On Analysts and Earnings Apple Reports today

This afternoon Apple will report another record quarter with both unit sales and revenues the best in the companies history.

If you knew before the announcement how many computers, phones, music players, Apple sold AND how much revenue they took in, you still could not reliably come up with a per share earnings number within 10% of what will actually be announced.

Analysts come up with a number because we (the investing public) goad them into it. It is a spectator sport. Some analysts will come closer to the actual number than others. Assuming they do not have inside information it is simply chance. Most of the analysts know this simple fact yet they submit to the kabuki because, well, they want to make a living.

Here, I can prove it.
If you knew Apples Gross Revenue all you would have to do to come up with an earnings number is accurately predict gross margin and tax rate. (that's all?) so on earnings of say 8 billion a 4% difference in gross margin would indicate a range of ~ 23 cents a share. Compound that with a 4% difference in tax rate (12 cents) and you could be off by 35 cents a share. And you knew the earnings!

Is that enough of a disclaimer?
Because I have to...
1.22 on 8.3 billion in Revenue

Writer is long Apple. Don't believe a thing he says, he is not particularly stable as evidenced by his willingness to predict (guess) earnings KNOWING he cannot possibly be correct.

So listen to what the Analysts say about the business

Apple Laptops Squeeze fun out of Business for Hewdell Packovo

Apple is going up-market.  Oh you say they were already there?  Not like this.  And what it means for Apples Desktop will be interesting to see too.  The new MacBooks and MacBook Pro's are beautiful.  Anyone that uses a laptop of any OS would want to use one.

Apple is telling the rest of the PC Business don't even try we will crush you if you try and chase us in the high end.

It was inevitable that as the price declined on the "commodity" end of the computing business that there be more differentiation.  That one company (Apple) has come to dominate the high end, while playing the underdog in the marketplace is amazing.

Remember the iBrick Apple building its own Factory Rumor?  ...  Ya well the fact that Apple is not selling a cheap laptop is as a result of that decision.  

Since Apple does not own factories (No-well less Fixed costs to distribute) they are not concerned about the utilization rates of those factories.  No Fixed costs or in place assets that must be used.  Apple could be the largest "virtual manufacturer" in the world.  (Made up but I will update if anyone knows for sure).   As a result, Apple can maintain high margins while Hewdell Packovo, all try to figure out how to compete.  

HewDell Packovo

The last figures I saw Apple 66% of the computer business selling for more than $1,ooo.  That means that not only is Apple making high margins  they are squeezing all the profits out of their competition at the same time.  At best 34% of the high priced Lappie business is left for Acer, Sony, HP, Dell, Lenovo, Panny....)

The Take Home (short term)

Apple has decided to forgo some level of market share growth in order to maintain high margins on their Laptop computers

The Take Home (Longer Term)

The PC business may continue to grow in unit terms but Apple is telegraphing by this decision that they think in Dollar terms the business is maturing.  The evidence suggests that further differentiation is the way to maximize the profit available for Apple.  This necessarily will limit growth of income from PCs

What this means for company growth (iphones product X) in the future is a discussion for another day (Asus as Volkswagen)

PC MAG  Dan Costa

Mac NZ Mark Webster

iBrick predictions 50-50

Apple "Tax"

Apple v Dell

Kvetching iPhone

iPhone is the Coolest Gizmo Ever.  Of this there is little doubt.  Even Joe the Plumber agrees!

That said I have a list of things that have begun to get on my nerves with my iPhone.

iPod

Prior to V. 2.2 a video podcast could be played as a video OR alternately as a Podcast.  This functionality is gone and it means that even if all I want to do is listen to the audio I am forced to leave the screen on wasting the battery.  There must be a way to let me listen to the Audio.

Podcasts now roll to the next file at the end of a recording.  Why?  I could see why you would want this in an audiobook but not a podcast.  Just End.  or better yet give me a choice in settings.

