January 22nd, 2008
Is Apple a barometer of the consumer economy?
During the investor conference call over Apple’s December fiscal first quarter conference, analysts kept pressing executives about whether the Cupertino company is the bellwether for the consumer spending. But Apple’s value proposition is different than the rest of the industry and so is its customer base, making it tough to serve as the economic test case.
Of course, on most fronts, Apple’s December quarter was excellent, especially for Macintosh and even for desktops, which defies the analyst predictions that what everyone wants is a notebook. Desktop sales were up 20 percent sequentially in units and up 53 percent year over year.
Apple Chief Operating Officer Timothy Cook said that Leopard upgrades were helping to drive sales of Macs.
Check out related story: Will Macs star at this year’s Macworld Expo?
Still, the big-picture questions about the economy wouldn’t go away, no matter how many times the executive team tried to punt the subject and how well the questions were disguised. The analysts wanted to know whether consumers will keep on consuming.
Answering a question early in the call about consumer demand and whether Apple was figuring a recession into its guidance, Apple CFO Peter Oppenheimer said it was confident in achieving its guidance targets. “In terms of the economy, we will leave the economic forecasting to others and we are focused on managing our business.”
“The business performed very well in the Dec. quarter, with revenue in the United States growing 27 percent year over year. This growth rate was actually faster than last year’s Dec. quarter, which grew at 21 percent in the U.S. and for Fiscal ‘07 in the U.S., it grew at 23 percent,” he said.
“In the Dec. quarter, our U.S. Mac sales were 43 percent year-over-year. And the traffic in the retail stores was amazing; most of the stores are in the U.S. and our traffic grew by over 10 million customers year-over-year.”
“… So we remain very confident in our strategy and in our business, and we will continue to invest to innovate in hardware and software products that delight customers and continue to improve the buying experience in our stores and in the channel,” Oppenheimer said.
Parts of that statement was repeated throughout the call. While it was a dodge to the consumer spending question, Oppenheimer’s expression of the company’s strategy was spot on, particularly the last bits.
For Apple, it’s really very simple: the company is all about creating excellent products and an excellent experience in services, with its software and in its stores. It then executes on that plan. Period.
The company’s solutions aren’t commodity PCs, commodity computer peripherals or electronics. Something off the rack, can’t give you more or less a similar result to an iPhone, iPod Touch or Macintosh. Do other stores in the mall create community? Nope.
At the same time, Apple’s customers are different than the rest of the pack. Its customers really want those “delightful products” and great buying experience, as we can see from this quarter’s results.
However, this would seem to present a problem for an attempt to make Apple the barometer for the consumer economy. If Macintosh and iPod are now in the same class as food, gas and other necessities of a modern life, then Apple’s results may not show the same movement in spending (or lack of spending) that we might find with a luxury or discretionary purchase.
Here’s something scary for the competition in the business market: Apple’s cash position keeps improving. Oppenheimer was asked about whether it would buy back stock.
“Cash generation of the business on the Dec. quarter was very, very strong. … Stock buyback programs and other forms to return to cash are discussed with the board from time to time but our preference continues to be to maintain a strong balance sheet in order to preserve our flexibility to make strategic investments and/or acquisitions.”
If there are missing links in Apple’s pitch to business customers, the company has plenty of cash to go strategic.
David Morgenstern has covered the Mac market and other technology segments for 20 years. See his full profile and disclosure of his industry affiliations.
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