Apple Earnings Preview

Ben Vested

First I was going to do a bunch of tables and charts and then I was going to do some really cool finance voo-do all over it but then I found out Andy Zaky  already did a fine job on that.  Here.  I did do a couple of charts you will find below.

This will be more information than you require (hat tip Hodgman) but here it is anyway.  I follow Apple as a company because (within normal healthy adult limits) I love tech, Apples products, the way they go about their business and the fact that they are a large successful easy to follow company.  I invest in them because in addition to all of those things, their business and the engine that drives their earnings can be understood.  Look, GE is a great company but based on their published financial statements three PHD's with a Ouiji Board and a bag full of darts could not figure out what is going to happen next with the company.

Apple is simple by comparison.  iPod, iPad, iPhone, Mac, and other stuff.  Apple is unique in the hardware space in that they make coin...  Apple is making money in two industries populated by companies fighting to do their best impression of Eastern Airlines (commodity out of business).    Nokia by far the largest maker of mobile phones by unit sales is losing money.  Dell the largest US maker of PC's has a 3% profit margin.  Their relative performance in the stock market over the last 6 years tells the story.

Apple is a hardware company, and they win because they innovate.  They refuse to compete on price and over time have produced time and again products that customers are willing to pay a premium for.  Apples ability to grow in the future will be tied to this simple equation.

You can argue at the margins but something between 45-55% of the companies earnings this year will be derived from product classes that did not exist before June of 2007.  iPhone came out in June 2007 and will have something over 20 billion in revenue this year.  iPad just came out this year and already is lighting up the revenue meter it should represent ~8% of 2010 revenue.

Here are two charts that show both revenue growth AND the contribution to growth by product.
This is revenue growth in dollars broken out by product.

Note 2010 projections are from Andy's analysis, they are as likely to be right as any (a little optimistic)  I used Apples presentation for products because It shows how the growth in Macintosh has been driven almost exclusively by laptops over the last 5 years, the last 12 months being an exception.  I have written about this before but Apple OWNS the over 1,000 computer market.  During a time when Dell and Asus are fighting over fifty bucks for a netbook Apple has been able to get the average price per unit for desktops to go up.

Iphone is obviously experiencing explosive growth as is iPad.  What has been surprising about the iPhone is that three years after launch the iPhone has maintained a PPU of over 600 bucks.  Estimated margins on iPhone are 60% so as the product mix moves towards iPhone Apples overall margin continues to expand.

This chart is the same data presented as a percentage.  It is here that you can see the relative importance of new products as a percentage of earnings.  The three big growing categories iPhone, iPad and Other music and related services (read this as APP store).  This category is going to grow like Kudzu in July over the next few years.

Longer posts coming on the following

Apples Cash position.  Apple is piling up cash at a rate that will force it to change its current accumulate cash forever strategy or not.  Currently they have about 47 bucks a share in cash and short term securities.  It is a stupid amount of cash that management cannot with rational argument hold onto given that they have zero debt and are continuing to accumulate cash at a rate of OVER 1 billion a month.  More on this later.

What happens next.  Apple will not make any new product announcements today but as sure as Microsoft will announce products that they will never make, the NEW is coming and it will be Magical and Revolutionary from a profitability standpoint .

Risks.  Apple is now huge. a lot of the poor PR in the last year has had to do with this size.  Size is also an issue in that they are running up against the law of large numbers in terms of their ability to grow.  Exxon Mobil is the only US company with a larger Market Cap and in order to maintain its current growth rate would have to create 20 billion in revenue next year that it did not have this year.  I am not saying it won't happen just pointing out that it is a big number.  Life after Steve not a happy thought.  There are others... Margins.

More after the announcements tomorrow.

The author of this post is long Apple but makes no recommendation for purchasing equity positions in the company.  Your grown people make your own decisions.  The author has no holdings of Eastern Air, Dell, Nokia or Greek sovereign debt.

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 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

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?!

Apple and The Troubles

So I'm at the mall yesterday looking for a gift for my daughter who is turning 13. She wants an iPod capable speaker set up for her bedroom. (Madness I tell you).

Anyway, I wander into the Apple store and am greeted by 1 and then 2 and then a group of 3 helpful Apple employees, which leads me to look around and notice that I am one of maybe 3 customers in the store... AT LUNCHTIME. So my buddy and I stop at a local restaurant for lunch and overhear the waitresses talking... "This is even slower than yesterday".

Is it possible that all the shoppers went to Washington with John McCain yesterday?

Look we don't know where the economy is now, only after the fact to we have any clue what happend so I won't say recession or depression instead I will refer to our current economic situation as The Troubles. Cool huh, non committal but ominous.

Look, Apple is great, the iPhone is going to sell like hotcakes, maybe 40-50 million units next year alone. As of today (or by the end of year) The iPhone will be available in 72 countries!

Earnings will break records every quarter. Just not as fast as it would have been. Whatever was left of the US Economy has been ripped to shreds over the last couple of weeks. Apple does not exist in a vacuum sales will be negatively effected. How negatively effected is anyones guess but it is all but assured that sales will be off.

So, when Peter Openheimer stands up on October 21st (aprox) he will announce record earnings, unprecedented growth, and the stock will get killed on very conservative future earnings estimates (unless it doesn't). Mr. Oppenheimer will take several questions regarding the Troubles but will as he has in the past decline to comment on the economy or how much it plays into Apples earnings estimates going forward

Apple's earnings will be less that what they might have been but they are the best in class competitor in all the business segments they compete in (computers, handsets, music players) and will be the dominant player in these segments when the troubles are over in maybe 15 years (I know not funny)

Bet on the long term

Writer loves breakfast cereal and is long Apple. Eat whatever cereal you like but don't do it because this guy said so. Same with Apple.