After n quarters of predictability, Apple surprised with sales performance that was 3.74% above the top of their guidance. This may not seem significant but since instituting a new range-bound guidance method in Q1 of last year the company reported revenue within about 1% of the top of the range.

This is in stark contrast to the wide variance in prior years. The following graph shows the “error” in guidance as the percent difference between reported sales and guidance[1].

Screen Shot 2014-04-25 at 4-25-10.18.06 AM

So prior to last quarter we were lulled into thinking that guidance was very nearly perfectly predicting the company. As I tweeted, it took the “sport” out of trying to do any forecasting. All an analyst had to do is tweak the main product growth figures to hit the sales target and then subtract the (generously provided) operating expenses and (also provided) tax rate to get the earnings. Only unknown to getting to an estimate of EPS was how many shares would still be outstanding.[2]

Knowing Apple also means that average selling prices are also very rigidly set in stone so the degrees of freedom in analysis were becoming highly constrained.

But just when you think you spotted a pattern, it changes. The company surprised with performance outside the band. The following graph shows the estimate ranges it has given and the actual revenues delivered.[3]

Screen Shot 2014-04-25 at 4-25-10.19.24 AM

So what happened?

The answer seems to be better iPhone performance. The following table shows my expectations, which were tuned to return revenues exactly at the top of the guidance range.

Screen Shot 2014-04-25 at 4-25-10.25.16 AM

On product shipments/sales I underestimated the iPhone and Mac and overestimated the iPad and iPod. I estimated iTunes accurately and underestimated accessories by 5%. I also generally got the blend of margins fairly close, being 1 point too low on gross margin.

The bottom line was that the Revenue and Earnings surprise could be accounted for through a significant outperformance on iPhone which offset a less significant underperformance on the iPad.

The iPhone grew sales by 14% which more than offset a drop of 13% in iPad sales and was enough to allow net sales to grow by 5%. Since the company guided nearly flat growth, that 5% was a big surprise.

Now one could ask whether 14% growth in the iPhone revenues is a meaningful change in the long-term evolution of the category. This is a difficult question. The way the iPhone is positioned makes it a great success in the premium segment of the market but it does not place it in competition with the perhaps 80% of the market which seems to be defined by a lower price point.

However let’s not forget that pricing is correlative to the market but it may not be causal. Purchase decisions are complex and price is one aspect of that decision. But there are many others. Availability, channels, service, brand all play parts. The error of many analysts is to conclude that price and price alone is causal to behavior. That may be so with commodities, but let us not forget that these products and their uses are newly created and how value is perceived has been changing rapidly. Buyers follow a learning curve in terms of discovering the uses and value of products. These learning curves can be modeled and usually show several years (sometimes decades) for most populations between early and late adoption.

We don’t know where the iPhone is on the learning curve for any particular region and that means we can still be surprised by how it grows.

  1. Upper end of range in quarters where a range was given. []
  2. The company itself would not know shares outstanding as their buying was opportunistic during the quarter. []
  3. Next quarter is also pencilled in. []
  • Jonathan Mackenzie

    “The error column shows negative values where I overestimated and positive values where I underestimated. ”

    This is reversed. The negative values show where you underestimated.

  • Jared Porter

    Thank you for recognizing that Apple’s products should rarely be accounted for as mere “pedestrian commodity products” and what additional factors go into distinguishing many of their products’ perceived uniqueness and rarified value in the marketplace. (I just heard a good discussion about this same viewpoint offered by another sage analyst, Ben Thompson, on the podcast Stratechery.FM, Episode 002). I wish more Wall Street analysts could understand this point when they keep on harping about Apple’s danger of being rendered irrelevant and swamped by the phantom “Android’s marketshare tsunami “. As always, thank you, Horace, for your unique perspectives and fresh, insightful, highly relevant revelations.

  • Ronald

    IPod was the easiest to predict (in hindsight). Simply take last years Q1 to Q2 change and apply to this year’s Q1.

    • KirkBurgess

      There will be a levelling off to a plateau at some point though, where there will be some people that will buy an iPod even though they own a smartphone. For instance people who don’t like to workout with a smartphone (so they have a shuffle or nano), or parents who don’t want their kids to have a smartphone when they are young (so they get an iPod touch), or android/windows phone users who still want a pocketable device that runs iOS apps (so they buy an iPod touch), or restaurant staff or sales assistants using an iPod touch as a ordering/POS system.

