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Estimates for Apple's fourth fiscal quarter: Entering the post-P/E era

I’m late with posting my estimates for Apple’s current (fourth fiscal) quarter. Normally I post my estimates a few days after the previous quarter’s earnings are announced. This quarter however there was a lot to think about.

As pointed out in my analysis of the previous quarter, the iPhone sold at a far faster rate than I thought. I had expected it would be a “lame duck” in the quarter but the expanding distribution allowed it to continue at a triple-digit growth rate (142% in fact, the highest quarterly growth rate since 2009).

So the question for this quarter is, as always, what’s the iPhone growth? The problem for me is that I have to choose between two assumptions:

  1. Due to distribution and dual product strategy (n-1 variant) production has now become more consistent.
  2. This quarter is the actual transition quarter when iPhone 4 production is throttled down in favor of the new model.

The first assumption would put the iPhone growth at 100%+ while the second would place it in the 60% to 80% range. I decided to dial in a figure somewhere in between at 90% but I’m not very confident in this until we see more evidence that a new pattern has emerged.

So here are my “mid” quarter forecasts:

  • iPhone units: 26.8 million (90%)
  • Macs: 4.8 million (23%)
  • iPads: 10.5 million (150%)
  • iPods: 7.0 million (-22%)
  • Music (incl. app) rev. growth: 30%
  • Peripherals rev. growth: 23%
  • Software rev. growth: 32%
  • Total revenues: $33.2 billion (growth: 63%)
  • GM: 41.8%
  • EPS: $9.05 (95%)

Three years ago the company’s share price was trading at a P/E ratio of about 35. The above estimate and today’s price implies that’s it’s trading at the same multiple but the Earnings is measured over one quarter not one year.

As @Patricklgoe noted on Twitter: the post-PC era for Apple means it’s the post-P/E era as well.

  • http://www.ourversion.net AaronS

    I don't have the history of iPhone transitions in front of me, but when a new iPhone comes out do we know how many countries they usually roll it out to within the first month or so? I assume they usually hit most of the high volume countries, but I didn't know how much that was taken into account.

    • Hamranhansenhansen

      I think it is US-only for the first few weeks and then they do 8 or 10 other countries and then a few weeks later, another round with 20 more countries and so on.

      • handleym

        It's tricky because I think Apple have learned, from four launches now,
        - the extent of demand, and
        - that demand is worldwide.
        At the same time, the net (and the interest of installed Apple base) mean that countries that are slighted can become more aggrieved than in earlier times — people both learn that they've been slighted, and they post the sort of rabble-rousing blog comments we've all seen. I've bought a lot of (maybe 8 or 10) iOS devices for friends in Asia who asked me to, not because of price but because they weren't yet released in their country.

        The iPad2 was, I think, in many ways an embarrassment for Apple on this score. Yes, it's nice that you a product that people love. But being sold out on the opening weekend is one thing — persistent unavailability of product MONTHS after the initial release make you look bad and pisses off would-be customers.

        So we have two conflicting trends — we want the countries that get given product to have all they need, but we also want to cover all countries ASAP. The one saving grace is that it's easier with phones than iPads because most existing customers will throttle their purchases based on when their carrier contract allows them to upgrade.

        Given all this, MY expectation is that Apple will attempt to square the circle by building up substantially more inventory than for earlier launches (even if this means delaying the US launch) and covering more countries sooner.

      • unhinged

        The question for me is not whether or not Apple have learned anything about the demand (and Apple production has lagged demand outside the US for at least a decade, from personal experience), it is whether or not Apple perceive more value in building up inventory than in maintaining the status quo of secrecy and highly efficient manufacturing and distribution. At a guess – no. My expectation is that Apple will continue to work to increase manufacturing capacity but refrain from holding excess inventory; my reasoning is that Apple is still experiencing incredibly strong demand for the products and thus has no impetus to change an existing process.

        The evidence is in the sales growth – would-be customers may well be aggravated, but Apple has no reason to care because there is no impact on their business. There is no worthy competitor to the iPad, let alone a competitor with greater supply capability.

        The only reason Apple would have to release more widely more quickly is to remove the distortion in their geographic grouping of sales; the number of foreigners visiting countries where the devices are available simply to purchase as many of them as possible is (anecdotally) huge and sales in Australia dip (anecdotally) substantially after other Asian markets receive the new-release products.

    • Tim F.

      International launch schedules have sped up and grown.

