Category Archives: Wireless

AAPL’s awesome 1Q12

January 26, 2012 By in earnings conference calls, Industry Analysis, Stock ideas, Technology, Wireless Tags: , , , , , Leave a comment

the report

After the close of New York trading on Tuesday January 24th, AAPL announced results for 1Q12 (AAPL’s fiscal year ends in October).

The company reported its best single quarter ever, with diluted earnings per share of $13.87 on revenue of $46.3 billion.  Sales were up by 73% year on year for the three months; eps were up by 116%.  Wall Street analysts had been anticipating earnings of $10.16 per share.  AAPL not only handily beat that figure, but also blew through the high end of the estimate range at $11.26.

Management’s (notoriously lowball) guidance for 2Q12 is for revenue of $32.5 billion and per-share profits of $8.50.

AAPL shares rose by 6.3% in the Wednesday market.  On the surface at least, this strikes me as a tepid response to the numbers.  More on this topic below.

the details

quibbles first…

–AAPL is another one of those companies that uses the week rather than the month as their basic unit of time.  This creates a problem, because a year is equal to 52 weeks plus one day for regular years, plus two days for leap year.  So companies like AAPL have to throw in an occasional quarter that has an “extra” week in it to keep their reporting year and the calendar in sync.

1Q12 was one of those adjustment quarters.  Not only that, but the extra week was the high-volume sales period between Christmas and New Year’s Day.  So AAPL’s sales for the three months were likely 10% or so higher than they would ordinarily have been.

–the introduction of the iPhone4S shifted revenue out of 4Q11 and into 1Q12, because AAPL ran down inventories of its older phones and consumers deferred iPhone purchases until the new model became available.

–don’t make the same mistake I’ve heard from Bloomberg radio commentators of saying that this quarter’s earnings were more than AAPL made in a whole year not that long ago.  This sentiment is correct, but the comparison isn’t.  AAPL changed its accounting treatment for iPhone sales a couple of years ago to recognizing all the profits from a sale (markup on the device + a share of revenue collected by the telecom company over the life of a contract) up front, rather than recognize them gradually over the (usually two-year) contract term.

…followed by stunning numbers (ex the iPod)

iPhone

In 1Q12 AAPL sold 37 million iPhones, with iPhone4S leading the way.  That’s up 126% yoy, in a market that expanded by 40% over that time.  It’s also 17 million more than AAPL’s previous record for a quarter.   Sales would have been even higher except AAPL ran out of phones to sell in key areas.

iPhone 4S wasn’t available in China during 1Q12.  It went on sale there earlier in the month.  Demand has been “staggering.”

iPad

APPL sold 15.4 million iPads during the quarter, up 111% year on year.  According to CEO Tim Cook, the launch of AMZN’s new Kindle lines has had no effect, good or bad, on sales.

Macs

AAPL sold 1.48 million iMacs and 3.72 million laptops, both records, during the quarter.  Desktops were up 21% in units yoy; laptops were up 28%.  Industry growth was zero.

iPods

This declining category of devices was up 133% quarter on quarter for AAPL, but down 21% yoy.  iPod Touch remains the lion’s share of sales.  APPL retains a 70% share of the MP3 player market in the US and is the top-seller in most other markets (not that any investor is going to buy AAPL’s stock because of the iPod anymore).

other stuff

Sales at the Apple Stores, which make up almost a third of retail revenue for AAPL, were $6.1 billion during the quarter.  Average revenue per store was $1.7 million, up 43% yoy.

The iTunes store took in $1.7 billion.

Weak worldwide demand for tech components gave AAPL a lot of buying clout for NAND flash and DRAM during 1Q12.  As a result, the company’s gross margin was unusually high at 44.7%.  To give a basis for comparison, full-year 2011 gm came in at 40.5%.  This favorable development probably also boosted net income by 10%.