Maybe I am alone on this but the "Not New" flag is unreliable on syncs.  Meaning after listening to a recording to the end.  I sync my iPhone and it both does not reset as being read on iTunes and then is re-loaded as new content on my phone.

Alarm Clock

So do you think that clicking into the clock, then the alarm clock, then hitting edit, then selecting which of the multiple alarms you might have you actually want to edit, then setting a time, and then finally saving.  (Oh by the way you have to get up in 5 minutes!)

Mail

Mail Box that can deal with more than one account.  Because the iPhone cannot deal with more than one account there are 4 clicks to jump between inboxes.

Calendar.

Why limit me to iCal?  (or Outlook?) aren't there some open calendar schemes that could be supported?  Say Thunderbird?

Synced calendars don't show up.  Makes it unusable for me.  There are multiple calendars updated by multiple people that I need information from.  This should, to coin a phrase, Just Work.  In my mind it is the baseline sales pitch for the whole Mobile Me-Apple-environment thing.  So I use Google calendars.  

An aside...  Do you think that Apple can compete long term with Android if the Google Calendar WEB Application is better than what is written in native code on the device?  

Contacts

Give me the ability to forward a contact in an email (or text).  Preferably in multiple formats but as a VCard for sure.  how embarrassing to pull out a pen and paper to write down information that I have to re-type into an email.   The people that see this are not thinking Gee Where can I get THAT phone.

Lastly is the most obvious.  Copy & Paste!  

Some Recent iPhone/Touch writeups

Verizon iPhones

Rimm Spends to keep up

Android and the iPhone

Iphone/Touch Kick Nintendo's Everloving ass

iPhone Sales projections (With Real Math and stuff)

Writer is long Apple, and is sad he listened to the little voice in his head that said "Sub-Prime" it's the wave of the future!  Don't let this guy be the little voice in your head.

Apple Refuses to give away Computers: This investor Cheers!!

$899 computer....  

Apple said their margins were going to get squeezed over the next year and the whole world thought.  Oooohh Apple's giving away free stuff!  (However unlikely I thought it was a possibility too)

Real back of the envelope stuff here but here it is.  Apples PPU (Price per unit) on computers of all kinds fell only 80 bucks from the year ago quarter.  

If Apple dropped the price of the lowest price laptop by $200 bucks and since the product mix favors sales of the lower price laptops a $200 price drop would have an outsized effect on the average.  combine that with the falling price on the Air and average PPU could drop by $200 would mean that just to maintain revenue equal to last quarter they would have to sell 20% more computers just to maintain their 3.6 Billion in Revenue.

So here is the take home.  If the business is growing. and revenue is growing.  Don't give up margin.

Apples cost to make a less expensive (at retail) computer is only pennies cheaper than making a more expensive one.  Apples strategy has and apparently will be (until it is not) to try and add further value to convince us that we do not want a $600 laptop.  (In fact Apples average PPU will be crushed this quarter anyway because of the Back to School promo but will be similar YOY)

I will write some more later on the effect this has on Earnings Growth prospects for next year.

Here are some related links

Reasons for Narrower Margins

Earnings release next week

Apple Crushes Dell

Why Apple should pay a dividend

Is Apple stock cheap?

Writer is Long Apple and is depressed that the Red Sox cannot beat the team from Tampa.  If your depressed you may be a Red Sox Fan too.  Don't love the Red Sox it only brings pain.  Love Apple but not because of Writer OR the Red Sox

Verizon iPhones on the Horizon?

AT&T Exclusivity

 

Apple's decision to be exclusive to AT&T is not based on the revenue from AT&T alone.  We know this because of the bleedingly obvious fact that they would have significantly more revenue selling to a larger market with lower subsidy fees than to a smaller market with higher subsidy fees.  Apple is currently made the iPhone available to significantly less than half of the US handset market.

So was this a strategic decision by Apple to NOT manufacture a CDMA phone (Verizon) to control development costs? 

