Tim Cook's Failed Apple Pitch

The CEO should focus on what's right with the iPhone maker, not why he thinks everyone's wrong.

Apple CEO Tim Cook insisted last week that everything was great with his company despite its first quarterly revenue decline since 2003. He and Apple's chief financial officer used the word "optimistic" 10 times during a conference call with analysts. Then the company's share price pessimistically fell for eight consecutive market days -- something that hasn't happened to Apple in nearly 18 years. 1  

Declaring victory didn't work the first time, so Cook made a trip to Jim Cramer's therapy couch on Monday to try to soothe investors. It's unfair to compare Apple's numbers to the 2014 debut of the iPhone 6, which was a tough act to follow, Cook said. He added: Everything is great. Look at how much money we're making. The smartphone market has plenty of room to run. Customers love us so much. Then Cook attended a gala at the Metropolitan Museum of Art. 

Here's what Cook didn't say: 1) Apple has been misjudging its own business, and that makes it tough to believe what executives say; and 2) The company failed to prepare investors for an inevitable slowdown in growth -- even if that slowdown proves temporary. If one duty of public company executives is to underpromise and overdeliver, Apple has flopped in that job.

Apple Swoon

Apple's stock market value has declined by $250 billion -- equal to the annual GDP of Ireland -- since a high point a year ago

Source: Bloomberg

Look at what happened just three months ago. On Apple's earnings conference call in January, Bernstein Research analyst Toni Sacconaghi asked about the company's own financial forecast, which he said implied that iPhone unit sales would decline 15 to 20 percent in the quarter that would end March 26. "We don't think that they'll decline to the levels that you're talking about," Cook said. 

At the time, Apple executives had one-third of the quarter under their belt. And yet, Cook was wrong and Sacconaghi was right. Apple sold 16 percent fewer iPhones in the March quarter than it did in the period a year earlier. 

Of course it's possible that sales in the next two months were worse than Apple had expected. Even if that were the case, Cook shouldn't have so confidently brushed off the sales decline number. 

Cook is also talking now about how unfair it is to compare Apple's sales numbers with those a year ago, when Apple was basking in the glow of intense demand for the iPhone 6, its first larger-screen iPhone released in September 2014. And yet, what's happening now was utterly predictable to everyone not in Cupertino, Calif. 

In a conference call with analysts just weeks after the iPhone 6 went on sale, Cook was asked (again by Sacconaghi) how sustainable the strong iPhone demand would be into 2015. Would a huge flurry of sales run the risk of a "reversion back towards an elongating of that replacement cycle in future generations?" Another analyst asked a similar question three months later. They were giving Cook a chance to prepare investors for a sales lull after the iPhone 6 boom.

He didn't take the opportunity. Cook's response in January 2015: "We're very bullish that it does have legs." Then he repeated the word "bullish" two more times. In the October 2014 call, he said so many people with older phones were eager to buy a larger-screen iPhone that "I would expect that to go on for some period of time ... I've never felt so great after a launch before." 

Plump Profits

Apple has the biggest profits by far among companies in the S&P 500

Source: Bloomberg

Note: Apple's profit figure is for the 12 months ended Dec. 26.

Fast forward 18 months, and Cook sounds like Sacconaghi. In his interview with Cramer on Monday, Cook said (emphasis added):

"What we're seeing is people are upgrading at a different rate, at a lower rate that they did last year, but still higher than the year before. And so we had this abnormally high upgrade rate last year as people bought into the iPhone 6, and now we're comparing to that along with the other things going on that many companies are facing with currency rates and macroeconomics, etc." 

Instead of playing catch-up to investor expectations, Cook should be changing the conversation to the company Apple is becoming -- enormous, hugely profitable and maybe not as spry in the growth department as it used to be. Smart work recently by analysts Jan Dawson and Neil Cybart show a more realistic picture of the iPhone's growth trajectory. Even without the bump from the iPhone 6, the pace of sales is slowing to increases by a high-single-digit or low-double-digit percentage each year. 

Air Escaping Apple's Balloon

Smoothing out the effects of Apple's sales boom from the iPhone 6, it's clear the iPhone's pace of growth has been slowing for some time.

Source: Bloomberg

Note: Quarters reflect Apple's fiscal year, which ends in September

That pace of growth in a company with more than $200 billion in yearly sales -- combined with annual profits that are double those of the second-most-profitable company -- is incredible. But if Cook wants investors to love that Apple, he has to pitch the beauty of that Apple, not insist that everyone who doubts his company is wrong.

The stock market saw an iPhone comedown coming, and Cook didn't. That makes it tough to believe his assurances now. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Apple's share price is higher so far during Tuesday's market session. 

To contact the author of this story:
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net

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