January 2011
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Month January 2011

Canalys calls it on PCs

‘Any argument that a pad is not a PC is simply out of sync,’ said Chiam. ‘With screen sizes of seven inches or above, ample processing power, and a growing number of applications, pads offer a computing experience comparable to netbooks. They compete for the same customers and will happily coexist. As with smart phones, some users will require a physical keyboard, while others will do without.’

‘Each new product category typically causes a significant shift in market shares,’ said Chiam. ‘Apple is benefiting from pads, just as Acer, Samsung and Asus previously did with netbooks. The PC industry has always evolved this way, starting when Toshiba and Compaq rode high on the original notebook wave.’

via Canalys reports global PC market growth of 19% in Q4 2010 (Canalys research release: r2011012).

Five years ago, back when Gartner and IDC were confused about what a smartphone was Canalys was on top of the market and was the first to correctly describe the smartphone.

Kudos for being first again to recognize a re-defined market.

iPhone and iPad: Fine Young Cannibals?

The iPad and iPhone came, saw and conquered new markets. But since the products launched the question on every analyst’s mind has been on how much have these products “cannibalized” their brethren the iPod and the Mac.

This notion of “cannibalization” applies when a product is designed to compete and “eat” the share of another product in a company’s portfolio. It has some negative connotations since it implies loss but many times the thinking is that it’s better to cannibalize oneself rather than have it done by a competitor.

But have iPhone and iPad taken share from their competitors?

Hyvä Suomi! O Canada!

When looking at unique visitors as a proportion of population, this site is more popular in Finland and Canada than in the United States.

Very impressed with Singapore and New Zealand who punch above their weight. UK is second in overall volume. Honorable mention to Australia, Sweden, Norway and Switzerland.

It’s interesting to compare this list with Newsweek’s ranking of the world’s best countries.

  1. Finland
  2. Switzerland
  3. Sweden
  4. Australia
  5. Luxembourg
  6. Norway
  7. Canada
  8. Netherlands
  9. Japan
  10. Denmark
  11. United States
  12. Germany
  13. New Zealand
  14. United Kingtom

The correlation is uncanny.

iOS enables 71% of Apple's profits. Platform products power 93% of gross margin

As the highly profitable iPhone makes up an increasingly larger proportion of Apple’s sales, the overall gross margin would be expected to grow.

Sure enough that’s what’s been happening.

The gross margin percent, which measures the direct or variable costs of production vs. price, shows a healthy rise in the last five years from slightly below 30% to around 40%. The Operating Margin, which also includes the overhead or fixed costs like R&D and SG&A, shows a similar rise, reaching about 30%.

Margin expansion while sales quadruple is a good indicator that a company is producing real value not just trading sales volume for profit.

Is Apple a candidate for acquisition?

As shown in the Apple growth scorecard, the company’s earnings growth is continuing at 75% with the top line increasing at the annual rate of 70%.

The $59 billion of cash on the balance sheet has reached the equivalent of $64 per share yielding an enterprise value of $263 per share based on closing price of January 21st.

The stock price has been rising but not outside a narrow P/E band. The following chart shows the stock price and the 15 P/E and 25 P/E bands that have bounded it for nearly three years.

How does the Mac gain share while increasing its price premium over the Windows PC?

Apple set a new record for Mac sales in the fourth quarter. This was not a surprise. The growth was perhaps a bit lower than some expected (including me) but it was still a healthy 23% and 8x the PC growth rate. The Mac has outgrown the PC (and hence has gained share) for 19 quarters straight, nearly five years.

What’s more interesting is where the growth came from. Every region outgrew the market. Asia-Pacific led with a 67% year-over-year increase, almost 10x the market. Japan grew at 56%, which is about 6x the market, and Europe and the United States both grew in double-digits despite both markets contracting overall.

Looking over a longer time frame, the Mac has nearly quadrupled in volume in five years. In the last quarter of 2005, Apple sold 1.2 million units. In the latest quarter it sold 4.1 million. So the performance has been relatively good.

One significant reason for the growth has been the shift from desktop to portables. The lines show how the percent of portables went from about 50% to 70% of units and sales in four years.

The Bank of Apple: Using capital to ensure additional capacity and supply

When I wrote suggesting that the “best use of cash” was not acquisition but integration of manufacturing under the Apple control umbrella, the rumor that set off that discussion was that Apple was financing new facilities for its suppliers.

Those rumors were quashed, but we now know there is something to them.

During the September and December quarters, we executed long-term supply agreements with three vendors through which we expect to spend a total of approximately $3.9 billion in inventory component prepayments and capital expenditures over a two-year period. We made approximately $650 million in payments under these agreements in the December quarter, and anticipate making $1.05 billion in payments in the March quarter.

Apple Management Discusses F1Q11 Results – Earnings Call Transcript – Seeking Alpha [my emphasis]

Estimates for Apple’s second quarter earnings (ending March)

Apple’s CFO guidance statement:

We expect revenue to be about $22 billion, compared to $13.5 billion in the March quarter last year. We expect gross margins to be about 38.5%, reflecting approximately $50 million related to stock-based compensation expense. We expect OpEx to be about $2.35 billion, including about $250 million related to stock-based compensation. We expect OI&E to be about $50 million, and we expect the tax rate to be about 25.5%. We are targeting EPS of about $4.90.

via Apple Management Discusses F1Q11 Results – Earnings Call Transcript – Seeking Alpha.

This is a particularly aggressive revenue growth forecast of 63% (note again that Apple’s P/E has dropped to 18 and 14 ex cash and 10 on a forward basis) . Since Apple always guides very conservatively, the likely figures for the top and bottom lines are likely to be higher.

How much higher? Here are my estimates (growth in parentheses is year over year).

  • iPhone units: 18.4 million (110%)
  • Macs: 3.62 million (23%)
  • iPads: 6 million
  • iPods: 10.1 million (-7%)
  • Music (incl. app) rev. growth: 25%
  • Peripherals rev. growth: 23%
  • Software rev. growth: 23%
  • Total sales: $24.5 billion (82%)
  • GM: 38.8%
  • EPS: $5.89 (77%)

Looking a bit further ahead, earnings suggest the company is now trading at a forward P/E of about 9.5.

The end of exclusivity doesn't change the price operators pay for the iPhone

AT&T does not pay a higher price for iPhone exclusivity | asymco.

At the risk of repetition, there are three instances in conference calls that Apple management has stated that the iPhone has a fixed price for all operators and resellers.

The first was in October 20, 2009:

“So when you go from exclusive to multiple, you don’t change the charge to the carrier?”

Cook answered: “Correct.”

The second was a year later, October 18, 2010:

How exclusivity distorted the US smartphone market

Here’s a wonderful chart from The New York Times:

Will Apple Put the iPhone on Other Carriers? – NYTimes.com.

Although the population of Android users is near in size to the population of iPhone users, the concentration in one carrier shows how distribution agreements hamstring platform choice.