Given the hiccups over the last year with Apple product launches you could see why they might have wanted to focus on a single product. That said if the 3g is safely being sold in 70ish countries and being manufactured at volume is it possible that a CDMA Verizon iPhone be coming soon? 

 

It is not entirely clear what AT&T is paying to Apple for each iPhone added to its network.   The rumors put it between two and three hundred dollars per unit, about double what is reportedly the current standard subsidy for non iPhone smartphones.  The Exclusivity agreement reportedly extends for 5 years (2011). 

 

What raised the issue for me is the outstanding G1 Pre-sale of 1.5 million units.  Significant evidence of demand for an "iPhone like product" available on a network other than AT&T.  There is no way to know for sure but I strongly suspect that 1 million of those G1s are potential iPhone sales that were unwilling to accept AT&T as their lord and savior.  T-Mobile is only 10% of the market but credible competition is coming so why lose out on profit AND give the competition a leg up in by providing an iPhone free zone within which to sell?

 

As stunning as iPhone sales have been in the US they have been limited for a number of reasons.  Tethering to AT&T reduces the possible US market by more than  half and limited outlets (Sales by only Apple and AT&T about 2200 stores all in) further constrain availability.  Now iPhones are widely available at 850 Best-Buy locations and 4200 Wal-Marts around the country.  Look RIMM will sell phones HTC will sell some phones but everyone knows who the competition is.  The Coolest Gizmo Ever (CGE)

 

One wonders...How much would ATT have to pay to limit sales of a product to less than half the available marketplace and by doing so give a leg up to the competition?

 

So what is the point?  There is no denying gravity.  There is immense support for the existence of a Verizon CDMA iPhone at some point in the not too distant future.  Will it happen?  Not a clue.

 

Writer is long Apple and is a customer of AT&T.  He does not hate his carrier.  You may hate your carrier but don't be a hater.  Don't hate on Me or Apple or AT&T  because of anything this lunkhead says either.

Apple Taxing Users Offering "More" than customers need...Microsoft Sez So

Ina Fried in an interview on cnet, speaks with Brad Brooks of Microsoft.  Who explains in repeated and excruciating detail how it is that Apple "Taxes" its users.  It is an interesting point of view that goes something like this.

You want a laptop.  So you and your PC Wanting self  you might walk in to PC store.   Say you spend $799 and left happy.  OR in Brads alternative universe you poor consumer you, instead you walked into the shiny Apple store and they (clearly unfairly) charged you $1099.  For a clearly superior product.  Now Brads contention is that Since you spent $300 bucks more for the computer that you were "Taxed" unfairly by Apple....  Now setting aside for a moment that the computer and operating system are VASTLY different Assume Brads logic is good.  (strain) 

Now.  Here we are in Brads World.  How much would the "Tax" be in Opportunity time spent clicking on security dialogs, hangs, crashes, lost productivity due to other system being underpowered  do not exist on OSX?   What is the value of your time Brad?  Hmmm?  What if the "comparably equipped" PC actually cost more than the Mac as it often does?  is that a Tax Cut?

It is a crap argument Brad, I like it though,  Its like arguing that the difference in price between "American Process Cheese Food" and a lovely organic imported goat cheese is also a "TAX"

Here is Brad on OSX Vs. Windows viruses...

You know, it's hard to get a direct comparison, Ina. I want to be very specific in any kind of the data or the information that I give you there is that you're running one system versus another. The best way to really look at it is based on the Internet services, and what's really going on out there in terms of things like phishing or other types of scams that can actually happen through your browser or Internet experience. That really is much more of a direct comparison.

Good thing there is not a "TAX" on the cost of rebuilding your system after a virus then.  I guess that fee would be called a "shoulda bought a Mac" fee?

Paying a Premium price for a premium product is not a Tax, it is called getting what you pay for.  

Krugman Awarded Nobel in Economics

Nobel prize in economics awarded to Paul Krugman today.

If you want a clear narrative to what is going on in the world financial system right now. Read his pieces over the last month or so.  Congratulations.

