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.

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?!

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 Vs. Dell: Bad Markets and growth prospects

So Holy crap is the world ending or what?

Fannie Mae, Freddie Mac,  Lehman Brothers, AIG, Bear Stearns.  All out of business.  Goldman Sachs, Morgan Stanley and Washington Mutual teeter on the brink.  

Does Wall Street think Apple is an investment bank?   (PS they have more cash)

Here is an interesting factoid.

YTD Dell and Apple stocks have performed identically (Down 30%), This is nearly meaningless but it makes a nearly meaningless point. (The irony is not lost on me)

Dell is the largest (sometimes second largest behind HP) manufacturer of personal computers in the world.  They are a formidable company that makes a lot of hardware.  But heres the thing.  They sell commodity boxes with a median price point between 6-700 bucks and despite a ridiculous 16.4 Billion in Sales last quarter made $746 Million   That sounds like a lot but here is the take home message.  Their margin is 17% and their Net per share 3.5%  

Apple on the other hand despite being only 4th and making a fraction of the unit and dollar sales of Dell maintained a margin literally DOUBLE 34.8% and net earnings more than 4x Dells. (14.3%).  Apple  Netted 1 billion dollars on 7.4 Billion in sales in the 2nd (their 3rd) quarter.  

Much of the price of a stock is the prospects for future earnings that investors believe the firm has  So what are the prospects of these two firms?  Maybe the sense is that people will buy a Dell instead of a Mac because of the impending foreclosure on the family home? After all Walmart's sales are up this year at the expense of more expensive retailers. Steve Jobs health (why do we say health when what we mean is death?) is a continuing issue, maybe investors are not convinced that the iPhone is the game changer we think it is?  

Dell

Dell has nowhere to go.  They are the price competitor the "low cost manufacturer" that can sell for less than you and still make money.  NO MORE.  Dell is not the low cost manufacturer as evidenced by the fact they are selling manufacturing facilities world wide.  So here is why that matters The price competitor has to be the low cost competitor or.... well you get the idea.  Dell's sales are growing at a pace with or slightly behind the industry as a whole.  Dell cannot and will not become a high margin competitor and by the very nature of the fact that they are at the commodity end of the business cannot grow faster than the industry.

Apple

Apple on the other hand is the innovator, they sell computers that sell for an average price of well over a thousand dollars.  In fact as recently as the second quarter Apple computers represented 66% of ALL computers sold for more than one thousand dollars.  The computer business represents about 45% of their total business and is growing at between 35-50% per year currently.  Their iPod business is flat but very profitable and the iphone business is growing exponentially (but will remain marginal for the next couple of quarters)

Now after having said all this if you had to buy ONE of these stocks which one do you think will have higher returns over the next 5 years?  One more Question... If you were the commodity manufacturer and were looking for a new market to grow into do you think you would want to build computers that could run the Mac OS? Like say Psystar? 

Author is long Apple, this is not advise but you really should call your mother.

When the "Rest of us" want more: a switchers parable

So here is a partial proprietary and perhaps even parsimonious LIST of things Apple has not made better for "Switchers"

These are things that, as a Mac User you know are there, and dread them coming back to haunt you.  You have seen the light and have carried much water for Jobs & Co. convincing the great unwashed that the thing they need to do, the ONE thing that will make their computing life more complete,  is to switch to a Macintosh.

Having done so, said unwashed person comes to you a couple of weeks after getting their Mac Pro/iMac and says agitatedly....

Where is the right click?  Well you say, if you just hold down the Control button when you click that will bring up the same menu functionality...  WHAT.  ADD  A RIGHT CLICK  the single mouse click thing was tired in 1994, now it's just stupid.

There is no Print Screen button on the keyboard.  How do I Make a screen print?  Your friend asks.  Well,  you can give them this list, but be careful,  because Macs support many different image types that are often not supported on the PC.  Nothing worse than Opening up a presentation on a PC and having none of the images you worked so hard to steal/find be there.  Damn you Tiff.

Why can't I play video?  Oh you can just not WMV video. without downloading.  Flip 4 Mac  ignore ALL the adds and get the FREE one.  This functionality should exist out of the box, really.

Why cant I Control-C/V/B/X/Z?  Oh you can you just have to scrunch up your pinky and use the command button instead.  WHAT?  The Mac is not Windows and this little penance will remind you how lucky you are to have such a wonderful machine.  

Here's an Idea, how about a Switchers panel on the Systems Preferences panel that will let you customize some of these "features" so that people can work in an environment that is comfortable for them.  That way the people that we convince that the Mac really is a better computing environment won't want to beat us unmercifully (as often, I really am a slacker) .