AAPL has $97.6 billion in cash on the balance sheet.  Of that, $64 billion is being held offshore.

the stock

Trying to “normalize” 1Q12 eps by correcting for the extra week and the elevated gross margins, I come up with a figure of $11.50 or so for the quarter.  If I had to guess, I’d peg full-year eps at least $40, even after a downward adjustment of 1Q12 results–meaning reported figures could be closer to $45 a share.

If I’m correct, AAPL shares are currently trading at, at most, 11x this year’s earnings, with 40%+ earnings growth in prospect.  That strikes me as really cheap.  Subtract AAPL’s cash from the equation and the forward multiple is 8.5x.

In contrast, WMT, which has nothing like the recent growth record or current prospects of AAPL, is trading at about 12x.

COH, a global semi-luxury company, whose stock has paralleled AAPL over the past year, and which has far better growth characteristics than WMT, trades at almost double the PE of AAPL.  But even COH probably won’t grow as fast as AAPL this year.

Why the low valuation for AAPL?

I think Wall Street views AAPL as a firm built at present on a single product, smartphones.  It perceives the global transition from feature phones to smartphones, which is at least part of what’s driving the company’s extraordinary growth, to be mostly played out.  Therefore, investors theorize, AAPL will sooner or later–and probably sooner–be reduced to depending on replacement demand.  When that happens, its earnings growth will shift into a much lower gear.

There’s some truth to this idea.  Look at the breakout of AAPL’s revenues during the current quarter:

iPhone     53% of sales

iPad     20%

Macs     14%

iPods     6%

Music services     4%

Other stuff     3%

Total = $46.3 billion.

After iPhone and iPad, nothing else moves the needle that much.  A half-decade ago, the iPod doubled the size of AAPL; the iPhone then doubled (a much larger) AAPL again.  Can iPad perform the same trick for AAPL a third time?  Eventually, maybe, as part of a transformation of the personal computer market over the next decade.  But I’m not sure many people would like to bet on that.

And, of course, NOK and RIMM are reminders of how fast the tech world can change.

Potential pitfalls may be Wall Street’s current focus, but it’s by no means the whole AAPL story.

As I’ve been writing for some time, AAPL shares have suffered immense PE contraction over the last four or five years, both in absolute terms and relative to the market.  According to Value Line, AAPL traded at a 40% premium to the market multiple in 2007 and a 60% premium in 2008.  By my reckoning, AAPL is now selling at a 25% discount to the market–a much lower level than firms (like WMT) with weaker business models and balance sheets.

That’s actually the good news.  The fact that a huge amount of potential future bad news seems to me to be already baked into the stock price is a powerful argument for owning the stock.  In fact, I think the market is discounting a far worse future for AAPL than is likely to develop.

Can AAPL do anything to help its own cause?  The company could begin to pay a dividend or split the stock.  Either would give the shares a short-term boost.  In the final analysis, however, all AAPL can really do is continue to post strong earnings to show that Wall Street fears are overblown.

AAPL’s 4Q11: another strong quarter

October 19, 2011 By in Current Market Thoughts, e-readers, earnings conference calls, Industry Analysis, Retail, Stock ideas, Technology, Wireless Tags: , , , , , Leave a comment

the results

AAPL reported 4Q11 results after the close of trading in New York yesterday.  The company earned $6.6 billion ($7.05 per share) over the three months, on revenue of $28.2 billion.  This is an advance of 52% in eps, year on year, on sales growth of 39%.  Although the company exceeded its guidance of $5.50 per share handily, it failed to beat the Wall Street analysts’ consensus, $7.39 a share, or the first time in a long while.  (The StarMine consensus of analysts who have historically been the most accurate forecasters–which in this case may simply have been the most aggressive–had been $7.51.)

EPS for the full fiscal year 2011 (ended September 24th) were $27.68, or 82% better than results for fiscal 2010.

AAPL also gave guidance for the holiday quarter we’re in now.  APPL’s 1Q12 will have 14 weeks in it instead of the normal 13.  This is an adjustment companies who organize themselves on a “weeks” basis rather than a “months” basis must make every six years or so to make sure their fiscal year remains aligned with the calendar year.  Anyway, AAPL’s guidance for 1Q12 is eps of $9.30.  My rough guess is that this equates to a “normal” quarter of $8.50,  which would be a gain of about a third over the $6.43 AAPL reported in 1Q11.

