Missing Phones - Perspective from Lawyer
I am surprised an attorney with securities experience has not spoken on this issue yet. When Apple says it "sold" 4 million units, it means that consumers purchased 4 million units, not that these phones are sitting on shelves. As someone who has been involved in SEC enforcement, I cannot believe that Apple would disclose this number in a conference call, link the number to "sales" and really mean that inventory is piling up somewhere. This is a distinction, and if Apple were so careless to misrepresent, it would be subjected to major SEC fines, and many, many securities lawsuits. So when speculating about what this number means, remember that you are accusing Apple of major fraud and securities violations if you believe that inventory piling is equated to sales.
As for the lower guidance this quarter, people should also read between the lines. Apple's earnings surpassed expectations and were phenomenal. So guiding ahead, we should account for the fact that those who unexpectedly purchased during the holliday season, would not be buying the same things this quarter. Apple did not sound concerned at all about the softening economy, while others, including intel, did. The message is clear to me: we anticipate lower demand this quarter, not because of the economy. We expect lower demand because the demand was so high last quarter.
As for the lower guidance this quarter, people should also read between the lines. Apple's earnings surpassed expectations and were phenomenal. So guiding ahead, we should account for the fact that those who unexpectedly purchased during the holliday season, would not be buying the same things this quarter. Apple did not sound concerned at all about the softening economy, while others, including intel, did. The message is clear to me: we anticipate lower demand this quarter, not because of the economy. We expect lower demand because the demand was so high last quarter.
Comments
As for the lower guidance this quarter, people should also read between the lines. Apple's earnings surpassed expectations and were phenomenal. So guiding ahead, we should account for the fact that those who unexpectedly purchased during the holliday season, would not be buying the same things this quarter. Apple did not sound concerned at all about the softening economy, while others, including intel, did. The message is clear to me: we anticipate lower demand this quarter, not because of the economy. We expect lower demand because the demand was so high last quarter.
Often, the simplest answer is the correct one.
In this case, the simples answer is that Apple almost always gives very conservative guidance, below wall street forecasts, and almost always exceed those numbers by a fair margin. Apple has been doing this for years, and the number of people who still get caught up in it surprises me.
I am surprised an attorney with securities experience has not spoken on this issue yet. When Apple says it "sold" 4 million units, it means that consumers purchased 4 million units, not that these phones are sitting on shelves. As someone who has been involved in SEC enforcement, I cannot believe that Apple would disclose this number in a conference call, link the number to "sales" and really mean that inventory is piling up somewhere. This is a distinction, and if Apple were so careless to misrepresent, it would be subjected to major SEC fines, and many, many securities lawsuits. So when speculating about what this number means, remember that you are accusing Apple of major fraud and securities violations if you believe that inventory piling is equated to sales.
As for the lower guidance this quarter, people should also read between the lines. Apple's earnings surpassed expectations and were phenomenal. So guiding ahead, we should account for the fact that those who unexpectedly purchased during the holliday season, would not be buying the same things this quarter. Apple did not sound concerned at all about the softening economy, while others, including intel, did. The message is clear to me: we anticipate lower demand this quarter, not because of the economy. We expect lower demand because the demand was so high last quarter.
I'm glad someone finally pointed this out. The more likely suspect is pointed out in this article and espeically the comments. RoughlyDrafted'sTake
I'm glad someone finally pointed this out. The more likely suspect is pointed out in this article and espeically the comments. RoughlyDrafted'sTake
That piece is totally delusional.
There isn't a lot of differenc between Sacconaghi's 670K in channels and Munster's 512K in channels. That author said Tom Krazit (who based his article on Sacconaghi's numbers) is delusional --- so is he also saying that Munster is delusional as well.
If you look at Munster's numbers --- he said that those inventory numbers are "normal". That's total BS because his theory of 5 weeks of inventory at 512K equal to 5.3 million iphones to be sold annually in 2008.
http://seekingalpha.com/article/6174...ing-2m-iphones
Apple shipped 3.7 million iphones in 2007. If Munster thinks that Apple is going to only need 5.3 million iphones in 2008 --- then Apple would miss the 10 million iphone target by a million units (3.7 million + 5.3 million = 9 million).