      In '07, the iPhone launched exclusively in the US at the end of June, expanded to UK, France, and Germany in November (3 countries, 5 months later), and Ireland and Austria in the spring of 2008 (2 countries, 8 months). http://en.wikipedia.org/wiki/IPhone#History_and_a

      The iPhone 4 launched in the US, UK, France, Germany and Japan (5 countries), expanded to Australia, Austria, Belgium, Canada, Denmark, Finland, Hong Kong, Ireland, Italy, Luxembourg, Netherlands, Norway, New Zealand, Singapore, Spain, Sweden, and Switzerland (17 countries, 1 month later) and rapidly ramped to 70-80 additional market throughout the first two quarter, and expanding to 10-20 more in the 3rd and 4th quarter. http://www.apple.com/pr/library/2010/06/28iPhone-http://www.ilounge.com/index.php/news/comments/ip

      The iPhone 5 is likely to launch on 3 US carriers, possibly 4 other key national markets (UK hasn't been performing well; Asia now more important), possibly including China, followed by a larger expansion into the 2nd tier key markets a month later, the same rapid expansion into the 80-100 existing markets/carriers that Apple is supplying throughout production ramp up, plus new additions (carriers in key markets (US, Japan, China), new territories, new model?).

      Yes, backtracking through the launch schedules (easily doable) and modeling estimates based on a national/carrier level (not easy) would probably be very helpful in modeling iPhone expectations.

      • Tim F.

        I wasn't sure about my own estimates for current growth in new territories/carriers, so I went looking:

        "And by the end of the quarter, iPhone was available through 228 carriers in 105 countries, compared to 186 carriers in 90 countries as of the end of the March quarter." http://seekingalpha.com/article/280344-apple-mana

        I hadn't realized I was being so conservative/accurate… thought I went overboard.

        Also interesting to note that the white iPhone 4 immediately launched into 28 territories: "White models of iPhone 4 will be available in Austria, Australia, Belgium, Canada, China, Czech Republic, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Luxembourg, Macau, Netherlands, New Zealand, Norway, Singapore, South Korea, Spain, Switzerland, Sweden, Taiwan, Thailand, UK and the US, beginning Thursday, April 28 and in many more countries around the world soon." http://www.apple.com/pr/library/2011/04/27White-i

  • Chip

    I'm interested in how many billion-dollar product lines Apple oversees. I see six: Macs, iPhone, iPad, iPhone, iTunes, and App Store. Is it possible there's a seventh in peripherals? And … are there any other companies that have more than two such product lines?

    • http://ourversion.net AaronS

      Judging from their last earnings report, it looks like Peripherals and Other Hardware is about $500 Million. http://images.apple.com/pr/pdf/fy11q3datasum.pdf [PDF Link]

      • disc1979

        per quarter.

      • handleym

        What is peripherals? My gut reaction would be that the important part of it is Airport base stations and Expresses; that the other stuff (replacement headphones, power supplies, iPod docks, etc) is lost in the noise. But maybe my instincts are completely off?

        Again trusting my gut, I would assume that

        - Apple will stay in WiFi hardware for a while, because they are invested in wireless that works well. If they abandon that market to such incompetents as Scientific Atlanta or D-Link, they lose control of their future.

        - My GUESS is that we will see Apple returning to BlueTooth in a big way. The current situation is the same as I said with WiFi — a large part of the iOS experience is in the hands of utter incompetents, and there is no standout brand that Apple can trust as a proxy for themselves. BT remains a pain in the ass — we've all had headsets that won't re-connect unless you power cycle them — but a better BT experience is key to a better iOS experience. For example — why do I still have to screw around with headphone cords? Why can't I get a BT headset that
        + doesn't require re-connecting — it just works in somehow detecting the presence of the phone and connecting?
        + doesn't require charging — it charges from body motion, or body heat?
        + has a richer connection to the phone than the current BT specs allow — for example when the phone rings, it tells me who is calling?

    • asymco

      All major product lines are over $1 billion / yr.

    • Hamranhansenhansen

      You missed Apple Retail and you missed application software (Final Cut, Logic, Keynote, FaceTime, and so on.) Also, notebooks and desktops would typically be counted separately, and each of those is a billion dollar business by itself.

    • unhinged

      Microsoft

    • Chris

      IBM has many more than 7 billion-dollar product lines.

  • http://twitter.com/hizkyasdufera @hizkyasdufera

    I agree with most of the estimates but for the iPad. I think Apple will sell more than 12m iPads this quarter given that there is still a supply-demand imbalance.

  • Ted_T

    I can't help but think that the iPhone estimate is high — I really don't think it is instructive to do Y/Y comparisons anymore, because everything changes so fast, but quarter to quarter is still in the same ballpark. Last quarter Apple sold 20.34 million iPhones in a quarter that saw the introduction of the white iPhone 4 and the collapse of US Blackberry sales and international Nokia sales.

    In the current quarter, informed consumers are waiting for the iPhone 5 (which will likely be released in October, fiscal Q1), and I don't think any major new carriers are being added. What will cause a 6 million q/q increase? Apple's ability to make more iPhones even in the face of ramping up the iPhone5? (which makes me unsure that even that proposition is true). Has Apple introduced any new major carriers/territories in this quarter? The world economy has weakened slightly.

    I just want to know the reasoning behind the 6M increase in iPhones.

    • newtonrj

      It is less on what AAPL is doing right. More on what the competition is doing badly. -RJ

    • timnash

      Peter Oppenheimer in the last analyst conference call mentioned a major product transition this quarter. That is likely to be the iPhone 5, although it may only be available in the US before the end of the quarter.