As a result of its earnings “miss,”  AAPL shares are down about 6% in pre-market trading as I’m writing this.

details

iPhone

Let’s get straight to the heart of the earnings “shortfall,” if that’s the right word to describe a quarter that’s up more than 50% year on year.  It comes in the iPhone.

AAPL sold 17.1 million iPhone units in 4Q11.  That’s up 21% year on year, and an all-time record for a September quarter, but down 16% from the record 20.4 million the company sold in 3Q11.  There were two reasons sales weren’t higher, both related to the introduction of the new iPhone 4s.

–AAPL decided not to add any new carriers to its iPhone network in the September quarter; and

–consumers slowed down purchases of the iPhone 4 in anticipation of the new model they expected to debut during 4Q11.  As demand waned toward quarter end,  carriers slowed down purchases of iPhones from AAPL.  Apple Store sales of iPhones were particularly weak.

APPL has since reported that the iPhone 4s has sold over 4 million units during the first three days of its launch in early October, more than double the rate at which the original iPhone 4 left the warehouses when it first came to market.  At $645 each, those sales amount to $2.6 billion, or about $.85 a share.  They could just as easily have occurred in 3Q11 if AAPL had moved the launch date of the 4s back to late September rather than early October.

How good is the iPhone business today? “In our wildest dreams we couldn’t have gotten off to a start as great as we have on the 4s,” says CEO Tim Cook.  Cook also noted that AAPL had anticipated a much larger reduction in telecom purchases of the original iPhone during the quarter than what actually occurred.

iPad

AAPL sold 11.1 million units during the quarter, an all-time record.  That’s up 20% quarter on quarter and 166% year on year.  AAPL finally seems to have obtained enough manufacturing capacity to keep up with demand.

Macs

Unit sales were up 37% year on year and 30% quarter on quarter.  That’s also an all-time record.  AAPL sees some cannibalization of the Mac business by iPads, but is still producing growth much greater than the PC industry.

iPods

Once half the company, iPods are now less than 10% of AAPL’s revenue.  Unit sales were 6.6 million during the quarter, down 27% year on year and 12% sequentially.

my thoughts

Even with an extra week to work with, I don’t think AAPL’s profits can be up 82% again this fiscal year.  Suppose they “only” reach $35, with (to make the arithmetic easy) $1 of that coming from the 53rd week.  Organic growth would then be in the low 20% range, which I think is easily doable.  It could be very much higher.

At a $400 stock price, AAPL would be trading at a forward multiple of under 12x on my low-ball figure.  Subtract out the $86 a share in cash (remember, AAPL has no debt) on the balance sheet from the stock price and the multiple shrinks to about 9x.  Even factoring in a substantial maturing of AAPL’s businesses, of which there’s no credible evidence yet, AAPL shares seem very cheap to me.

 

the Silk browser on the Kindle Fire

October 6, 2011 By in e-readers, Industry Analysis, internet, Publishing, Retail, Stock ideas, Technology, Wireless Tags: , , , , , , , Leave a comment

what a browser does…

A web browser is a software program that finds web pages for you and renders them on your computer.  It locates the page you want and then reads and follows the HTML instructions it finds there.  The instructions may require the browser to travel to separate locations so it can get detailed–and sometimes complex–formatting instructions, or favicons, or to call up images that belong to the page.

…takes time and effort

All this can mean lots of round trips communicating between your browser and the page you’ve asked it to look for.  Once you’re on a given page, you’ll most likely want to follow links to other pages, either to watch a video, read an article or get more details about a possible purchase.  That’s a bunch more round trips.  Yes, we’re talking milliseconds (1/1000 of a second) for each one, but even milliseconds eventually add up if there are enough of them.

how AMZN makes Silk “super-fast”

Most of this has to do with the massive “cloud computing” infrastructure AMZN has built in becoming the online department store to the world.