So Munster has 2 choices --- either state that (1) Apple will miss their sales target by 1 million iphones or (2) Apple will be stuck with 1 million iphones in channels.
That piece is totally delusional.
There isn't a lot of differenc between Sacconaghi's 670K in channels and Munster's 512K in channels. That author said Tom Krazit (who based his article on Sacconaghi's numbers) is delusional --- so is he also saying that Munster is delusional as well.
If you look at Munster's numbers --- he said that those inventory numbers are "normal". That's total BS because his theory of 5 weeks of inventory at 512K equal to 5.3 million iphones to be sold annually in 2008.
http://seekingalpha.com/article/6174...ing-2m-iphones
Apple shipped 3.7 million iphones in 2007. If Munster thinks that Apple is going to only need 5.3 million iphones in 2008 --- then Apple would miss the 10 million iphone target by a million units (3.7 million + 5.3 million = 9 million).
So Munster has 2 choices --- either state that (1) Apple will miss their sales target by 1 million iphones or (2) Apple will be stuck with 1 million iphones in channels.
The only delusional pieces are the analysts. The simplest explanation, which is supported anecdotally by my friends in Europe and Asia, outside of France, Germany and the UK, is that these phone have been purchased and 1 of two things have happened
1) they're being unlocked
2) People got them for Xmas and didn't activate them until after the 1st. I personally know two people who did this. They were busy during that week.
The added value for this is that it is consistent with facts and Apple's public declarations at MacWorld and their quarterly call.
Declaring inventory shipped to Apple Store's as sold would be a gross violation of both GAAP and SEC rules, and easily caught and reported. There is NO motivation on Apple's part to do this. While you might argue they could have shipped to AT&T and claimed they were sold (would depend on details of the contract with AT&T) this has several fundamental problems
1) Its questionable under GAAP (remember they said sold NOT shipped)
2) the AT&T stores are selling far fewer per store than Apple stores so the inventory build-up at the AT&T stores would be impressive and might require disclosure by AT&T.
3) Again, no motivation on Apple's part. 4 million at this point is probably well ahead of internal targets.
So, to support the analysts theory requires a massive conspiracy of Apple, its independent auditors, and probably AT&T.
The added value for this is that it is consistent with facts and Apple's public declarations at MacWorld and their quarterly call.
It has been well known since last July that the difference between Apple's number and AT&T's number is partially due to channel inventory.
http://www.news.com/ATT,-Apple-diffe...3-6198884.html
Shipment numbers --- much like back-dating --- is actually legal if they declared them correctly in the SEC filings. Nothing wrong with that.
f you look at Munster's numbers --- he said that those inventory numbers are "normal". That's total BS because his theory of 5 weeks of inventory at 512K equal to 5.3 million iphones to be sold annually in 2008.
This assumes no additional markets are opened. Additional markets will likely add both to sales and channel inventory (unless sales outstrips supply).
It has been well known since last July that the difference between Apple's number and AT&T's number is partially due to channel inventory.
http://www.news.com/ATT,-Apple-diffe...3-6198884.html
Shipment numbers --- much like back-dating --- is actually legal if they declared them correctly in the SEC filings. Nothing wrong with that.
If you declare them as shipped, of course, if you declare them as sold, it depends on the contract, which is what I said above, but the article you reference never actually deals with the number in channel, just that some of the so called missing phones at that time were in channel, the rest were just not activated. And, as indicated in the wording of that report
iPhones that were sold to AT&T for distribution through its network of retail stores and iPhones sold through Apple's retail stores.
The so called channel inventory at Apple stores is NOT counted as sold. So then ALL of this so-called missing channel inventory would have to be at AT&T stores. Why would AT&T unnecessarly increase its inventory? They don't even advertise the iPhone.
The simplest explanation requiring the most reasonable assumptions is that above.
This assumes no additional markets are opened. Additional markets will likely add both to sales and channel inventory (unless sales outstrips supply).