      • Ted_T

        I totally agree that Oppenheimer was talking about the iPhone 5 — but even if the iPhone 5 is actually released in the first few days of October (and BTW doesn't Apple's fiscal Q4 end before Sept. 30th?) the iPhone 5 transition will have a material effect on the Q4 results, so his statement would be just as valid.

        In any event a US only release of the iPhone 5 a day or two before the end of Q4 would at most move the needle by 3 million or so devices — Apple/AT&T/Verizon can physically sell only so many phones in a limited amount of time. So even if the iPhone 5 arrives in Q4 we are still short of Horace's 6M Q/Q growth.

        And if I can go slightly off topic — for Q1/Q2 of 2012 the constraints on iPhone are strictly manufacturing capacity and carriers (China Mobile, Sprint and T-Mobile coming on line will materially move the needle). In other words, nothing has changed in that regard.

      • Joe_Winfield_IL

        For what it's worth, Apple counts sales to the carriers in its financials. It doesn't matter how many AT&T and Verizon can sell, it matters how many they buy. Apple also tracks activations, but the quarterly earnings will reflect the sales. Also, as you point out, T-Mobile and Sprint will likely get the new phone. Even with a U.S. only launch, Apple's sell-in will be huge.

      • kevin

        IIRC, Oppenheimer mentioned that product transition in the context of why the revenue guidance seemed so low. (Fiscal Q4 guidance was lower than Q3 actuals.) So that provides for the anticipated slow sales that will occur in the 3-4 week gap between announcement and product availability for iPhone 5.

        With the likelihood now that the supercharged sales of an iPhone 5 launch not happening until fiscal Q1, iPhone sales for the fiscal Q4 could very well be flat. I'm estimating only 21m in iPhone sales.

      • kevin

        BTW, my assumption is Apple's quarter ends on Sep 25th, and iPhone 5 will be available in stores on the rumored Oct 7th. So iPhone 5 channel fill primarily occurs post-quarter.

        If there is also the rumored new, cheaper iPhone 4S (to replace iPhone 4), then the fiscal Q4 iPhone numbers are hurt even more, with an even bigger bump up in fiscal Q1. Plus I think this coming Q1 gets the extra week to re-align the fiscal and calendar years, so it gets a still bigger bump up.

      • Joe zou

        Is it possible that a cheaper iPhone 4 for pre-paid markets is released in September? china mobile, etc? IPhone 5 in October?

    • Tom Ross

      If it has to be yoy one should compare Q2'10 and Q3'11. The exact timing of the launch (Last weekend of the quarter as usual? Or earlier? Or later, in October) as well as the price range (Finally a sub-$500 model? Or not yet?) will make a big difference at the end of this quarter.

      I don't see much value in making an iPhone estimate right now if the result is either being totally wrong or being right for the wrong reasons. There's no way to make an informed estimate without insider knowledge of the new products.

    • Hamranhansenhansen

      Demand is always rising. When the iPhone 4 was introduced, sales of iPhone 3GS went UP.

      Most consumers do not know there is more than one model of iPhone. They decide to buy "an iPhone" and that is that. Doesn't matter what model is current at the time. They simply decide whether they want to pay $299, $199, or $99. In some cases, you can get the $99 iPhone for free. The introduction of the iPhone 5 will just bump the 4 down to the $99 spot, and the media frenzy around iPhone 5 will double demand again.

    • asymco

      In-line q/q would imply about 45% y/y growth. That would make it the lowest growth for the iPhone except for one quarter which had a 500% comparable the year before. 45% would probably imply market share losses as the market will probably grow faster than that.

      • EWPellegrino

        On the other hand isn't there often a small QoQ drop for the actual quarter of a new model release? Followed by an extremely large surge in the next quarter? So we could see significantly lower iPhone sales in Q3, followed by over 30mil in Q4. That would seem to match the pattern better. YoY growth may not be a good guide now that Apple has varied from their annual product cycle.

      • Iosweekly

        I think your iPhone number is high, and I don't see apple adding any extra production capacity for iPhone 4 in it's final quarter of production. Last years Q42010 had the benefit of all the new iPhone 4 production lines eclipsing the output rates of the year before Q42009 3GS.

        This year we don't have the same huge jump in iPhone production lines (unless all those new iPhone 5 lines actually are producing phones right now that will be counted in this quarters sales figures?)

  • Walt French

    Given that 3GS sales have been so strong I have to wonder whether the “annual” iPhone transition wasn’t/wouldn’t be just the addition of new assembly lines. That would make a slowdown depend only on Apple’s management of the channel.

    • EWPellegrino

      The 'future product transition' was part of an answer to a question about projected revenue decreases for Q4, so it clearly doesn't apply to them simply adding new lines as that wouldn't reduce revenue.

