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.

Bad day to be a case manufacturer

I think the most important news to come out of today's press conference was missed by most if not all of the scads of reporting firepower assembled to record the event.

Apple is in the case business because of the failure of existing manufacturers to keep their collective mouths shut about upcoming products.

Can you imagine being the CEO of an accessory maker and having to hear that today? Ouch. It reminds me of the take the cookies away from all the kids until whoever scratched dads car door comes forward. ( it wasn't me really ).

Steve Jobs...

Sometimes websites buy stolen property and they get out there... and case makers have a history of showing off their new cases for our new products. The case vendors haven't had a history of helping to keep our work under wraps

Maybe they already knew they were screwed, maybe Phil or Steve told them just how screwed.

But now they have been screwed.

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 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.

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.

Apple TV: The Second Coming or iBrick

The folks at TUAW caught wind of a rumor regarding a possible update of Apple TV coming this Tuesday Sept 30th.  

No Predictions here as to what may or may not happen except to say that the current version of Apple TV is the only and original version of the Apple TV.  It is entirely possible that Apple TV is being updated without ANY real functionality change except to upgrade the hard drive and possibly the video output.  But heck maybe this is the iBrick, the second coming of the Apple TV.

If it is...  Than this is a good time to update my thoughts from a prior post regarding Apple TV.

To sell broadly Apple TV must Replace some or all of the products and services that it currently competes against.  It must be a Set Top Box Replacement.  It must be an effective replacement for Blockbuster/Netflix and it must have a working PVR. 

By broadly the market must reach beyond us geeks so ruling out those of us using any Elgato Product. (sorry Elgato your market is gadget geeks, but you knew that) 

In addition, and this is the deal breaker, Apple has to get hollywood to play along.  Without content equivalent to NetBuster (netflixBlockbuster)  say 95% of new releases and a back catalog of thousands,(Currently there are less than 1,900 movies available for rent in iTunes)Apple will only have limited sales with Apple TV.  

If they did it it would be too expensive for broad acceptance initially but who knows maybe this is the product they "Crush" their margins with.  Certainly the integration with iPhone/iPod Touch would be kick ass.

Longer Term Apple really wants to be the company to provide integrated home entertainment solutions but we are not likely ready for that yet.  For Now Apple TV Remains a serious Hobby.  The products existence gives Apple a reason to assign resources and keep tabs on the market.  

We will see on Tuesday.

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.

RIMM Blood on iPhone's Touchscreen

Research in Motion (RIMM) announced stunning earnings yesterday.

the Waterloo, Ontario-based company said it earned $495.5 million, or 86 cents per share, in the fiscal second quarter, which ended Aug. 30. That was a 72 percent rise from net income of $287.7 million, 50 cents per share, in the same quarter last year

RIMM is down 78.01 -19.52 (-20.01%) this morning in pre-trade as a result of their margin forcast going forward.

[RIMM] warned on Thursday that profit in the current quarter would come in lower than analysts had expected because of higher costs related to its newest BlackBerry smartphones

RIM did not share but we know why they are willing to spend so much to grow. iPhone.

If there is one thing that has settled in my mind over the last few days is that (for right now) the iPhone is literally in its own market space. We can talk about iPhone Vs. Blackberry or iPhone vs Android (GooMo love it) or iPhone vs WinMo (sad) but the reality is that every phone that claims to do more than just make calls is compared to the iPhone. There are phones that do things better (email Blackberry) and there are phones with features the iPhone does not yet have but the entire handset industry is running to keep up with just one player. iPhone.

The quarter ends in a couple of weeks and Apple will report similar stunning earnings with outstanding unit growth in all segments. And then their stock price will get killed too.

More to come

Writer loves his mother and is long AAPL, you should love your mother but what you do with AAPL is up to you

Podcaster... GooMo (Android) is Calling

Yesterday Apple shut down the back door that Alex Sokirynsky was using to distribute Podcaster.  

Duh 

Podcaster duplicates iTunes Podcast distribution function.  This is a core feature of the iPhone/iTunes environment and one that Apple will not allow to be duplicated.  

Duh

There is no mystery here you could write/develop the coolest program in the world, if it duplicates core functionality of the existing iPhone it will be rejected.  Apple is not going to release a press release that says what it feels it has already communicated to developers and the developers have nothing to lose by bitching about big bad Apple.  Sokirynsky will take his resentment/skills to another platform, for which Apple may pay a price. 

Many respected voices in the intertubes have voiced the opinion that Podcaster does not duplicate any functionality of Apple Software.  Some of these voices distribute podcasts (that I like) so they may have a little bit of a blind spot.  Podcaster distributes podcasts wirelessly. 

Podcaster is a program that might have been used to stream podcasts directly from an iPhone/Touch wirelessly. Soon to be available on an Android phone near you.