In particular,

–AMZN links directly to the internet backbone.  So it can connect Silk to “outside” web pages up to 20x faster than other services.

–AMZN maintains continuous connections to the “top sites on the web,” eliminating the need for initial introductions between you and the page you want.

–AMZN has a big web hosting business, so lots of sites are inside the AMZN cloud already; AMZN caches others.  No need to go hunting for them.

–for the most popular destinations, AMZN cuts through the back-and-forth between browser and web page and starts to send information it knows you need, even before your browser asks for it.

–AMZN studies how people generally behave on a given page.  Based on its conclusions, it pre-loads content on your browser that it anticiates you may ask for next.

pretty impressive–

In fact, AMZN’s description sounds an awful lot like AOL back in the heady days when dial-up was king and the AOL server farms were all the internet many people ever used.

one caveat

Anyone using the Silk browser may well spend most or all of his time inside the “walled garden” of the AMZN cloud.  This means that, like AOL decades ago, or GOOG or AAPL today, AMZN will be able to see–and analyze–large chunks of the internet life of any such customer.

This stands to give a tremendous marketing advantage to AMZN, in two ways:

–in all likelihood, AMZN will “own” the Silk customer in the way AAPL “owns” users of its app store, and

–AMZN will be able to collect huge amounts of new data about consumer behavior.

Will customers balk at giving so much personal data to AMZN?  …not at all, in my opinion.  But AMZN will have to walk a finer line than before between using customer data for marketing analysis and respecting the privacy of users.

–

Google’s takeover of Motorola Mobility: implications

August 16, 2011 By in Current Market Thoughts, economics, Industry Analysis, Recent Market Action, Stock ideas, Technology, Wireless Tags: , , , , , , , Leave a comment

the deal

Yesterday morning before the start of trading in New York, Google and Motorola Mobility jointly announced an agreement for GOOG to acquire MMI for $40 a share in cash, or about $12.5 billion.  The takeover price represents a 63% premium over MMI’s closing quote last Friday.  The parties have also agreed to a breakup fee of $2.5 billion, or 20% of the deal price (an unusually large amount)–and that MMI will operate as a separate division of GOOG.  The deal is expected to close late this year or early next.

MMI ended Monday trading at $38.12 a share, a price that I think signals two Wall Street’s beliefs:   that the acquisition is highly likely to occur, and that a rival bidder is probably not going to emerge.  That’s my take as well.

MMI has three main assets:  by far the largest is its massive collection of cellphone-related patents; it also has a set-top box business; and it makes handsets.

why the acquisition?

Look no farther than the competitive situation in the global smartphone market.

In the early stage of any market, the field is wide open.  Entrants focus on building their own market share and ignore everything else.  With smartphones, we’re long past this stage.

As the market matures, the competitive field separates into frontrunners, and also-rans.  Typically, the stronger entrants turn on the smaller, weaker competitors–who fall by the wayside, one by one.  Think NOK and RIMM as being on the losing end.

A further sign of maturity is when the top dogs–in this case, AAPL and GOOG–turn on one another as the only additional sources to fuel further growth.  This phase comes last because the market leaders are typically the most difficult and expensive to wrest customers from.

That last stage is where we are now.

According to ComScore, the Android operating system extended its market share lead in the US during the three months ending June 2011 by 5.4 percentage points from 34.7% to 40.1%.  During the same period, the iPhone added 1.1 percentage point of share, from 25.5% to 26.6%.  The overall situation:  APPL is losing ground to Android, picking up a decreasing share of the customers being shed by RIMM and MSFT (NOK has almost none left to take).