  • CndnRschr

    iPhone estimates are going to be nuts this quarter. There is the China effect which is sustaining sales but there are also a lot of hold-outs for the iPhone5. The iPhone4 and 3GS are still top sellers though so 90% sounds reasonable. I think your iPad sales are over-estimated though by about 500,000 units. I think demand may have softened a little and although Apple has said they've sold everything they've built, they are very good at tuning supply to demand once the initial sales launch has waned (how many new markets has it been launched in this quarter?). It's a difficult call though, as there will be a lot of students buying these and its still an iPad market. Heck, everyone has underestimated the iPad. Everyone. Lastly, I think you have actually underestimated Mac sales. The new MacBook Air refresh is a killer. If it wasn't for its 4 GB RAM limit, I'd buy one to replace my 2009 MBP. I think Lion provided a boost too. Will be interesting to see how this quarter pans out.

    • Tom Ross

      For the iPad—channel fill alone will eat up at least 2 million extra units this quarter. Apple only had 10 days of channel inventory at the end of last quarter. The target range is 4 to 6 weeks. So in terms of sell-through Horace's estimate already reflects softening demand.

      • CndnRschr

        Good point although is Apple's target 4-6 weeks? They have the advantage of very detailed intel on their customers and control the physical AppleStores and the on-line store. They do not need to rely so much on typical big box sellers with their promotions and other "jerky" means to push sales.

      • EWPellegrino

        Yes it is.

        From the conference call:

        'We ended the quarter with about 1.05 million iPads in channel inventory, a sequential increase of about 200,000, which was well below our target range of 4 to 6 weeks.'

    • Hamranhansenhansen

      As far as the iPad, every day in the news there is a story about another company deploying 10,000 iPads. Today it is an airline that just handed out 11,000 iPads to be used as flight manuals. Yesterday there was a story about a retailer who just deployed iPads to their employees so they can have product information at their fingertips as they make sales.

      We never really saw too many corporate sales of the original iPad because for so long there was not enough supply. So there is this additional level of corporate sales for iPad 2.

      • CndnRschr

        That's why the estimates are fun! In the last quarter, Apple sold over 100,000 iPads a day, 7 days a week. The United flight crew deal is equivalent to just over two hours of sales…. This is like trying to ride a wild bull while holding on with dental floss.

      • claimchowder

        They sell every unit they can make, and still had a back log a short time ago. So it comes down to how many iPads Apple can make. It shouldn't be hard to estimate that, though being a technical person I'm not the right guy to do it.

      • CndnRschr

        At some point, that will change (sell every unit they make). For HP, they hit the sales limit after about 10,000 units (at the regular price) which redefines the words "niche" and "failure". In fact HP managed something quite remarkable. They launched a product in to a space that is expanding enormously yet still managed to create a blackhole for themselves. I am sure astrophysicists can explain this. If sales volume projections were as simple as projecting production rates (which I know Horace likes to do when a product is constrained and in high demand), then Apple would be foolish not to simply triple production. They have not done this for several reasons. Firstly, there is a yearly refresh and an abrupt ramp down/ramp up. Secondly, they cannot source enough parts. Thirdly, they do not want to flood the market and also possibly drop quality standards. And lastly, they are mitigating risk/liability. It's difficult enough to control a car at 150 mph on a straight. Throw some unexpected bends and the task gets much harder. They are not leaving money on the table by not producing more than they can sell because they have faith people do not buy crap (unless its priced at $99).

      • EWPellegrino

        At some point yes, but that point does not appear to be upon us as yet. As for simply tripling production, it's actually possible that they did exactly that.

        In Q2 they sold 4.6mil iPads, so they built roughly 1.5mil per month. In Q3 they sold 9.4mil, so at a minimum they doubled the monthly build figure. However if the supply increase didn't kick in sharply on day 1 of the quarter they must have increased it further. An abrupt increase mid-quarter, or a linear ramp over the entire quarter would imply about 4.5mil per month, or triple Q2 production. Given that they also said that supply improved further in July, it's hard to imagine that they have done less than triple it since Q2.

      • asymco

        And let's not forget that a phone typically lasts 2 years. Many people bought Blackberries first only to upgrade to touch based phones later. Apple may be content to let Android migrate a generation of users from dumb phones to smart and then they can upgrade them later to iPhones (or whatever the product ends up being).

    • r00tabega

      Agreed about Macbook Air – several coworkers have replaced their aging home laptops with a new tbolt MBA (I'm holding out for 8GB RAM or 15", or I'd have done so also).

      Also, anecdotal evidence for iPhones suggests that folks don't buy based on product timing entirely. I know 2 folks who (since they're off-contract now) bought VZ iPhone4s,, switching from ATT & T-Mobile. They did know the iPhone5 would be released soon, but didn't care… the stability in product line ensures that it won't be some enormous leap forward and they needed a new phone.

      Finally, other markets than the US may not see the iPhone5 till well into next year, also making an iPhone4 purchase reasonable within the "transition quarter".

      All in all, I don't expect the dip to be much.

      • handleym

        MacRumors buying guide has MacBook Pro's approaching their end of cycle. (But it's possible they may not be replaced until Ivy Bridge comes out.)