Cell phone sales are mostly concentrated in the christmas quarter (and iphone sales were not really good in the last quarter).
AT&T activated 900K in Q3 and stalled at the same 900K activation in the christmas Q4. Chances are sales for the iphone are going to be really really slow in Q1-Q3.
If you declare them as shipped, of course, if you declare them as sold, it depends on the contract, which is what I said above, but the article you reference never actually deals with the number in channel, just that some of the so called missing phones at that time were in channel, the rest were just not activated. And, as indicated in the wording of that report
The so called channel inventory at Apple stores is NOT counted as sold. So then ALL of this so-called missing channel inventory would have to be at AT&T stores. Why would AT&T unnecessarly increase its inventory? They don't even advertise the iPhone.
The simplest explanation requiring the most reasonable assumptions is that above.
Read the 10K SEC filing (page 38) --- Apple has always declared shipping numbers:
"Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped, and title and risk of loss have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion of the risk of loss on these sales during transit. If at the outset of an arrangement the Company determines the arrangement fee is not, or is presumed not to be, fixed or determinable, revenue is deferred and subsequently recognized as amounts become due and payable and all other criteria for revenue recognition have been met."
http://media.corporate-ir.net/media_...APL_10K_07.pdf
There are now 4 carriers holding channel inventories. Munster said 4 carriers each holding 130K iphone in channel inventory is not that bad. Sacconaghi said 4 carriers each holding 165K iphone in channel inventory is very bad.
There isn't a lot of difference between Sacconaghi's numbers and Munster's numbers --- both in terms of estimated number of unlocked iphones and estimated number of channel inventory.
Read the 10K SEC filing (page 38) --- Apple has always declared shipping numbers:
"Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped, and title and risk of loss have been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers revenue until the customer receives the product because the Company retains a portion of the risk of loss on these sales during transit. If at the outset of an arrangement the Company determines the arrangement fee is not, or is presumed not to be, fixed or determinable, revenue is deferred and subsequently recognized as amounts become due and payable and all other criteria for revenue recognition have been met."
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This is exactly what I am saying. Apple Stores are consolidated in the financial statement so for inventory shipped to Apple Stores " persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped, and title and risk of loss have been transferred. " IS NOT MET. Please talk to someone who actually does this for a living. Shipping to Apple Stores is NOT a sale as its to themselves. AT&T is different, and as I've said twice now, it depends on the contract with AT&T. If AT&T could return the iPhones for credit then Apple could not take revenue nor declare them as sold.
If you want a concrete example, suppose an Apple Store burns down then don't you think the loss of that inventory would be born by Apple. Who else would bare it????
This is exactly what I am saying. Apple Stores are consolidated in the financial statement so for inventory shipped to Apple Stores " persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped, and title and risk of loss have been transferred. " IS NOT MET. Please talk to someone who actually does this for a living. Shipping to Apple Stores is NOT a sale as its to themselves. AT&T is different, and as I've said twice now, it depends on the contract with AT&T. If AT&T could return the iPhones for credit then Apple could not take revenue nor declare them as sold.
If you want a concrete example, suppose an Apple Store burns down then don't you think the loss of that inventory would be born by Apple. Who else would bare it????
I didn't say that Apple considers Apple stores to be an independent channel. Whatever number of units actually sold by Apple stores is the number sold.
Considering that Apple doesn't have any Apple stores in France and Germany --- the channel inventory holding by AT&T, O2, Orange and T-Mobile gets more and more likely.
Apple can hold inventory for themselves --- i.e. for warranty exchanges and for Apple's own stores --- but they don't count as part of the Sacconaghi's estimate or Munster's estimate
AT&T activated 900K in Q3 and stalled at the same 900K activation in the christmas Q4. Chances are sales for the iphone are going to be really really slow in Q1-Q3.