      But its hard to say where that plateau will be – it could be 2 million a quarter, or it could be 1 million, or even 500k. Whatever it is I imagine it gets rolled into the accessories segment as soon as a new hardware product line arrives to replace its position in the financial statements, hopefully in 3-6 months time.

  • obarthelemy

    Isn’t revenue guidance mostly PR, same as running out of product on launch day ?
    What’s the penalty for getting the guidance wrong, apart from “beats guidance” headlines ?

    • KirkBurgess

      Well for one thing the share price can fall from “revenue guidance below expectations” which is the “penalty” Apple suffered after January earnings.

  • charly

    Ipad numbers are bad. Was 20123 the highpoint for ipads?

    • rattyuk

      “Was 20123 the highpoint for iPads?” I have no idea and I won’t be around to confirm.

      • Don’t tease charly. He’s already sad and frustrated that that was the best he could come up with. At least he didn’t have to stoop to knocking iPod sales.

      • highr0llerr

        Hey, wait until Apple gets into 3D organ printing. Why so much pessimism after a great quarter?!

      • Space Gorilla

        Cool! Apple will be around for another 18,000 plus years 🙂

  • Accent_Sweden

    From Apple’s released info, is it possible to see how much of the beat on iPhone numbers was out of China?

  • ronin48


    Have you looked at iTunes account growth rates, numbers, spending, revenue compared with those of Google, FB, Twitter, Instagram, Amazon, WhatsApp, etc?

    I suspect it would compare favorably on many metrics.

  • are there any consensus rates of replacement on the different product lines? I know it’s 2 years on the iPhone but what about the Mac and iPad?

  • ptmmac

    I think we are also getting close enough to Apple’s unveiling of it’s new products that it becomes possible to guess what is in store for us on this cycle of innovation.

    I just came from the Wired discussion of Apple’s oft mentioned payments platform. While I was commenting there I realized that Apple has more irons in the fire than I had previously noted for payments. I am somewhat concerned that the systemic problems with iCloud are from a lack of senior management focus on the Cloud infrastructure. The iCloud has a weaker uptime record than most of the premium cloud service providers especially compared to Google. Here is my comment there:

    “I am not sure Apple will succeed with this effort [building a cloud payments system]. Their biggest weakness is no technical person on the senior management team who knows cloud services backwards and forwards. Their top iCloud manager, Eddy Cue, has a technical degree, but most of his work at Apple has been negotiating contracts with other copyright holders, and not building Cloud services. I do not really know Eddy Cue well enough to know if he is already fixing Apple’s traditional weaknesses here. Certainly iCloud has had more outages than Google for example, but change will not happen overnight.

    The key thing to take away from this is not just the article topic. The key idea here is Silicon Valley has identified the next killer app and it poses problems for all of the incumbents. The killer app is based upon privacy, security and trust. It will be a new form of money that bridges the web and real world payment systems. Google and Facebook do not have the trust or privacy of its clients as a part of its current business model. Amazon, and Ebay compete with all of the brick and mortar incumbents. Apple has the weakest cloud services.

    Apple needs a top level manager who understands security, software vulnerability and Cloud infrastructure. Apple’s problems are fixable, but they require the guts to admit the current lackluster offerings that are the iCloud are not good enough. This is really Tim Cooks first real gut check as the CEO of Apple. If he gets it right, and gives Apple a truly Cloud centric services company, then Apple will consolidate its control of mobile devices and become the largest company in history. Otherwise, someone else will do this and eventually take a lot of Apple’s business away from them.”

    While I was writing that I was looking up Apple’s management structure on line and I was surprised to note that Eddy Cue appears on Apple’s web page as Tim Cook’s right hand man. The other person I was surprised to see on Apple’s board was the CEO of America Grameen, Andrea Jung.

    So how would a new payments system, smart watch, smart phone, micro payments, an extremely large pile of cash, and cloud services tie together to make sense? I am jumping to conclusions, but I stand by my assessment of Mobile payments as the next killer app for Silicon Valley. It is hard to believe that this is something Apple is just now starting on. This has been in the works since before Steve Jobs left Apple. M/C and Visa are desperate for a system that can reduce fraud expenses for them in America. Apple might just be able to make that work.

    The iWatch makes much more sense as a device with this killer app embedded in it. The micro payments might offer a way to expand into lower cost markets that Apple currently does not have access to. An Apple phone and smart watch might be out of reach for many individuals that could use it through another persons business in emerging markets. Even the focus on medical applications for the iWatch makes more sense because it would relieve some of the complexity of using just an iPhone and the security aspects would be extremely useful as well. Even leaving Eddy Cue at the top of the management team makes more sense from this perspective. Adding M/C, Visa and Discover to the system will require Apple to do the same types of negotiations as were needed with the App store and iBooks.