        I think we'd all be amazed, horrified, and disappointed if they STILL have optical drives in them. All signs point to them being "MacBook Air Pro's" — most of the thin-ness, but twice the RAM, a better GPU, ethernet, and larger screens.
        I suspect it's something of a tossup whether the MacBook Air brand-name continues or not. On the one hand, MacBook and MacBook Pro is easy to understand; on the other MacBook Air brand has so much cachet right now that it may be worth sticking with for a another iteration or two.

      • addicted44

        Good call on the branding. The current Macbook Air is simply a Macbook, but the Air branding is really way up there right now.

        Apple is so good at brand management, that I am really interested in seeing how the pros handle this.

  • davel

    Splitting the difference on the phones seems reasonable as last qtr Apple surprised most people with the number of units sold for a one year old product.

    My question is why is you tablet figure so low? You are essentially saying sales from qtr to qtr are flat. Since Apple does not seem supply constrained anymore I would think they would be able to sell more.

  • r.d

    iphone was 20.5 million last quarter. with 5 million in the sales channel.
    ipad sold 9.246 last quarter with none in the back channel.
    Now that there is no delay in shipment at apple.com.
    you have to assume at least 2-3 million just for the channel. so 11-12 million is reasonable.

    PS. United Airline just announced 11,000 ipads for their pilots.

  • timnash

    The iPad didn't reach 1 day delivery from the online Apple Store in the US until about the end of July. It was later in Europe. When Apple's target 4-6 weeks of channel inventory is added in, provided they could be produced, 12 million iPads looks more likely.

    • EWPellegrino

      Agreed, considering the conference call

      'I don't want to give you a specific yield numbers, but as I've said earlier, the supply of iPad improved dramatically in the quarter, that allowed us to do the over 9.2 million, that's up from the 4.7 from the prior quarters that we added almost 100%. I also said that we had further incurred the supply in the initial weeks of July.'

      If we assume that the supply increase occurred mid-quarter we'd be looking at a monthly build rate of 4.56mil, so over 12mil per quarter and that's without even including the increase in supply in July.

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  • MOD

    I think these are low. Also one should compare with the quarter just finished not with a quarter last year. That should also be out. There does not seem to be much seasonal variance between quarters anyway. If people need a new phone, or computer they are not likely to wait for Christmas until they get one.

    They are now a necessity, like laundry soap, not a novelty, like a gift. Since when did anyone give phones as gifts anyway. This sector is stupid.

    • EWPellegrino

      Historically the YoY comparisons have been good not because the iPhone is highly seasonal, but because the product refresh cycle was at the same time each year.

    • asymco

      Can you explain what makes a sector stupid (or smart)?

      • MOD

        Just compare the IQ/education/income of an Iphone user with IPad user or Icomputer user. It used to be that Iphone users were the most sophisticated, now everyone has one (or an Android copy). Maybe it has become like the Ipod (a commodity). I see young students with their Iphone/Android in class texting their friends to checking their facebook, instead of paying attention to the professor. That is stupid, especially since they are most likely to fail or drop out.

        Just like the Ipod was replaced by the Iphone. (I never had an Ipod before the Iphone.) Apple should look to replace the IPhone.

        I am thinking of getting an IPad with Skype, and a Skype phone number to replace my cellphone and the ATT monthly service.

      • Joe_Winfield_IL

        I think you're projecting your worldview a bit here. Horace's job isn't to weigh in on college students' attentiveness. He provides "curated market intelligence." Your opinion on why/when people buy products is theoretical, not empirical. If you read through this blog, you'll learn the history and logic behind the seasonality of Apple's product sales. Some product lines are tied to 'back to school' and 'Christmas' shopping, while others are much more affected by product release date and manufacturing capacity.

        Finally, iPads have been incredibly popular as gifts. They are expensive gifts, but are very easy to buy and don't require continuing contracts. Phones are trickier, but much of the world does not operate with carrier subsidies like the US. iPhones are relatively easy to gift to anyone in unsubsidized markets.

        Also, I think I know what you mean when you say that the iPod is a commodity (everybody has one and cachet is lost). However, in this web community, "commodity" usually means "undifferentiated." The iPod is definitely not a commodity in the latter sense, or else the market share would have been lost to cheaper alternatives. Sales have declined in recent years, but the iPod is still dominant within its market.

      • handleym

        If only there were some magic box in the sky that could answer this for us…
        Oh wait, there is: http://images.intomobile.com/wp-content/uploads/2

        iOS users — 37% more likely to have a college degree
        Android — 80% more likely to have only a high school diploma

        As for carrying your iPad around EVERYWHERE as conveniently as a phone (iOS or Android variety) — well good luck with that, but might I suggest that an iPod Touch would be a better tool for your plans?

      • MOD

        The table is good analysis, but we also need a comparison between smartphone owners and computer owners and IPad owners.

        As regards the Ipod touch, thank you, but does it come with wireless data like the IPad? I don't mind paying for data, it is the phone and texting I don't want.