AAPL is fighting with patents

Several reasons for this:

–smartphones are by far AAPL’s largest business, so growth here is important,

–APPL doesn’t want to introduce lower-priced handsets to compete with GOOG’s mid-market offerings, and

–its lack of patents is a potentially severe point of weakness for GOOG.

last week’s EU tablet decision is a case in point

The details can be found in the blog Foss Patents, but the bottom line is that Samsung’s 10.1″ Galaxy Tab has been banned for now from sale in the EU, ex the Netherlands.  What’s interesting is that the design drawings on which the ruling are apparently based are very generic  (look at pp.3-4).  They look kind of like Etch-a-Sketch screens and boxes without the knobs.  In fact, a ZD Net article suggests that the iPad itself isn’t an original idea–it looks amazingly like the prop tablets actors used on Star Trek.

In any event, last week’s ruling suggests that patent litigation can be unpredictable.  It can also have potentially disastrous consequences for the loser.

better safe than sorry

$12.5 billion is about what GOOG generates in cash flow during one year.  It’s also a bit less than a third of the cash the company has on the balance sheet.  The fact that this money is earning very close to zero is a key reason why the acquisition of MMI will likely be “mildly accretive” to earnings from day one.

So the cash is not a real issue, particularly since control of the mobile user is so key to GOOG’s–and APPL’s–future.

cable TV cord-cutting is here to stay

August 1, 2011 By in Current Market Thoughts, Entertainment, Industry Analysis, internet, Stock ideas, Technology, Video games, Wireless Tags: , , , , Leave a comment

That’s according to media consultant, SNL Kagan.

SNL Kagan is the firm that first called widespread attention to the phenomenon that significant numbers of subscribers to multi-channel entertainment service providers, like cable TV or satellite, are cancelling their service.  People are watching increasingly their favorite programs over the internet through services like Hulu.  And they’re using Netflix as a substitute for on-demand movie watching.

During the middle two quarters of last year, cable et al. in the US actually showed declines in subscriber numbers for the first time ever.  The fact that subscribership has since rallied back into the plus column has some observers concluding that internet-based “over the top” content distribution will remain a fringe phenomenon.  SNL Kagan disagrees.

The consultant points out that:

–while traditional cable/satellite is growing, its expansion is less than the rate of new household formation.  This means the older services are gradually losing market share;

–the number of OTT households will likely rise by 80% this year to 4.5 million, or about 4% of the market;

–for at least the next several years, the consultant expects OTT households to expand by a steady 2 million annually.  This means they’ll number 12 million or so by 2015, and represent 10% of the market.

Netflixing and Huluing are different

Neilson observes that, although they may be the same people, individuals behave quite differently while Netflixing from when they’re Huluing.

–Netflixers, as you’d suspect, primarily watch movies using the service.  A small majority view content on their TV screens, with a game console as their preferred connection device.  42% watch the movies directly on their computers.

–Huluers, as you’d also figure, watch almost nothing but TV shows.  They view their content almost exclusively on their computers, however, although sometimes they’ll hook the computer up to a TV screen.

One constant for both services:   almost no one uses Google TV or Apple TV.  More people watch on cellphones or tablets than on either.

my thoughts

Let’s assume that Huluing and Netflixing give us a peek into the future.  What are we seeing?

–a world where cable TV companies are valuable because they deliver internet access to customers, not entertainment content directly to a TV. Their rivals will principally be the wireless companies that are building their own mobile internet networks.

–a world where TV sets no longer play a prominent role.  Maybe you’ll have one in the house to watch sports events (the only kind of entertainment where people are willing to pay for picture quality), maybe not.  Viewing gets done on computers or tablets.

–a world where the low-end PC disappears.  Tablets are one successor, as the market already realizes.  Traditional PCs, laptop or desktop, with larger, better resolution screens and good audio may be another.   APPL is moving in this direction by eliminating the MacBook from its lineup and offering customers only the MacBook Air and the MacBook Pro as choices.  (This seems to me to open the door to Chromebooks in the education market, but time will tell.)

Implications for INTC are, at worst, mixed and maybe pretty favorable.  It may sell fewer chips, but its product mix will shift to higher value-added products.  Cloud computing becomes much more important.  And the performance bar is raised for ARMH’s much-discussed entry into the PC market.

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