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  (Source: Reuters)
Tim Cook offers many interesting theories as to why the tablet market is growing, but iPad sales are shrinking

While showering shareholders with $90B USD cash via a 7-to-1 stock split -- just over half of Apple's roughly $170B USD cash pile (including fiscal Q2 2014 profit and long term investments) -- sent shares of Apple, Inc. (AAPL) rising and investors humming a happy tune, one part of Apple's earnings report unsettled analysts.

I. Asked About Slow Sales, Office, Tim Cook Chides Microsoft for Slow Launch

The iPad had sold: It doesn't take a rocket scientist to notice the trend there -- sales of the iPad, the world's most popular tablet computer, have hit a slump after a strong holiday season.  Combined with basically flat quarterly Mac computer sales and weak iPhone growth (~17% on a year-to-year basis) by Apple's standards, and this red flag becomes even noisier.

Apple CEO Tim Cook offered a somewhat odd non-sequitur in that he simultaneously praised rival Microsoft Corp. (MSFT) for its high profile launch of an Office 365 app for the iPad, yet also seemed to perhaps imply that Microsoft's "slowness" to release that app had hurt the iPad.
 
iPad sales are in the doldrums because of Microsoft Office?

During the earnings call's Q&A segment UBS Securities (UBS AG (UBS)) Steven Milunovich asked Tim Cook about the slow iPad sales, perhaps nudging him towards the Microsoft Office tie in.  He asked:

Tim, I understand that the iPad is not as weak as it appears on a sell-through basis, but still it's relatively flat over the last year in terms of sell-through. What are your thoughts in terms of why that is and can that accelerate with Office on the iPad going forward?

Tim Cook odd look
Tim Cook, Apple CEO [Image Source: Mashable]

He responds:

Office; I believe does help. It's very unclear to say how much. I believe if it would have been done earlier, it would have been even better for Microsoft frankly, there is a lots of alternatives out there from a productivity point of view, some of which we brought to the market, some of which many, many innovative companies have brought. But I do see that Office is still a very key franchise in the enterprise, in particular. I think having it on iPad is good, and I wholeheartedly welcome Microsoft to the App Store to sell Office. Our customers are clearly responding in a good way that it's available.

The response sort of makes sense, but one must wonder what good it does to complain about Microsoft not having released the software earlier.  Apple, of course, offers its own first-party solution iWork for the iPad.  
 

Tim Cook did try to emphasize the strong points of the iPad's sales.  He emphasized in another part of his lengthy, winding response that the iPad had sold 210 million total units to date.  He remarks:

When I backup from iPad, here is what I see. It absolutely has been the fastest growing product in Apple's history, and it's been the only product that we've ever made that was instantly a hit in three of our key markets, from consumer to business including the enterprise and education. 

He also pointed to that Apple had a 95 percent market share in educational deployments (excluding Microsoft's free giveaways, apparently), and that 98 percent of the Fortune 500 were using the iPad in some way.

II. Cook Offers Vague Aspersion About Hybrids

Other parts of Tim Cook's response were also somewhat odd and defensive, though.  He seemed to imply that Apple's slump to 46 percent of the tablet market sales in the U.S. was the result of miscategorization.  Presumbably he's talking about hybrid form factors like Microsoft's Surface 2 or the numerous transformable tablet computers that run Google Inc.'s (GOOG) Android operating system.  

Tim Cook doesn't believe hybrid tablets are really tablets.

But he fails to ever really explain what he means, stating:

In the retail market, if you look at the U.S. as a proxy, the NPD numbers for March just came out a few days ago and we had 46% share and embedded in that 46%, there's a lot of things in there that I personally wouldn't put in the same category as iPad, and that are weighing the share down.  It's certainly a market we wouldn't play in and in a type of product you would never see an Apple brand on.

Perhaps Tim Cook has learned a lesson from public blowback over comments from the late CEO Steve Jobs that seemed to imply smaller tablet and larger phone form factors were useless.  Perhaps by keeping his complaints as vague as possible, if Apple later sees a strategic advantage in making, say, a hybrid tablet, he won't face quite as resounding a "told you so" from critics.  But the alternative -- making such vague and bitter complaints -- seems almost worse that Steve Jobs' approach.