    • charly

      Would iwatch work with Android?

      Problem with smartwatches is that their battery life sucks which makes their physical security hard as people remove them. I also don’t see why i would need to carry a watch with me at all times.

      • obarthelemy

        That’s indeed an issue. iTunes is not even on Android, what are the chances on an Apple payment system even breaking out of Apple’s 15% share ? Is that enough to build a payment ecosystem ?

      • graphex

        800 million accounts (mostly with credit cards) certainly seems like a good base to start from.

      • obarthelemy

        Yep. Then they tack on a 30% commission ? And convince shops to sign up becauuuuuuse…
        I’m not saying it can be done, I’m saying it takes a lot more than credit cards numbers to do it, and that “we’ve got credit cards numbers of people with too much money” argument probably doesn’t work as well when you want to replace other payment systems, as when you create a new market in electronic content. I’d be delighted to be wrong.

      • charly

        The 30% commission is not a problem. The 20% discount on itunes euro’s is the problem. It makes offering a 5% discount to selected, but not to selected, retailers impossible.

      • KirkBurgess

        15% of what? an Apple payment would likely be USA only initially, where Apple has close to 50%.

    • obarthelemy

      I’m not sure MC and Visa are that desperate for more security: cards with microchips and unhackable PIN codes have been available for decades, yet the US are still only magnetic stripes + signature (both very easily hackable). I think MC+Visa are more desperate to defend their chasse gardée and their nice cut on all payments. Succeeding in mobile payments will either require customer revolt (unlikely because apathy), heavy merchant push (unlikely because dependency on MC+Visa), or a complicated compromise that both ups fees for users, and works out a complicated split. Or all of the above. This is not about the tech, it’s about politics and partnerships, and I’m not sure Apple is that good at that: they do arm-twisting, they do proprietary, they do expensive…

      I’d go further than payments too: the only wearable that I’m interested in is an ID tool, that not only lets me pay with 100% safety and very low fees, but also lets me log in to anything just be being on my wrist. I don’t rate the chances of anyone managing to build the kind of support to enable that very highly, but Apple’s way less than others. Oh, and it should open my house and car door, too. And of course detect if the wrist it’s on is not mine, or not a wrist, or not alive.

      • ptmmac

        I would expect that the key will be to work with and not against the incumbents. Eddy Cue’s strength is in corporate negotiations. This was one of the things that made me think 2 part authentication was the real killer app for the iWatch. Giving the current payment systems a way to shut down fraud would be extremely valuble to them. The key for Apple is knowing how much they can ask for and not trying tomtake any more than it is worth.

        That plus the rumors about health care apps. Those will be important but they wouldn’t drive adoption. The same sensors that would track your health would be able to identify you. I can imagine some one could lose one of those devices, but losing both with out knowing it would be unlikely. Any attempt to spoof both would be difficult by itsef. Doing that with out having the device shut down by its owner would be nearly impossible unless you are willing to kidnap them. The medical tracking would be able to recognize extreme stress if it occurred.

    • Mark Jones

      Apple’s cloud infrastructure has been processing hundreds of millions of transactions daily in the iTunes Store and the App Stores, including those already being made from millions of iPhone 5s today. (I don’t see how problems with other iCloud services have much relevance with regard to mobile payments.) In the most likely case, Apple’s system doesn’t replace credit cards but simply makes your iTunes account the transaction point. (There are many other possible mobile payment schemes.)

      An optional iWatch would make the system even more convenient, as the iPhones stay in pockets/purses. The iWatch would have a secure method to authenticate with my iPhone, and might have NFC to increase the number of payment points of sale. (See Bruce Tognazzini’s iWatch entry from Feb 2013 at AskTog (dot) com for one view of this.)

      • charly

        Doesn’t apple need to get their store offline to sell new imacs?

        Apple has not a very good name in the technical aspects of their webstore. Why would their payment service be different.

      • Mark Jones

        Apple adds/modifies/removes thousands of apps, content (songs, movies, etc), and hardware on their stores each day without going offline. At this point, one should conclude that the whole going offline thing prior to a big announcement is simply a marketing ploy (plus a small step at avoiding buyer’s remorse.)

