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Month October 2010

Motorola ships 3.8 million smartphones

Sales from its handset business climbed 20 percent to $2 billion last quarter, helping to narrow its loss to $43 million from $216 million a year earlier. The division had an operating profit, excluding some charges, of $3 million. Motorola said it shipped 3.8 million smartphones last quarter.

via Motorola Profit Tops Estimates on Rising Sales of Droid Phones – Bloomberg.

Motorola shipped a total of 9.1 million phones. This is down 33% from the year-ago quarter’s 13.6 million units but up 10% sequentially from 8.3 million last quarter.

I’ll summarize the top tier vendors’ unit volumes, sales value, price and profitability in a few days.

Wall Street's Infinite Loop: How AAPL is valued

In the previous article discussing the growth scorecard, I left open the question of how Apple’s growth is reflected in its share price.

The approach to answering this question is to show how the share price correlates to that growth. The challenge for analysts has been that the company switched from subscription to current accounting for the iPhone (the largest component in its income statement). As they re-stated income and thus earnings, any historic review of P/E or other multiples of Earnings have to also be re-computed.

So this is what I’ve done:

Apple's Growth Scorecard

Every quarter I try to score growth by top, bottom and product lines. As unforeseen growth is the only driver creating shareholder value, it’s of paramount importance to measuring a company’s performance.

For Apple, the analysis is fairly straight-forward. There are relatively few product lines (seven including the iPad). I measure y/y sales growth and try to form a picture that is easy on the eyes and mind.

The method I’m using now is color coding growth for each line according to the legend to the left.

The table that follows shows each product plus the Net Sales and Earnings lines according to this color coding. I also added an average column for reference.

Sony shares up on speculation of Apple interest

TOKYO (Reuters) – Shares of Sony Corp rose nearly 3 percent on Tuesday as traders cited media reports speculating that the Japanese electronics maker could be a potential acquisition target of Apple Inc.

via Sony shares up on speculation of Apple interest – Yahoo! Finance.

There’s a sucker born every minute. That phrase, (erroneously) attributed to a major benefactor of my Alma Mater, continues to ring true today.

Although Steve Jobs once admired Sony, the company today contains nothing of value to Apple. A disruptor is unlikely to buy the company he just disrupted. Would Sony have bought Westinghouse? Would WalMart have bought Sears? Would Microsoft have bought IBM in the 1990′s?

When considering an acquisition the chances are that the asset being purchased is going to ask a premium price. So the buyer has to answer this question: what is it about the asset that makes it worth more than the market price?

There are three (and only three) sources of value that a buyer can buy:

  1. The resources (intellectual, physical, contracts, channels or employees)
  2. The processes (the algorithm of how those resources are put to use)
  3. The business model (the way the assets and processes and applied to create profits).

A company like Sony has some resources but its processes and business model are obsolete. Should Apple pay a premium for Sony’s assets? I don’t see a reason why.

Visualizing Apple's Profitability

After the last earnings report, many noted that Apple’s gross margins dipped. Turley Muller noted in a letter to PED that the cause was probably the aggressive ramp in iPhone 4 production which broke new records at 14.1 million units.

That may be. My estimate of iPhone margin shows it dropping to about 49% from the more usual 55% (sometimes even higher).  We’ll never know exactly how much, but sometimes margins drop. RIM and Nokia are punished for drops in the GM percent so why shouldn’t Apple?

However, there are some other factors to consider: the overall margin is currently historically very high. As the high-margin iPhone makes up more of the total product mix, the overall margin should be growing. And it is. The chart below shows the trend since 2005. GM was in the high 20′s five years ago.

Note however the other margin: operating margin. After taking the fixed costs into consideration (which we saw to be shrinking as a percent of sales), Apple’s bottom line profitability has been rising slightly more rapidly than the GM. It has plateaued recently but not dipped significantly.

Also note that there have been dips in the past from which GM expansion resumed. One such dip was at the launch of the first iPhone in 2007, though we can’t be sure that was attributed to the iPhone itself or to other factors like that most cited by management: components costs.

However, the bottom line profitability is only part of the picture. It would be instructive to look at which product contribute how much. You won’t see this analysis often because the gross margin by product is not published by Apple and it takes quite a bit of guesswork to get there.

I maintain product-level gross margins and compute the overall GM bottom-up. The product-by-product line profitability is based on several assumptions which I won’t detail here, but those assumptions lead to the following contribution chart:

Supporting Asymco

I’ve received many supportive comments following the Fortune piece. Many also worried that the site is fragile due to a lack of income.  I’d like to put those worries to rest.

First, I want to state one goal for the site which defines my attitude toward how to monetize it: I intend this site to be a useful resource to the reader.

From utility comes value. I want readers to obtain value with a high signal/noise ratio. Unless well targeted, advertising drives up the noise factor and lowers usefulness. I would only accept advertising if it improved the value to the reader. Since ad networks will push ads over which I have no control I cannot be sure that they are adding value and not contradicting my content. But as you see in the right-most column, I do accept advertisements (sponsors) whose message I can evaluate and curate. You can be a sponsor (see the sponsorship page for a measure of what value you can gain from exposure through Asymco).

Second, there is also another way to support Asymco: if you use iTunes, do your music, movies, app or TV show shopping through the affiliate link in my site. It’s the App Store logo in the upper right corner. Or bookmark this link: Support Asymco by buying content. I receive a commission of up to 5% from any purchase made through that link. It has already been enough to pay for my hosting.

Third, there are also indirect ways in which I derive value from Asymco. I offer consulting, data and services to clients directly. If you are interested in any of these feel free to contact me directly by email.

Thanks to all who read and contribute comments to this site. The biggest value to me is the learning I get from interacting with the readers.

The Mac App Store: can it change the software business?

What is it that makes the iTunes App Store so compelling? Will the value the App store added to the iPhone be added by the Mac App Store to the Mac?

If AT&T Is So Bad, Why Is It Beating Verizon Every Quarter?

CHART OF THE DAY: If AT&T Is So Bad, Why Is It Beating Verizon Every Quarter?.

AT&T just signed up 2.63 times more subs in Q3. They’ve been adding more subs every quarter since Q1 09.

Another point is that both are adding subs. So who is losing?

Nokia's moderate-intelligence-phone performance

A complete market overview will follow when all the top tier vendors report the last quarter, but in the mean-time here are some data that are available:

Smartphone volumes for Nokia, Apple and RIM:

The new king of Apple analysts – Apple 2.0 – Fortune Tech

The new king of Apple analysts – Apple 2.0 – Fortune Tech.

My thanks to Philip Elmer-DeWitt but I think he is not right in proclaiming a King. Credit is due to all the other blogger analysts who inspire and push analysis forward.

The  lines were nothing but a commercial advertisement, but they very well describe this group that opened the eyes of the world:

Here’s to the crazy ones,

the misfits,
the rebels,
the troublemakers.
The round pegs in the square holes.
The ones who see things differently.

They’re not fond of rules
and they have no respect for the status quo.

You can quote them,
disagree with them,
glorify or vilify them.
About the only thing you can’t do
is ignore them,
because they change things.
They push the human race forward.

And while some may see them as the crazy ones, we see genius.

Because the people who are crazy enough to think they can change the world
are the ones who do.

Crazy Ones“, directed by Chiat/Day’s Jennifer Golub who also shared the art director credit with Jessica Schulman and Yvonne Smith. The familiar voiceover was by Richard Dreyfuss. See the video here.