The following article considers a number of issues looking forward to 2008 cell phone sales in general:
http://www.technewsworld.com/story/wireless/61389.html
Several possible explanations are offered in the middle of the article:
Some Explanations
First, in AT&T's conference call with investors, AT&T actually addressed a question that gets at the perceived discrepancies without definitively nailing down each iPhone, which may be impossible. AT&T said there are devices that AT&T has purchased that are in inventory; there are devices that have been sold and shipped but haven't been activated yet; and there are some devices that are being purchased through channels in the U.S. or purchased through online channels that are actually going to international markets.
AT&T's answer means that the company actually buys the iPhones from Apple, which lets Apple credit the sale before AT&T. What's a reasonable number? That's hard to say, since companies like AT&T also sometimes use so-called middlemen distributors for mobile devices. However, it's safe to say that a good number of iPhones are in AT&T's channel somewhere. Plus, it's possible that more customers are buying direct from Apple vs. from AT&T, which indicates a customer preference to initiate the sale through Apple -- and that might mean AT&T has gobbled up more iPhones than it thought it could sell through its own stores.
The notion that iPhones have been given as holiday gifts brings up two points. First, the owners may be waiting for service contracts with other carriers to expire before activating the iPhones. Secondly, these owners may be more likely to attempt to hack and unlock their iPhone and use it with their existing carrier until their service contracts run out -- or forever. These buyers may not see a tricky software hack as a $400 risk since they didn't actually pay for the phone themselves.
In particular, they cover the discrepancy that exist between units sold and activations at the end of the article:
The Last Option: Something's Fishy
It is possible that someone is lying or overstating their numbers for the benefit of public perception. In this case, it seems unlikely for AT&T simply because the numbers are far under what Apple has first reported. The larger the discrepancy, the more likely it appears that customers are bypassing AT&T altogether. That's not a point public relations people like to make.
As for Apple, the company certainly wants to be given investors' money and make the world love Apple products. Also, don't forget the company's stated goal of selling 10 million iPhones by the end of this year. Might Apple be fudging any numbers?
"Generally speaking, it's a balance," Charles Golvin, an analyst for Forrester, told MacNewsWorld. "On the one hand, yes, for news and public perception, numbers inflation is the more likely direction ... but on the other hand, with Sarbanes-Oxley and all the other [compliance and financial reporting] scrutiny, there is a countervailing force on the part of financial teams to err on the side of caution."
So, while Steve jobs can point to market percentages in his keynote address at Macworld that cites, for example, positive "smartphone" market penetration reports created by other companies, the numbers that come out of today's official financial reports are probably accurate.
If that's the case, long live the unlocked iPhone.
I am not sure why you consider sales of 2.3M iPhones "not good" - especially considering it was sold in a total of only four countries compared to other companies' sales worldwide. In its competitive smartphone market it did reasonably well.
I also question the wisdom of trying to project a sales figure based on a presumed channel inventory without also acknowledging the potential for increased sales as the iPhone is offered in new markets. If you are arguing that the existing gray market has already met the needs of these markets, then you have to also admit that ATT's activation number does not approximate worldwide iPhone sales or use.
Several possible explanations are offered ....
I am not sure why you consider sales of 2.3M iPhones "not good" - especially considering it was sold in a total of only four countries compared to other companies' sales worldwide. In its competitive smartphone market it did reasonably well.
I also question the wisdom of trying to project a sales figure based on a presumed channel inventory without also acknowledging the potential for increased sales as the iPhone is offered in new markets. If you are arguing that the existing gray market has already met the needs of these markets, then you have to also admit that ATT's activation number does not approximate worldwide iPhone sales or use.
Maybe tens of thousands of iphones under the christmas trees --- not hundreds of thousands of iphones.
2.3 million iphones aren't "sold" to the end-users --- when there are possibly hundreds of thousands of iphones sitting on the shelves of cell phone stores around the world. That's just grey market inventory --- nothing to do with actual demand for the iphone.
All we know for sure is activations stalled for AT&T during the busiest christmas quarter.
2.3 million iphones aren't "sold" to the end-users --- when there are possibly hundreds of thousands of iphones sitting on the shelves of cell phone stores around the world. That's just grey market inventory --- nothing to do with actual demand for the iphone.