List of Krugman articles

WSJ story about the award

Apple Earnings Preview October 21st.

Last year, in the Fourth Quarter, Apple earned 904 million dollars on 6.2 billion in income with a Gross Margin of 33.6%. They are predicting 905 million in income on 7.8 billion in income with Gross Margins of less than 32%.  (and 30% for 2009)  It is arguable how much Apples Margins may be coming in  some but there is no question that Apple will be reporting some unbelievable numbers for this quarter.  Apple guided to 1.00 per share in the 4th quarter this year ( July-Sept 2008 ) 

Apple hit the cover off the ball this quarter.  iPhone sales are off the charts and even with the Kabuki accounting that delays recognition of income for the iPhone earnings.  This will be the first quarter iPhone sales contribute significantly to total earnings.  Macintosh sales continue to outpace the rest of the industry and laptop sales are now greater than desktops.  iPod sales growth had all but stopped last christmas but the introduction of the iPod Touch with all of the additional functionality that brings sales have continued to climb.

The Bear Case for Apple over the next 12 months:

The Dow is down 37% YTD and Apple is down over 50%.  Apple does not exist in a vacuum they sell expensive products to a broad market base.  If there is a recession (duh) Apple's Sales will be effected it is anyones guess as to how much.  iPhone (from the market perspective) is still an unknown quantity and sales and gross margins are still very much in question.  The Narrower margin guidance from Apple has the street thinking Apple will tank prices and begin to compete with price.  (eew)  Macintosh computers are growing but only in a segment of the market that is now saturated with Apple products.  In order to continue growing Apple will be forced to sell less expensive (sub $1,000) computers that will cannibalize sales of more expensive computers and  as a result narrow margins.

The Bull Case for Apple over the next 12 months

iPhone Sales are far beyond currently priced in expectations,  The Coolest Gizmo Ever will have 15-17 million in sales for 2008 and projections of 30 million (because they want to sell 50 million) for 2009  Perhaps as much as $4.00 per share in net income from iPhone ALONE!.  Mac mind share continues to grow and even if the economy dings the growth. It will continue to be faster than the industry.  iPod touch/iPhone app sales will continue to grow.  Traditional iPod sales will become a less important part of the business over the next year as the Touch takes over.

Apple will report close to 30 Billion in Current assets (approx $33 per share) is currently selling for ~$90 per share 17x trailing earnings and 15x forward earnings.

Links to Related financial analysis

iPhone Analysis

Forces narrowing Apple Margins

Touch Vs. Nintendo DS

Apple and the Economy

Writer is long Apple and will be watching the Red Sox tonight. Root for Tampa Bay or Dell, or IBM it is not up to me.  Capiche?!

iPhone/Safari Search Revenue

Mozilla receives 

Apparently v.2.2 of the iPhone Firmware includes a google search-bar on the top and right of the address bar just like in a "real" browser.

Revenue is the answer to the question you were going to ask.  Apple cut a deal with Google to put the search bar

 there and will receive income for how much it is used. 

Mozilla received the lions share of its income, $57 Million from Google for the Google branded search bar on it's browser last year.  Apple earns money on the iPhone/Safari browser too.

The back of the envelope...   Mozilla search share implies that 1% of search is worth ~$10 million from Google.  A month ago iPhone represented .3% of the Browser market or ~$3 million dollars worth of search.  It does not sound like much but wait a year.  When there are 50 million of these things on the ground the revenue will be $10s of millions of dollars.

Look, tens of millions of dollars is a lot of money even to a company that earned more than 4 billion dollars in the last year.

Just as an aside when I say iPhone I mean iPhone AND iPod Touch.  Don't be so offended shees.

Victoria's Secret Joins Apple: Offers Field Trips for Kids

I can't be the only one that thinks this is a bad idea.