III. Apple Still Struggling to Figure Out Supply and Demand Balance Under Cook

The other parts of the Q&A were equally cryptic.  As he did with the iPhone 5C miss in Q1 2014 (Oct.-Dec. 2013) he blamed some sort of overproduction (or underproduction?) scenario.  He states:

iPad sales came in at the high end of our expectations, but we realized they were below analysts' estimates and I would like to proactively address why we think there was a difference. We believe almost all of the difference can be explained by two factors. First, in the March quarter last year we significantly increased iPad channel inventory, while this year we significantly reduced it. Luca will go into more detail about this later.

It makes sense that Apple would balance supply and demand but Mr. Cook's wording is troublingly ambiguous.  He could be alluding that Apple underproduced to try to avoid excess inventory.  Or his comment could perhaps allude to drops in price of some models.  But that would be yet another non-sequitur as if anything you'd expect lower prices would stoke more sales.  Or perhaps he's saying that Apple overproduced in Q2 2013 and sold the iPad at lower prices to try to temporarily reduce excess inventory resulting in a somewhat artificial temporary jump in Q2 2013 iPad sales?

He perhaps hints at the latter possibility in Q2 2013's earnings call, in which he stated (the grammar is a bit odd, possibly garbled by Morningstar's transcription):

These compares are made further challenging until we anniversary the launch of the iPad mini, which as you know we strategically priced at a lower margin.

The phrase to note is "strategically priced".


iPad mini with Retina Display

If he was telling investors something in his first point, they shouldn't expect much from his second point which basically repeats his first point about supply-demand imbalance in Q2 2013 versus a more balanced Q2 2014.

He continues:

Second, we ended the December quarter last year with a substantial backlog of iPad mini that was subsequently shipped in the March quarter whereas we ended the December quarter this year near supply demand balance. We continue to believe that the tablet market will surpass the PC market in size within the next few years, and we believe that Apple will be a major beneficiary of this trend.

The final part of that response it really peculiar, in that it seemingly casts Apple in a very negative light.  His comment doesn't really speak to the iPad sales slump at all -- if anything it highlights its severity by clearly stating that the market Apple is competing in is growing, but Apple's sales in that market are shrinking.

IV. Apple Says It's "Anti-Doing Something That's Not Strategic"

There's plenty of other places where Tim Cook appeared to be on the defensive.  In an interview with The Wall Street Journal and ZDNet Mr. Cook defended Apple's decision to be less aggressive in terms of acquisitions, instead opting to push the cash out to shareholders (something some shareholders have long been noisily clamoring for).

Alluding to Google and Facebook, Inc. (FB) he comments [sources: 1, 2]:

From an acquisition point of view, we've made 24 bids in 18 months, showing that we're on the prowl.  Obviously, we’re on the prowl.  We’re not anti- getting a big company.  What we’re anti- doing is doing something that’s not strategic.  We’re not looking to pay the most and get the most buzz out of it.

(There's a bit of a discrepancy -- ZDNet reports that Mr. Cook just said that Apple bid on 24 companies, not that it necessarily bought all of them.  The WSJ report says Apple bought 24 companies.)

Facebook Instagram
Tim Cook sort of seems to insult Google and Facebook's
acquisition strategies in a roundabout way.

Tim Cook also took the opportunity in the Q&A segment to take a potshot at Android.  He comments:

I would just add to that, because we are not fragmented like our competition, we can update an OS with a major release and a substantial percentage of our customers will update to our latest software.

While Tim Cook's response to this slump is less than decisive and a bit troubling, it's not necessarily atypical of his reign at Apple.  He's earned a reputation for at times offering odd or offensive remarks, such as his rant about Europe, which he later apologized about.  At times it seems as if Mr. Cook is struggling with the unenviable challenge of running one of the world's most profitable companies, a company that was long regarded as a key trend setter.