The number of units in the channel is only an issue if it exceeds the channel partner's regular stocking levels. If I had to guess, I suspect that Carphone Warehouse, in particular, has excess inventory. Apple stated that their own inventories were in line and there is nothing in ATT's SEC filing that draws any attention to large unsold iPhone inventories - something that, as physguy suggested, would be material in ATT's SEC filing.
This has nothing to do with gray market inventory which is sold (or otherwise accounted for) as far as Apple is concerned - the units were purchased by presumed end-users at either the Apple Store or from one of Apple's iPhone partners. Apple's only concern with grey market sales is the lost revenue potential from the service fees. You are correct that it is not possible to equate grey market offerings with demand and, in fact, channel inventories are probably more representative of demand - if Apple's and its channel partner's inventories are in line then iPhones are selling more or less as expected.
You continue to latch on to the most negative interpretation as it applies to iPhone sales without ever considering other possibilities. You state with certainty that the missing units are gray market inventory without even acknowledging the possibility that 50% (or more) of that presumed inventory could be sold and in use - to you, these phones are all sitting in shops collecting dust. Neither you nor I (nor any of the analysts) can state with certainty the number of iPhones in use in unofficial iPhone markets.
The sum of what we know is that ATT's reported iPhone activations are lower than Apple's stated iPhone sales which leads us to this hotbed of speculation on what it all possibly means and your opinion is no more or less valid than any other reasoned viewpoint.
The number of units in the channel is only an issue if it exceeds the channel partner's regular stocking levels. If I had to guess, I suspect that Carphone Warehouse, in particular, has excess inventory. Apple stated that their own inventories were in line and there is nothing in ATT's SEC filing that draws any attention to large unsold iPhone inventories - something that, as physguy suggested, would be material in ATT's SEC filing.
This has nothing to do with gray market inventory which is sold (or otherwise accounted for) as far as Apple is concerned - the units were purchased by presumed end-users at either the Apple Store or from one of Apple's iPhone partners. Apple's only concern with grey market sales is the lost revenue potential from the service fees. You are correct that it is not possible to equate grey market offerings with demand and, in fact, channel inventories are probably more representative of demand - if Apple's and its channel partner's inventories are in line then iPhones are selling more or less as expected.
You continue to latch on to the most negative interpretation as it applies to iPhone sales without ever considering other possibilities.
The sum of what we know is that ATT's reported iPhone activations are lower than Apple's stated iPhone sales which leads us to this hotbed of speculation on what it all possibly means and your opinion is no more or less valid than any other reasoned viewpoint.
The problem is that the 4 carriers don't need to have a lot of excess inventory (to the point of writing it in their SEC reports) --- in order to affect the wall street analysts' forecasts in future quarters. It is just this simple, they didn't account this channel inventory in their forecast before, and now they need to.
Contrary to your comments, I am not latching on to the most negative interpretation.
As I stated repeatedly, the worst case scenario (Sacconaghi) and the best case scenario (Munster) --- don't differ much. Other posters (and they aren't Apple bashers) have applauded my coining of the term "grey market inventory". I haven't stated any concrete numbers to this "grey market inventory".
What's my opinion? Sacconaghi said 670K channel inventory could be very bad. Munster said 512K channel inventory is normal. My opinion is that if Munster (being the bulliest of the Apple bull) is saying that the level of channel inventory is normal --- then the vast majority of the Wall Street analysts will take a more conservative, reasonable and sensible view that Apple has a excessive inventory problem.
The problem is that the 4 carriers don't need to have a lot of excess inventory (to the point of writing it in their SEC reports) --- in order to affect the wall street analysts' forecasts in future quarters. It is just this simple, they didn't account this channel inventory in their forecast before, and now they need to.
What's my opinion? Sacconaghi said 670K channel inventory could be very bad. Munster said 512K channel inventory is normal. My opinion is that if Munster (being the bulliest of the Apple bull) is saying that the level of channel inventory is normal --- then the vast majority of the Wall Street analysts will take a more conservative, reasonable and sensible view that Apple has a excessive inventory problem.