 Related Tidbit

There were 88 new applications posted to iTunes last night. 3927 applications total 900 in the last two weeks!

RIP Windows Mobile

The most interesting thing in the crush of Android news today was not the comparisons to the iPhone or to a lesser extent the blackberry. The biggest news today was the profound ommission of WinMo even in passing as a reasonable alternative to either the iPhone or Android.(GooMo. It is too goody not to use)in any of the thousands of news/blog postings regarding the launch.

Windows Mobile is dead. Long Live GooMo and the iPhone.

Android comes to Play: GooMo and the Future

Ahhh the future.  Three weeks ago we knew there would always be investment banks....

The first "GPhone" is being released today and so is born the first credible competition for the iPhone.  Do not misunderstand, the phone released today could be terrible.  

It is the first credible competition for the iPhone.  Google does not care about the device, they continue to look for ways to expand and protect their search and advertising franchise.

Great Article by Greg Sterling outlines the market and how the iPhone has been really a "proof of concept"  device that will lead to other, more and better devices.  Regardless of what WinMo and Blackberry had done up until the iPhone was introduced, they did not actually get used in a way that makes the internet the internet.

There are a lot of WinMo and Blackberry devices sold and in use, its just that they are not used for anything but texting and email.  (as measured by hits )  [if WinMo is WinMo, should Android be GooMo?]

To Google the internet is advertising and the "Mobile internet" is the future.  Andy Rubin points out in the Google Blog There are more mobile phones in use today by people that have NEVER had a PC (of any kind) than there are currently PC's.  To grow Google must be as ubiquitous in Mobile as they are on our desktops.  It is not important to Google that Android be anything but a minor success, they just need it to be enough of a threat to insure that Google will continue to serve mobile advertising on many devices.

So later today when people are talking about how Great or terrible the actual device is remember that this is the first of what will be MANY from many competitors.  WinMo will eventually be trashed by Microsoft and they will start from scratch and there may be even more players that we have never heard of that will innovate their way into the space.  The point is that in a couple of years there will be better internet enabled phones than we have now available from a number of sources.  

Today is the day that Apple begins to give up some of its 100% market-share in the next generation of mobile platforms. (of which the iPhone is the only current offering).  

We know that there will be insane growth in this market for the next couple of years and that we all will get to benefit from innovations in the devices /methods / cost.  We do not know what those devices would be.   For the Near term iPhone will play "PC" to Googles "Mac"/Android.  It will be fun to watch.

iPhone/Touch/App Store Vs. Nintendo DS

So, why if you had the alternative of the iPod Touch would someone buy a DS for their kid.

If current pricing in the App store for major publisher games holds (5.99-9.99 per game) the iPod Touch is the less expensive option if you buy more than 5 games.  Even cheaper if you have 2 kids since one purchase on iTunes will legitimately sync on a number of iPhones/Touches.

No Lost games, bigger screen, cheaper to own.  The only current Nintendo advantage is a large (huge actually) library of existing games.

Developers must like it too because distributing thru iTunes they have zero packaging costs as well as much lower distribution and sales cost. (Typical cut for publishers at retail is 50%  vs. the 70% at the App Store) it is clear with both EA and THQ now producing iPhone/iTunes content that the publishers are sold on the platform.

This market will not be as big as the iPhone but since 2004,  77 million DS's have been sold.   5-20 million Touches a year would be a very nice number. 

The iPod Touch is a much more flexible platform for any kind of software development but is super for games.  The open question remains... Will the market agree with my impeccable logic?

Edit ya I left out that the iPod is in fact an iPod.  

App Store Blogstorm

So there is this kerfuffle regarding the App store.  On the one hand we have Gruber.  Defender of the liberal arts and on the other Mike Arrington of Tech Crunch defender of well gravity.

  

Gruber/Arrington make very different arguments so you would think that they could not both be right but they are.  The thing that makes this argument cool is that we are free to assign whatever motive we want to Apple since we have no way to know what really happened.

Gruber is right, Gruber is Always right (Daring Fireball.net )

It’d be different if Apple had published an explicit rule stating, for example, that podcasting apps are prohibited. But there is no such guideline. Podcaster seems to fully comply with Apple’s published guidelines, and yet it was rejected for violating a secret rule....

The point is not that Apple can’t reject apps arbitrarily. They can. Elsewhere in the SDK Agreement is a more or less wildcard clause that grants Apple the right to reject apps — and remove apps which were previously accepted — for whatever reasons it chooses. The point isn’t about what Apple can do but what they should do.

And they shouldn’t be doing this. 

Gruber gets hot about an issue once every couple of weeks and lets fly all of his substantial edumicated smoothyness.   Slick awsome and right.  He represents that part of us for the world as we would like it to be.  He is hopeful, but unyielding and ultimately willing to make a go/no go decision based on something that is a poor compromise.