So there you have it -- Apple is pure and unfragmented, but shrinking in the fast-growing tablet market.  And if you want to know why you have to learn to decode Tim Cook's cryptic comments.  Were it Steve Jobs at the helm still, investors would likely receive a blunt -- if perhaps biased -- view on the issue.  Instead in the new era of Apple they're left to decode the web of words Apple's new leadership is weaving.

Sources: Apple Q2 2014 Earnings Call Q&A on Morningstar, Apple Q2 2014 Earnings Call on Morningstar



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RE: apple refuses to change with the market
By Fleeb on 4/24/2014 2:55:13 PM , Rating: 3
Couple of reasons:

1 - Why change something that works (the fanatics' words)
2 - Apple determined a long time ago that their offering are the perfect ones so there is no need to change them. What would be the implications if they do? But then, they have one of the best marketing teams in the world so they should not worry.


RE: apple refuses to change with the market
By Apone on 4/24/2014 3:15:36 PM , Rating: 2
quote:
Why change something that works (the fanatics' words)


It's always funny to hear the classic "if it ain't broke, don't fix it" argument (especially from i-tards) which compels me to respond with "You don't see auto manufacturers making and staying with just one style of a vehicle indefinitely and not trying to innovate and refresh/enhance its aesthetics, safety, MPG, etc.."


RE: apple refuses to change with the market
By Samus on 4/25/2014 3:23:31 AM , Rating: 1
Comparing progress in the auto industry to the tech industry couldn't be more apples to oranges.

The auto industry is heavily regulated by governing bodies that require safety advancements, fuel economy improvements, and design enhancements in order to be legal.

The tech industry is entirely consumer-driven. There are virtually no governing regulations outside of interference restrictions, radiation, and UL safety requirements. With the exception of no longer being able to ship lithium batteries on aircraft and the deregulation of WiFi radio's on aircraft, these regulations haven't changed in decades.

All improvements in the tech industry are for survival. Apple doesn't seem to be having a problem surviving. They're the most valuable tech company in the world. I'm not saying they're right, and I think we all agree there should have been a 4.5" iPhone years ago, but for the most part Cook can't be argued with. Yes iPad sales are down, but it still outsold all other tablets by a huge margin with even huger profits.


By Singaporistu on 4/28/2014 10:05:22 PM , Rating: 2
The IT and especially the software industry moves way faster than the auto industry. The problem is not with the industry but with apple management. After Steve Jobs left the scene they forgot to innovate and are just surfing the wave of fans passion for the initial products.

Apple fails to see what the user wants. They hinted on building an iWatch more than 3 years ago, there was a big excitement in the Apple fans community forums, however few years had pass and I'm still waiting for it. Another disappointment (disApplePointment). Samsung seen user's desire for such device and build it within 1 year and now they even lunch the second generation.

If they don't come up with new concepts in iPhone 6 they will loose whatever fans base they have and will collapse in the same way Apple collapsed after Steve Jobs was fired in 85.


By arrandale on 4/25/2014 8:14:46 AM , Rating: 2
quote:
Why change something that works (the fanatics' words)


Just because something works doesn't mean it's the best way to do it. (response to the fanatics words)


By NellyFromMA on 4/25/2014 11:14:05 AM , Rating: 3
quote:
In the retail market, if you look at the U.S. as a proxy, the NPD numbers for March just came out a few days ago and we had 46% share and embedded in that 46%, there's a lot of things in there that I personally wouldn't put in the same category as iPad, and that are weighing the share down. It's certainly a market we wouldn't play in and in a type of product you would never see an Apple brand on.


The irony of that stance is that if Apple would create an MacBook Air that could convert into a tablet and optionally even transitioned into iOS when undocked, they would likely have a Surface killer, except it would likely cost at least twice as a Surface Pro equivalent.

That product-that-will-never-be sounds very appealing from a strictly tech standpoint actually.

Not that Apple necessarily HAS to do anything as it's quite healthy, but it seems rather odd to demean the Surface Pro when its actually setting the bar higher than the MacBook Air and the iPad when compared to each product separately, again, from a technical standpoint.


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