      • MOD

        Just like people dropped their land lines in favor of a cell phone number, people will drop their cell phones in favor a something better…

        Also, this is not to say that Apple cannot become a commodity. Obviously is has with the Ipod (and perhaps will do so with the Iphone). The original Apple II pc was a commodity too.

      • http://twitter.com/PaulMaxime @PaulMaxime

        How has the iPod been commoditized? Almost nobody buys and MP3 player from anyone except Apple. Now, the iPod has perhaps been obsoleted for the most part, but that was by Apple, not by the market at large.

      • MOD

        Exactly, first it became universal (commodity), then it is replaced. The cellphones will go through a similar transition.

      • kdt

        And you still don't seem to understand the definition of a "commodity". A commodity is "a good for which there is demand, but which is supplied without qualitative differentiation across a market." Producers of commodities usually have no choice but to compete on price and is usually sold at a very low profit margin. There is usually very little brand loyalty for a commodity. By that definition, neither the iPod or the iPhone could be considered a commodity. Apple has seen very little price pressure on either.

      • EWPellegrino

        Consider a different example, point and shoot cameras. A couple of firms make the majority of point&shoots. For Sony and friends margins are pretty decent so brands like cybershot arguably aren't commoditized. However the P&S category in its entirety has been commodtized by smartphones such as the iPhone, but also other upper end handsets.

        So when thinking of iPod as a brand it isn't commoditized, but when thinking of iPod as a category, ie as a generic for the entire dedicated PMP market, it has been – in the same way that P&S cameras have been.

      • kdt

        That still doesn't fit the definition of a commodity. Commoditization only occurs when a product category loses it's differentiation not when it becomes obsolete due to a technology shift.

      • EWPellegrino

        Obsolete would imply that the technology was outdated but it isn't, it has converged onto another device and in the process lost differentiation. So for yet another example 10 megabit ethernet is obsolete. Gigabit ethernet was commoditized by convergence onto motherboards.

      • kdt

        "The word commodification which describes assignment of economic value to something not previously considered in economic terms, is sometimes used to describe the transformation of the market for a unique, branded product into a market based on undifferentiated products."

        There was never a "unique branded" Gigabit Ethernet card. Whether it was on the motherboard or not, there were dozens of undifferentiated products that competed on price.

        The "iPod" has not been "commodified". It still is unique branded and does not have to compete on price with other PMP's.

        The "IPod" is not category, the iPod is brand of PMP's.

      • EWPellegrino

        I should just drop this but last try.

        First you're confusing commodification with commoditization, they are distinct – see for instance http://www.rushkoff.com/blog/2005/9/4/commodified…. Commodification refers to commercialization of a normally or previously non commercial activity. Prostitution is the commodification of sex.

        Commoditization is a newer concept and is still rough around the edges, like all words and especially new words it is defined through use, not by lexicographers.

        There certainly were branded ethernet cards once upon a time. Just as there were branded sound cards, and branded wi-fi cards. Just as to this day there are branded graphics chipsets. Sound cards, wifi cards and ethernet were all completely subsumed by the motherboard and commoditized in the process – graphics is still somewhat branded though the convergence process is clearly taking place there and it's likely that sooner or later all graphics will be on-board and inevitably commoditized.

        The iPod is indeed a brand and not a category when speaking technically, just as rollerblade is a brand and not a category – the category being inline skate. But people frequently refer to it as a category. Moreover as the category is commoditized the brand inevitably is too. Remember Soundblaster?

      • Joe_Winfield_IL

        I generally agree with your thoughts, but I think kdt has a point too. The iPod has been marginalized, and it has been cannibalized. Still though, I would argue that it has not been fully commoditized. I agree that it's a tough definition to pin down, but I don't think iPod fits in with Rollerblade, Kleenex, Band-Aid, etc. just yet. Most buyers of inline skates don't care if they buy Rollerblades, but most PMP buyers specifically want an iPod.

        The experience of iPod is still different enough than anything else in the field, largely due to iTunes. The software prevents commoditization of the hardware. One could argue that the same is true of PCs. While the category has certainly been commoditized by Wintel, Apple's stubborn determination to support Mac OS over the years has kept their (technically very similar) products from falling victim of the commodity label.

        And for the record, I distinctly remember making the decision to spend an extra $25 for a US Robotics 33.6 modem vs. a "generic" product. In retrospect it does seem silly, but to your point – modems weren't just a soldered motherboard component once upon a time.

    • handleym

      "Since when did anyone give phones as gifts anyway."

      Uhh, people with teenage children? People with aged parents?
      Both of these are perfectly sensible segments for "phones as gifts".

      And given that contracts run for n years, once you start this pattern (christmas purchase), it's common to continue it; especially since it's an easy gift idea that you are pretty sure will be enjoyed by the receiver.

      There is also the "present for myself" phenomenon, but I don't know how common that is. I suspect teenagers is VERY common, and aged parents exists — though in many families, maybe the aged parents inherit the two year old phone, and the gift is paying the phone contract?