From the web site:

Take your students on a Field Trip to an Apple Store for an unforgettable learning experience. On their Field Trip, students can create something amazing right on the spot. Or they can bring in a project they’ve already created and turn our store into a theater, sharing their achievements with parents, teachers, and friends. No matter which option you choose, everyone will have a great time

Look I get that marketing and sales are amoral departments.  Their singular focus on what....  Oh yea MARKETING AND SALES.  But Someone at Apple has to have had a little bell go off in their head that says... ding ding ding ding... ARE you F-Ing NUTS?!

Would you think that field trips to these "Better Mall locations" would be a good idea?

Victoria's Secret (what would they do?)

Wal-Mart (Teach kids how to use an inventory handheld, let them pitch in at no cost)

Look at the upside

Kids love a day out of the school,

Teachers love a day with no teaching?  Is that a problem?

FREE well except for the bus, lunch and all that learning you did not do today.

And the Downside

Headline Risk  (Imagine if you will... a news story with the  upsides listed above in a frontpage article of local news paper.  Watch dads head explode about his kid is spending the day at the galleria instead workin on the learnin of the writin  You Betcha!)  

I pay property taxes for THIS!

A corp program alternative that would carry a much lower risk albeit at higher cost and o yea A POSITIVE RESULT?

Higher, or better yet get volunteers thru local partnerships, graphic artists, musicians, photographers, OR MBA's loaded for bear with Apple gear to give hands on demonstrations of how they use technology to do their special voodo.  Go ahead bring the T shirts but leave some gear for the school.  (hint: leave a phone number)

iBrick: "Revolutionary" SALES Process...

Look There may be a "Revolutionary Manufacturing process" code named iBrick (I LOVE code names!). But in advance of being proven incorrect. I call bullshit.

1, Customers do not care about "Process" if it makes the product better GREAT we love it but sans improvement no sales. So for example the laptop were more ridged or significantly lighter or better at dissipating heat. it would be killer.

2, If there is a "process" why would it have to be here and Apple building factories? Double Bullshit!. One of the reasons Apple is so Profitable is they do not own factories or huge backlogs of inventory. It also provides them flexibility in product design, and does not mary them to plant and equipment that can (READ WILL) become obsolete.

3, As an example. Dell and AMD have BOTH announced in recent weeks that they are selling off factories and ramping up orders from third party manufacturers in an effort to cut costs. I point this out just as a corporate reality of the immense cost of owning manufacturing. Dell and AMD are not companies that Apple should generally be emulating (Apple=good, Dell=huh?)

Really revolutionary would be having the iBrick sold on street corners by Earthfriend Jen. "Would you like some water or Hemp with that?"

I'm just sayin.

Apple Dividends: Are you kidding me!

Apple needs to pay a dividend.

Really.

I no longer buy the Tech "Growth" myth.  It is true for small tech firms with no income investors to pay hypergrowth curves but not for large established companies with large institutional investors.  Business is business.

Legitimate uses for cash in a business are investment in capacity, or investment for return.  Apple invests plenty in capacity, R/D and innovation but realistically what could they invest $20 billion dollars in?  they could build New Yankee stadium 20 times!  As for Return .   Braeburn Capital in Reno is owned by Apple and invests their cash.  Returns for cash are pitiful right now.  Every dollar not returning the growth of the computer/ipod/iphone business is dilutive to earnings.

Apple has $27 billion dollars in Current Assets and NO debt.  Apple should reward the investors that own equity in the company.  Pay the shareholders that have taken the risks on the company a yield on their investment.  Apple added 17 Billion dollars to their current assets in the 33 months since Sept 2005.  OVER a half a billion a month!.  If Apple had paid 5.00 per share dividend for each of the last three years they would currently have more than 10 Billion in the bank and no debt.  

Ignoring "Agency" issues that could motivate a company to hold cash more than what would be prudent Here is a list of some reasons that Apple should be paying a dividend.