Arrington:

The fact is that there are more than twelve million iPhones in people’s hands today, and another800,000 or so are likely sold each week. That is too much of an opportunity to pass up. Developers will complain, but ultimately they’ll play by whatever rules Apple demands. Even if those rules are ambiguous and subject to change regularly without notice.

Arrington is right, I mean he is seriously correct.  This is what will happen.  I like Arrington too, it's just that I don't want to agree with him.  He is drive, ambition, business everything I admire in someone that likely feeds his family.

The downside of Arrington's argument is that it means we live in that world that is not fair, where we don't necessarily like the choices we have at any given time.  There is this MBA/Machiavelli thing that while right is a little to grown up.  

(Daniel Dilger is involved in the argument too but besides being pedantic I don't think I like him and three ways are sooo confusing)

As an aside.  The App store continues to Explode with Apps.  Four Hundred have been added since last weeks iPod show (3405 current total). Including todays release of The Force Unleashed.  This is the first release on the App store by THQ and further evidence that the iPhone/iPod Touch are going to be taken VERY seriously as a gaming device.

Update:  Fake Steve Jobs Weighs in at his lucid best: Blow Blogstorm Blowww.

Apple Sucks less than Lehman and AIG

Apple was spanked yesterday (140.36 -8.58 (-5.76%) Sep 15 4:00pm ET) during a 500 point market sell off triggered by Lehman Brothers filing for Chapter 11 protection from creditors.   Fannie Mae and Freddie Mac two companies that together hold HALF of all home mortgages in the country were taken over by the government.  These are not good times.  And for those of you blissfully unaware of what is transpiring in financial markets know this.  If AIG, one of the worlds largest insurers, is forced out of business we will all be worse off.  Things are not good in the economy, this week has been one of the bleakest in the financial markets in the last hundred years (1929)

On the other hand

 

Apple has between 21-25 Billion dollars in the bank.  Mac sales growing 25-50%.   iPhone sales off the charts (as many as 12 million to date), and plans to buy a Mac hit an all time high.

 Apple is just fine selling overpriced, proprietary computers,  overpriced proprietary music players, and overpriced proprietary cell phones.  Be a believer in sustainable margins, sustainable market advantage, and remember cash is king.

Lost in the news today aside from half of Ohio not having electricity,  Citibank reiterated a buy on  Apple with a price target of $287!  You go Richard!  No one knows where stock prices are going but given Apples actual earnings and projected growth for the next year.  It would seem that the performance of Apple stock should suck less than the market at large for the next year.

If you buy this stock you must have money, can you share?  I make all this up.  Really.  If you take the word of anonymous, but deceivingly erudite bloggers including this one. You deserve what you get.  Do real research this is just fun.

iPod Touch on Sale $1455 less than iPhone

Shawn Wu is wrong about this  

American Technology Research analyst Shaw Wu last night warned that Apple's recently-revealed iPod touch price cut may not go far enough, saying: "While we are pleased to see lower pricing, we are concerned that price points may remain too high given the tough macroeconomic environment and relative to the 3G iPhone at $199 and $299."

The iPod Touch is an entirely different product than the iPhone.  Regardless of price which I will get to in a moment, the product is used differently by the person who buys it.  The "price out the door" does not begin to tell the price difference.  If the iPod Touch died after 24 months of use it would cost $1455 (69*24)-199) less over that period.  So you could buy say an iPod Touch AND a really bad used car for less.

Assuming he is thinking of unit sales and he was expecting iPods to be part of the Margin Crushing trend that Apple has told us about I suggest that iPhone Accounting and broader channel Sales of Macs are margin crushing enough.

Repeat after me.  iPods are the CASH COW! ...iPods are the CASH COW!

iPhone Hangover: The unfair expectations of the CGE!

When you have invented the coolest gizmo ever (CGE), everything that follows is ...   well ...  not the CGE.

Every Apple announcement cannot be the iPhone, Get over it.

Yesterday Apple introduced slick sequels to their iPod line of products and updated iTunes. They told us ahead of time what the purpose of the event.   The event went off pretty much as planned.  YET everyone went home feeling empty and sad.  Apple will sell between 25-30 million of these things between now and christmas that is impressive.

The problem is that at MacWorld in 2007 Steve Jobs Apple  changed expectations about what comes out of cupertino forever.  Nothing (Never say never but really NOTHING) can be as exciting as the introduction of the iPhone/coolest gizmo EVER (CGE for short)   And no matter how much we rationally thing about what is going to happen today, we hold out in the back of our feeble little Apple loving minds the hope that something magical like that time... back in 07....CGE... NOOOoooo

It does not help that the last several of these events have been anti-climatic since virtually everything but the color of the product is know ahead of time.  The leaks are a factor of the crazy fast growing size of Apple and its "affiliates" and likely cannot be changed.. but it does remove some of the magic of the reveal.