      • MOD

        I don't understand how you can give a cell phone that costs $0 but has a monthly contract of $50 as a gift? It did not cost you anything, but you are burdening the recipient with a large monthly expense.

        Unless you are assuming the contract for them. But then you are mostly paying for a cell phone contract/usage charges, not the cell phone itself. And it is your cellphone, not theirs, since the billing stays in your name.

      • David

        One obvious way is someone who already has a contract. Even more so if it is AT&T. Pull the sim card out, stick it in the new phone. Done.

        Second. As handleeym said, a gift to a child or parent. For example, We cover my mother-in-law's DSL access. It is in her name, but we pay the monthly bill. She gets the statement, but I pay it automatically each month.

        I'm not really sure why you are having such an issue with this.

      • Martin

        I agree. I gave my wife an iPhone 4 as a gift. She had trouble seeing the utility in a smart phone over her old low-end feature phone. So, I loaded it up with things she'd find useful and fun. It might seem like a boring gift, but we don't usually buy niceties like that, so it was a bit of an extravagance for us.

  • Venkat

    I think the iphone 27M estimate may be a tad high. I would think more like 20M given the new iphone is coming.

  • Martin

    Wait, you're calling for $9.05 EPS when Apple has guided $5.50 EPS and $33.2B revenue against their $25B? I know Apple guides conservatively, but that's getting into willful deception territory there. We're off by a Google in revenue and over an Intel in income. Am I missing something here, or is somebody WAY off.

    • asymco

      The earnings guidance "deficit" is not extraordinary by any means. I'm projecting earnings at 64.5% over guidance (my estimate-guidance)/(guidance). The ratio (actual-guidance)/(guidance) has been (sequentially since cQ4 2006): 62% 58% 43% 51% 29% 30% 25% 149% 81% 88% 105% 134% 115% 61% 53% 34% 31% 30% 54%.

      The average deficit was 65%. The minimum was 25% and the maximum was 149%.

      My estimate is therefore spot on the mean.

      • CndnRschr

        H.O.L.Y. mackerel! Horace, you should tweet those ratios. Stunning. How do they compare to Goog and (sorry) Microsoft? Didn't make you out to be a "mean" dude though ;-)

      • asymco

        Sorry, I don't track the others.

      • CndnRschr

        Nice tweet! The high variance does make your job interesting and the consistent deficit likely raises market expectations.

      • Joe_Winfield_IL

        That's a remarkable trend. I guess it's just hard to reconcile because in cQ4 2006 EPS was $0.71. A 62% miss was $0.27/share. There's plenty of chatter each quarter about Apple's reluctance to give real guidance, but there's a material difference between missing by $0.27 and $3.55 – even if the percentage is held constant. This is just getting silly. My concern is that Apple actually guided down this quarter. I don't doubt that they'll annihilate their own estimates, as per usual. However, I'm a bit nervous that expectations are as strong as they are. I think Apple has done a better job guiding with their words than with their numbers, and I'm inclined to think that Oppenheimer was trying to temper iPhone growth expectations a bit.

        My (totally useless and unscientific) guess is EPS of around $8-8.25, with iPad channel fill and back to school MBA sales as the primary growth catalysts. I think the timing of the updated MBA is a bigger event than anything else from this calendar quarter; keep in mind that last year's models came out well after the US college students had made their purchases, making for a pretty easy comparison.

      • asymco

        I think I tweeted once that beating by 2c can be exciting but beating by $2 is boring.

      • Martin

        Wow. That's surprises me – maybe just because the base numbers are getting so much larger that I never picked up on the percentage before. Been long AAPL since 1997 in fact.

        Thank you very much for addressing that. I couldn't find anything in your estimate to poke at critically – everything looks about right to me. I'll admit that at the end of the day to being a bit astonished at what Apple is doing here.

    • asymco

      If anyone is WAY off it's anyone who believes Oppenheimer's estimates. If you look at the sequence above you might also notice that the biggest deficits occurred during the trough of the recession in 2009 [88% through 115%]. I suppose it was fashionable to talk oneself down during those quarters and it may be coming into fashion to do so again.

  • CAW

    Horace, If you see $9.05 EPS and Iike the unit estimates you are forecasting, I am curious what do you see them adding to the balance sheet this quarter? $12 Billion would seem resonable to me, what are your thoughts on that cash build?

    Thanks

    • asymco

      Cash flow depends on several other factors which I do not model (i.e. I focus on the income statement and not balance sheet and cash flow statement). Cash build can be seen to be a bit more seasonal though again that seems to be leveling out. Overall net income is in the $8.5 billion range so I would not be surprised to see cash increase by something in that range. As a further guess, I think by end of year cash should rise to $95 billion.

  • http://twitter.com/rcastano @rcastano

    If you are right and EPS turns out to be 9.05 for the Qtr…

    1) AAPL at $400 would have a P/E just short of 13.5
    2) AAPL at $500 would have a P/E still short of 17
    3) AAPL at $600 would have a P/E just over 20

    I hope you are wrong and we don't live in a post P/E era. AAPL's future cash flows deserve a P/E of 35 like you say it had 3 years ago. That would put AAPL at a price of over $1,000.