The problem is that no one except Apple or its channel partners can confirm or deny the existence of excess inventories. All the analysts in the world can jump on this but they are just giving it their best shot, although I will agree that their guesses can certainly move a stock price.
What's my opinion? Sacconaghi said 670K channel inventory could be very bad. Munster said 512K channel inventory is normal. My opinion is that if Munster (being the bulliest of the Apple bull) is saying that the level of channel inventory is normal --- then the vast majority of the Wall Street analysts will take a more conservative, reasonable and sensible view that Apple has a excessive inventory problem.
If 512k channel inventory is normal, this should have already been factored into the stock analysts' projections - Apple's 4-5 weeks inventory has long been known as a target. You don't see them making an issue of iMac or MacBook channel inventory because it is not an issue as long as it is in line. Apple should not be blasted for unrealistic expectations on the part of third-parties (if the analysts were expecting inventories to be below Apple's average).
The real issue here is whether or not there is an inventory overhang and how significant it might be. If there are 160k units lurking in inventory, this is very significant. If, on the other hand, 50k of those units were already sold through gray market sellers with another 50k sitting in gray market shops, the picture looks markedly different (though still a problem). Note that I am not trying to paint a unrealistically rosy picture here - Apple may, in fact, have an iPhone inventory problem - but just offering that we really do not have a very good idea of how good or bad the situation is.
Other posters (and they aren't Apple bashers) have applauded my coining of the term "grey market inventory".
This speaks more to naivete than anything else. I worked at Epson in the mid-80s and we were acutely aware of gray market inventory as were almost all consumer electronic firms.
As far as Apple making their projected 10M unit sales by the end of the year, I think Apple has a much better picture of this since they know their product release plans. Interestingly, if people are right that 3G is the primary issue for the lack of iPhone sales, even an inventory overhang will not likely hurt Apple in terms of achieving their sales goal, despite whatever financial repercussions it might have.
I agree that some analysts need to reign in their unbridled enthusiasm with regards to Apple. I have found some of the price targets laughable ($600 by the end of 2008
What's my opinion? Sacconaghi said 670K channel inventory could be very bad. Munster said 512K channel inventory is normal. My opinion is that if Munster (being the bulliest of the Apple bull) is saying that the level of channel inventory is normal --- then the vast majority of the Wall Street analysts will take a more conservative, reasonable and sensible view that Apple has a excessive inventory problem.
Lets forget the analysts for a second. 4-5 weeks inventory at the 20K sold per day rate quoted at the MacWorld keynote turns into 560,000 to 700,000 phones in the channel following Apples long stated 4-5 week inventory target.
Even that so called "bad" number falls into the acceptable range. 512K sees to be a number picked to be wildly optimistic, fitting for Munster. Overall much ado about nothing.
If 512k channel inventory is normal, this should have already been factored into the stock analysts' projections - Apple's 4-5 weeks inventory has long been known as a target.
Note that I am not trying to paint a unrealistically rosy picture here - Apple may, in fact, have an iPhone inventory problem - but just offering that we really do not have a very good idea of how good or bad the situation is.
I agree that some analysts need to reign in their unbridled enthusiasm with regards to Apple.
The problem is that you accept Munster's view (unbridled enthusiasm) from the start as normal.
I accept Munster's view as the bulliest of the Apple bulls as a best case scenario. I might as well accept President Bush's view that there is no global warming.
Even that so called "bad" number falls into the acceptable range. 512K sees to be a number picked to be wildly optimistic, fitting for Munster. Overall much ado about nothing.
I perfectly agree with you that even the bad number doesn't look that bad --- if they are taken on a pure academic point of view.
Unfortunately, Apple share went from $85 (pre keynote Jan 2007) to $200 late last year --- so all normalcy is gone forever. If Apple shares drop another $30 down to $100, they are still up $15 or 20% for 1 year --- not bad for a tech stock when the Nasdaq and S&P are down 5% for 1 year. I am not saying that Apple is going to drop that much --- I am just using it as a comparison with the overall stock market.