        As for the “not very good name”, I don’t see anyone complaining about iTunes/App Store transactions, especially given the hundreds of billions of purchases and upgrades.

        For a key technical aspect like security, many critics believe Apple has implemented it exactly right with iOS 7 and TouchID. Example: Steve Gibson at SecurityNow episodes 446 to 448. grc(dot)com/securitynow (Ever the critic, Steve correctly finds a privacy issue with iMessage but that has nothing to do with payments.)

      • charly

        Apple and security. They are a step up from the smartTV, – light etc makers but that isn’t really a compliment.

      • Mark Jones


      • charly

        Their handling of java to name one.

        ps. Do you really want to go into this? Their only security advantage is their closed store but that is more because they are control freaks than any understanding of how to handle security.

      • Mark Jones

        Their current handling of java?

      • charly

        I think you know what i’m talking about and if you don’t than don’t talk about security.

        ps. Another example how Apple doesn’t get security is how they handle IOS security issues and the way they are also often issues in OS X

      • Mark Jones

        Oracle supplies Java for OS X now, so I really don’t know what the issue is that you’re talking about.

      • charly

        They do it now. But did they before?

      • Mark Jones

        Why is “before” important? Companies can and do change; Apple hired many security staff back in 2011-2012, and we can see now it has had an impact.

        The point is Apple’s security has been significantly improved, especially in iOS 7, and there hasn’t ever been any significant security issues with iTunes Store or App Stores or Touch ID. These capabilities are relevant to mobile payments.

        And since you brought it up, Apple has also eliminated the security issues it created with its previous Java scheme.

      • charly

        Security is not number of staff or dollars. It is an ethos and Apple doesn’t show that ethos.

        ps. Touch ID is not security. It is fake security. I think we even can break it

      • Mark Jones

        Current evidence of that lack of ethos? My point is that the ethos has begun to change.

        For sure, hackers will be trying to break Touch ID once Apple unveils a mobile payment scheme, though I’m sure some are already trying. So join them and try.

        While you’re at it, what smartphone (or mobile ecosystem) do you say is more secure for mobile payments?

      • charly

        That is easy. S30

      • Mark Jones

        That S30 is really making an impact in global mobile payments!!

      • charly

        I assume you see that the answer is partly a joke. But mobile payment is at the moment mostly a success in very poor countries so i’m probably not even wrong

      • charly

        I don’t think it is in Apple’s blood to be good at security. It conflicts with their expression of superiority.

        TouchID was broken on the first day. Nothing Apple can do would change that. Besides $30k fingerprint scanners are also broke so i doubt an add-in for a $400 phone would be better.

      • Gray_Williams

        You truly have no idea what you’re talking about.

      • Walt French

        You’ve out-done yourself in making empty, attacking assertions without offering a shred of evidence.

        Apple users have by and large done quite well by depending on Apple’s security efforts being sufficient. So have other users, once you consider the full ecosystems (e.g., the firewall where I work that blocks many—not all—of the worst malware efforts). Stories of “shocking,” “horrible” vulnerabilities end up not actually causing Apple users’ data to be compromised, at a rate even a small fraction as frequently as happens on competitive platforms.

        PS: Touch ID is not security in the same way that Microsoft Patch Tuesday or Android anti-virus programs are not security: all are but one part of the multi-level strategy that is required. Many articles about security make no effort to examine the costs of security (such as emails that get caught in company spam filters, or research sites that I can’t visit because they use scribd; the TouchID is a real breath of fresh air in adding security at the same time it speeds the user in starting up.

  • translator

    “But just when you think you spotted a pattern, it changes.”
    Translation: “I was completely wrong”

    • jinglesthula

      ‘Completely’ is a big word. I think Horace did a good job of pointing out which parts he was right on and which parts he was off on, and by how much.

    • Mark Jones

      “I was completely wrong” is a possible translation but it’s most likely incorrect. In all cases, it’s irrelevant.

      A more useful analytical perspective would be: Why did the pattern change? Was the extra ~2.7% a surprise to Apple, especially since they offered that guidance almost one-third of the way into the quarter (four weeks)? If so, what happened in Feb and Mar that Apple did not expect?

  • Chaka10

    By my calculations, iPhone ASP declined to $596 from $613 in C1Q13). That’s good news in that the percentage YOY decline (2.79%) was less than in C1Q13 (3.47%), and perhaps shows the power of the 5C. But it does highlight that much of the iPhone growth, which broadly surprised observers and analysts, came from emerging markets.