    • asymco

      One piece of evidence regarding how Apple is priced is the day that Apple restated their earnings to reflect the elimination of subscription accounting. In an instant, the company's P/E dropped from 33 to less than 20 but the stock price barely budged.

      • Laurent Giroud

        But doesn’t this mean simply that the market was already pricing Apple very low before the change and thus was already valuating the company without subscription accounting?

        The company’s value didn’t change because of the way the earnings are presented so it seems logical that the share price wouldn’t move. I feel that I am misunderstanding how that piece of evidence should be interpreted and I wouldn’t mind if you could clarify it :).

      • http://www.asymco.com Horace Dediu

        The day reporting changed there were significant re-statements of prior periods and a lot of new information emerged, especially about the gross margin of the iPhone (which was far more difficult to ascertain with subscription accounting). It took me many days to sort through the changes. Yet the market saw nothing of note there.

        Practically I can say that many analyst models were never correct during the period of subscription accounting. There were many who were forecasting iPhone revenues _lower_ than what had already been booked. The income from iPhone based on prior sales not yet reported was higher than what some were forecasting for the near future.

        There was inefficiency in the stock because the confusion about revenues with the iPhone was rampant among professionals and amateurs. However, after the re-stating, there was no change in pricing which implies either the market remained inefficient or it was efficient all along. I’m certain it was not efficient before so one has to conclude that it’s inefficient now.

  • Tim F.

    Hypothesis: Steve Jobs's health has been a weight pressing down the P/E ratio. If the Tim Cook-led Apple continues to perform financially as well as Apple has over the past 3 years, the P/E will rise. (Not to 3 year ago levels, but upward. May also depend on continuing to introduce new and exciting products that surprise in the "Apple way" but clearly post-Jobs, i.e., Apple has to continue to succeed/"lose.")

  • http://twitter.com/maxrogo @maxrogo

    I recently posted a fairly detailed Quora answer explaining that the $1000/share price and the $1 trillion market cap had an almost inevitable future around them. Now that Steve has retired as CEO (and it should go without saying, but I hope his health is good, thank him for his amazing tenure, and tip my hat to his presiding over the greatest turnaround in corporate history), the excuse that's been overhanging the stock will turn into the reality of sell off, buyback rally, and return to fundamentals. Fundamentally, Apple's share price is indefensibly low.

    • http://twitter.com/TektonikShift @TektonikShift

      Yup…. "Fundamentally, Apple's share price is indefensibly low."

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  • Rusy88

    Apple has a fully integrated hardware and software system and a strong ecosystem. HP being the biggest hardware vendor pulled out of tablet and Pc market because it cannot compete with Apple's iPad and iMac pc. Nokia, the no. 1 mobile phone vendor over the last few years, had to partner with Microsoft, the no.1 software company, to develop and compete in the smart phone market.

    Google, being a successful search and software company, just acquired Motorola Mobility. Many reckons that this is a move towards adopting Apple's integrated model for smartphone. What are the chances of Google executing the integrated model? What are the implications on it's relationships with HTC, Samsung and other
    hardware suppliers? Would appreciate your thoughts on the possible scenarios!

  • http://twitter.com/Breen_Anthony Anthony Breen

    Horace, what do you make of the DigiTimes report that FoxConn is shipping 20M iPads this quarter?

  • http://twitter.com/Breen_Anthony Anthony Breen

    Horace, what do you make of the DigiTimes report that FoxConn is shipping 20M iPads this quarter?

    • http://www.asymco.com Horace Dediu

      It’s conceivable. My estimate is only about 10.5 million sold, but you have to factor that some of this quarter’s production may not be sold in the quarter. My estimate for CQ4 is about 18.3 million. Both reflect 150% y/y growth. If production can increase at a faster rate, then targets indeed need to be updated.

  • Peter Hanes

    Horace,

    You wrote in your post: “The first assumption would put the iPhone growth at 100%+ while the second would place it in the 60% to 80% range. I decided to dial in a figure somewhere in between at 90% but I’m not very confident in this until we see more evidence that a new pattern has emerged.”

    Would you care to put confidence limits (i.e. uncertainties) on each of the input quantities for your model? You could choose limits for levels of confidence of, for example, 68 % (which would mean that you would expect about two thirds of the eventual actual results to be within the confidence limits that you state) or of 95 % (which implies that you expect 19/20 of the actual results to be within the limits).

    For example:
    “I estimate iPhone units sold to be 26.8 M, +/- 4.2 M, at a level of confidence of 95 %.”
    or
    “I estimate iPhone units sold to be 26.8 M, +/- 2.1 M, at a level of confidence of 68 %.”

    Over time this would give a nice indication of how appropriate your confidence in your estimates is.

    For an individual quarter, you could also propagate the uncertainties in the input quantities through to your estimated results.

    Wouldn’t it be fun if every forecaster did this?

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