1, Holding cash in excess of current needs is dilutive to earnings.  (over simply... if Apples market cap is 90b and they have 30b in the bank: earnings of 20x is diluted to 30x plus the cash)

2, A significant block of shareholders cannot, due to investment guidelines buy stocks with zero yield.  (Pensions)

3, If Apple were paying a dividend do you really think the shareprice would have halved in the last 10 months?

4, Among companies with a market cap over 25B (Aprox. 165 companies yahoo finance) there are only 8 that pay NO dividend (Apple, Oracle, Transocean, Amgen, DirectTv, Goog, Berk-A, CSCO)

5, Its the shareholders money.

6, There is currently no better use for the money.  (EG Yields for cash investments are crap)

Writer is long Apple and wants a dividend!  don't do anything because this guy thinks you should. not that he thinks you should, see it is a slippery slope thinking you know what I mean.  Don't do it!

Apple Cheap: Unless it's Not

So World financial markets are melting down  and our favorite stock looks cheap cheap cheap.  Not so fast...

Apple is only cheap IF it is cheap relative to other alternatives in the market.   Since we have limited information and ability to research all the information about all the stocks in the marketplace we use the S&P as a proxy for the market and a warning.  In 1932 the average PE for the entire S&P 500 index was 8!

Apple is currently selling for 19X Earnings (14 if you deduct the cash they should be paying shareholders in stock buybacks/dividends)  The median P/E since 1920 is 15.7 (Robert Shiller Yale via Investopedia) and has been BELOW 10x earnings 5 times for a cumulative 11 years.  

Apple is easy to love and certainly the stock is, on a P/E basis the cheapest it has been in years, what is not clear is whether it is cheap relative to other stocks available in the marketplace.  What is Dell's P/E?

Psystar Delays Delays Delays

Last Week Apple filed for dismissal of Psystar's Anti-Trust countersuit filed in California.  There is an excellent summary of what is going on along with links to all the public documents over at Groklaw (LINK)  .  

The next pertinent date appears to be Nov 6th when the judge could rule on the request for dismissal.  In the mean time Psystar has until Oct 15th to file some counter arguments to the request for dismissal.  Should the case not be dismissed it would appear to my non legal mind that this "ADR" agreement moves the case out of the court and into private mediation.  Private mediation would mean no more public documents.

Where is the fun in that?!

Just as a reminder, I am not a lawyer, (nor did I play one on TV) I barley passed english and most everything I write is made up.  Except for the disclaimers nothing here is presented as fact.

Apple: a Berkshire Hathaway Company

Apple would be a great fit for Mr. Buffet.  And since he is on a buying spree...

Apple's stock closed Thursday at $100.10 a share a new 52 week low.  Their market cap is now less than 90 billion dollars soooo anyone wanna team up with Warren and  buy a computer company?  

You and your new business partner Warren Buffet can buy Apple Co. today for less than 100 Billion dollars.  Here is what you get... for the low low price of $90 billion dollars.  You get 4.5 billion in earnings (TT) growing at 25-35%. [maybe more!] and 27 Billion in current assets!

27 Billion!  

You and your buddy Warren will get Apple for 61 billion dollars (88-27)  which is effectively 13.5x trailing earnings.  Why?  you say are you and your partner Warren interested in this clearly suffering company (stock price down 50% YTD)?  

• Sustainable world wide growth (at a significant discount)
  
• Unsurpassed brand loyalty, 
  
• FAT margins (albeit narrower than historically)  
  
• Best in class products (Mobile computing, Computers, Music Players)
  

Apple has finance all of its amazing growth over the last 8 years from available cash flow, so has no debt and the best employees in silicon valley

Realistically a takeover of Apple would cost significantly more than the current stock price and it's not like the world is flush in takeover capital right now.  The point is that this is a crazy successful and strong company with huge prospects for the future.  What multiple would you pay for Dell's 3% margin, GM's millions in losses, the entire finance industry's mystery balance sheets?

Writer is long Apple and loves his mother.  You should love your mother but Apple is up to you.  Do not suppose that writer is suggesting other than loving your mother.  Your finance decisions are yours alone.