuilt as a modern OS like, you know, WP8. There’s rumblings that they’re giving up on the high-license-cost enterprise OS business model for a Google-style hardware and services model, but they’ve been lagging in execution by years.

        Which brings us back to this post. IF ONLY Blackberry had spare billions of dollars to stay in the mobile market, you know?

      • http://www.noisetech-software.com/Home.html Steven Noyes

        I would trade growth in the US, UK, Japan, France for Niobe, Turkey, Kenya and Czechoslovakia any day. As for carriers… All handset makers are beholden to the carriers for distribution and this is serious strength of Samsung. Relationships they have been building for 15+ years paying off.

    • Walt French

      I want to step in just on the iOS7 issue with a perspective I’ve only seen hints at elsewhere.

      iOS7 provides a long list of system services for apps that make it much easier add sharing, P2P connectivity, big-screen display and other features to apps. It substantially enhances developers’ ability to support user preferences for display, gaming and other important product areas.

      But most people focus on the “new coat of paint” that has little to do with the central purpose of an operating system, its mediation between apps and the hardware. I believe that the tools were put in place for the same reason as the paint, and that is to help users get the most out of the screens’ real estate, allowing bigger features without visual clutter. Hence, the developers’ “textkit” that allows an app to have small text for users who prefer a lot of content, versus large text for users (like me) who often use my phone while walking or in moving vehicles, and have trouble focusing closer than 12″/30cm anyway. And a design language that de-emphasizes borders around buttons, drop shadows and other on-screen elements that take space when another idiom supports the same affordance.

      A 5″ diagonal screen is over 50% bigger than a similar 4″ screen, and comes with a lot of cost: pocket size (I prefer my shirt pocket), component cost, battery usage and weight. I believe that iOS7 is primarily an initiative to “work smarter, not harder” at matching apps and the OS functions to more svelte devices (just as Apple never went for monster 19″ portables).

      I believe that security is the other underlying feature of iOS7. iPhones and iPads are now much less valuable to thieves, because ownership information cannot be wiped off the device, no matter where in the world it connects to the internet. In addition to the cited speed advantage, the 64-bit CPU includes an apparently unhackable security module to prevent malware from escalating their privileges or interfering with apps or data outside of its allowed zone. The fingerprint reader is a but small part of helping users make their device secure against theft or malware. The market for stolen iPhones could virtually disappear, and merchants and banks will be able to trust the phones for build-out of transaction systems atop them.

      Undoubtedly, Android devices will license 64-bit designs from ARM and there are already dozens of faux-iOS7 skins in the Google Play library. These will allow Android to get a look-alike, but not work-alike version of it.

      • Space Gorilla

        Agreed. I see Apple slowly building the next computing platform, and it seems most analysts are missing this, they’re so focused on viewing everything through the smartphone lens. The 5S is not a smartphone.

      • Walt French

        Several otherwise savvy bloggers (I’ll pick on Benedict Evans) who insist on looking at the iPhone in the context of all phones. There’s some truth to that, in that almost everybody wants a phone in his pocket but few people want to drag around multiple devices to also have a music player, internet, etc.

        But especially inasmuch as you can get a nice Nokia featurephone for less than one-tenth the price of an iPhone, the iPhone is barely fulfilling the same job as a “phone” is meant to.

        Supporting this observation: the Pew surveys recently cited that my demo (Americans ≥ 65) primarily use phones for voice, if they have a mobile at all (half of the US’s non-mobile users are in “my” group). But others primarily use phones for non-voice.

        Apple is indeed “building the next computing platform.”

      • Space Gorilla

        Yes, I look at the 5S and wonder how long before the iPhone is a ‘computing engine’ that drives accessories, a second screen, wearables, etc. Not too long I think.

  • the Ugly Truth

    RE: why would anyone interpret Apple’s sales release as a negative signal?

    Because no one believes a Black Swan exists.

    Why does it take an independent blogger to explain the nuances of the contrasting releases?

    NVM…who is paying attention anyhow?