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Month April 2017

Predicting The Second Quarter

The last quarter of 2016 was Apple’s biggest ever. $78.4 billion in revenues. 78.3 million iPhones. Both records. Earnings of $3.36[1] and cash reached new highs. The growth was modest but Services is now not just the second largest revenue but also the fastest growing, on track to doubling in four years.

The reason for this is the vastness of Apple’s user base coupled with the loyalty the brand engenders. The company reached one billion active devices more than a year ago and is quite likely to have nearly a billion users. Not just any billion either–the best billion most probably.

The realization that Apple benefits from extreme quantity and quality of customers has led some observers to defer the imminence of Apple’s demise. Share prices have risen lately to new highs and the ratios between these prices and earnings have started to come closer to the average of other large companies.

But enough with the reductio ad absurdum. Let’s look at the next quarter. The company has been very precise with its own offered predictions (guidance) so it’s a simple task to make an accurate forecast. The history of guidance vs. outcomes for revenues is shown below:

Placing the pipper on the upper edge of the guidance range was a safe targeting method for 11 of the last 17 quarters. We have never seen a drop below the bottom of the range but had a few overshoots, some huge. Doing this for the latest quarter and working backwards to the individual product contributions to revenue and using historical margin and cost patterns we can get the following core financial performance metrics:

Fiscal Q2 2017:
Rev ($B) 53.4
EPS ($/share) 1.96
iPhone (thousand units) 53100
iPad (thousand units) 9900
Mac (thousand units) 4100
Watch (thousand units) 2300
Services ($ million) 7129
Other products ($ million) 2300
Gross margin (%) 37.8

I sent these estimates to Philip-Elmer DeWitt and I recommend looking at his survey of the other analyst estimates on his excellent Apple 3.0 blog.

Overall, the quarter is shaping up to offer slight growth y/y and indicating a plateau formed after the surge from the iPhone 6 surge in ’15. All eyes are on the “super cycle” for the next iPhone.

The reason it’s “super” is that the iPhone has a 2+ year cadence for form factor changes and the user base updates on a similar cycle. The demand is vast due to the user base and accumulated age of devices in use. Expectations are that supply will be offered to meet this demand.

If history is a guide then the next iPhone will be the best iPhone ever.

 

Notes:
  1. On shares priced at the time around $105 or 3.2% yield quarterly earnings []

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Contact Less

In September 2016 Apple Pay came to support the world’s largest public transit system. It happened through the integration with Japan’s FeliCa and gave Apple Pay access to 160 million daily transactions.

This, along with many other milestones don’t get a lot of attention. Apple Pay is in what could be considered an attritional competition with non-consumption. There are no decisive battles won or lost, only the relentless pressure to make progress against a reluctance to change.

Before I go on, I should make the attrition/decisive type of conflict clear. The terms come from military science. A war of attrition is one where two sides essentially grind against each other and the winner is the one which lasts longest. A decisive battle is one where a conflict is won through a single, acute encounter where, due to either demoralizing or circumstance reasons, one side gives up. It’s the knock-out punch vs. the fight to exhaustion.

When applying this dichotomy to competition, we need to be careful about who we define as competitors. Note that I said that Apple Pay is in a fight with non-consumption. It’s tempting to say Apple Pay competes with some other payment system like Samsung Pay or Google Pay. But none of these alternatives are as powerful as the existing mix of contact payment systems: cash, credit card magnetic swiping and some other hybrid of codes and user experiences (especially online.)

When seen this way the challenger must compete through persistence. It’s impossible for Apple Pay to decisively defeat non-consumption in one battle. It takes literally millions of decisions for adoption: each consumer, each merchant, each bank, each point of sale. It’s a relentless grind of pitching, selling, demonstrating and shaming into action.

It’s been three years of this type of competition and progress may seem hard to spot. That is because we don’t see the big wins. We can only see small wins. The win in Japan, as significant as it might be (160 million daily transactions added to the addressable market) is still small compared to all transactions world-wide.