It also does not help that we have 47 year old men showing us how to play video games, DUDE. Schiller might has well have been wearing a leisure suit for how cool this was.   Truthfully the segment felt like filler for something that was not there.

There are the unreasonable unthoughtful expectations like iPods for $100 bucks or cheerful John Dvoraks, but this is different.  No matter what you thought was going to happen today it just was a little empty.  

You cannot invent the iPhone every year.

Jobs: 10 Million iPhone Goal Reached!

Apple is telling the press that todays "Lets Rock event will be big because...

Steve Jobs will announce iPhone Sales to date and Apple may have reached their self imposed goal of  10 million iPhones for  calendar year 2008 3.5 months ahead of schedule. 

If the folks on the IMEA project at Investor Village are to be believed.  

To do this Apple has sold close to 6 million phones in the not yet complete September quarter. 

The Christmas quarter has always been big for Apple and iPhones are available in more places every day (point is that sales are going UP not staying flat or falling)  Should they sell 2.5-3 million phones a month for the rest of the year there could be between 17-20 million iPhones sold in Calendar year 2008.  Analysis is here   

Charles Jade had it on Sept 2nd

iPhone Ubiquity

The iPhone is the coolest gizmo I have ever owned.  Nothing, compares.  Not my baseball cards, my Camera, stereo high def-TV, convertible, toaster oven, None of it.  Not even my Mac Plus (which back in the day was pretty badass)

The iPhone is simply put the single most compelling computing device to hit the market since the first PCs 30 years ago. 

It is clear that the iPhone as a handset and platform are so dramatically different and better than current market offerings that sales growth will continue to be freakish.

Gene Munster Put Apple on its "Alpha"  (Piper Jaffray)List this week indicating that there is significant short term upside in the stock of Apple (AAPL).  While mentioning that he expects Apple to sell 45 Million handsets next year.  45 MILLION.  I have not seen another analyst reporting a number that big.

Reports of manufacturing runs of 800,000 a WEEK being reported by several sources.

Munster mentioned Apples Back to School promotion which gives buyers a $299 incentive to purchase a Mac  (Free iPod woo hoo).

So I did some analysis of my own.  and projected out Sales thru 2014.  It is a Projection so by definition it will be wrong. 

Assumptions

• 15-20% annual price declines
• 10-15% cost declines
  
• iPhone kabuki deferred earnings
• 30% market share in 2014 (Nokia has 40% today you think thats going to hold?)
  
• 37% tax rate
• Declining growth in the Handset market 20-7%

I project Apple with 30% of the handset market in 2014.  (I made it up)  Nokia has 40% of the market currently so it is not unreasonable to assume that one company could have a share of that size.  There will be competition from someone we don't know who yet but someone will come up with a compelling competitor to the iPhone platform.

As a thought experiment Apples earnings per share could be 12 bucks a share from iPhone sales ALONE in 2014.  Oh and BTW 23 Billion in additional deferred earnings.  

Enjoy.

Let me know.  I can send you the Excel...

The writer has been long AAPL for a long time.  The writer is not giving advice (call your mother) am not telling you to buy this stock, and think that people that don't do their own research are lazy and doomed to failure 

Squishy Margins: Apple Lower Margins Explained

Apple announced a their last earnings conference call  that they expect Gross Margins to be lower at the company for this quarter and into next year.  Here is a list of Margin squeezing forces that may be squeezing Apples margins.  

No one release, product, or strategy is the culprit here.  Do the MATH  a 2% narrowing of Apples gross margin will translate into almost a billion dollars a year in lower earnings (thats why we care)  That is more money than many new products will do in sales.

iPhone Accounting.  

Apple is accruing the income from iPhones over 24 months.  The expense created to enable the development, manufacture and sale of that phone is written off in the quarter it occurred in.  Apples manufacturing partner is currently rumored to be manufacturing 800,000 phones a WEEK.  The expense for this will show up in the next 90 days.  The income will not be completely realized until September of 2010.

Retail Sales Mac/iPhone

Mac sales are growing like crazy, much faster than the industry.  In order to maintain that growth, Apple has partnered with additional retailers, most notably Best Buy to sell their products.  For recent history Apple products have been sold primarily directly by Apple. 

Broad market competition

The larger Apple gets, the more price sensitive their next marginal customer is... Apple will be lowering their prices on iPods, Macs, iPhones in order to get them into more peoples hands because as has been shown is that if you buy one Apple product you  are MUCH more likely to buy another.

Product X

Product exists as does product Y and Z .  These products will have narrow gross margins on release but I think it is a red herring hiding as the product BY IT SELF will not be large enough a force to lower the margins as Apple has indicated.  All of these forces together are conspiring to lower the margins.

More to come