In this special “live” version of The Critical Path, Horace gets the numbers just minutes before Apples January 27th, 2015 earnings call and dissects them live. The show picks up just after the call finishes with a quick recap and discussion of yet another record quarter.
Thomson Reuters reported that excluding Apple, the entire S&P 500 grew profits at a rate of 4.4%. Including Apple the figure is 6.4%.
Using one weird trick I calculated the value of profits generated by the S&P 499 (i.e.the largest public companies excluding Apple) in Q4 2013 and Q4 2014.
Apple therefore accounted for nearly 8% of the S&P 500 in the last quarter. A year earlier Apple was a mere 6%.
It should therefore be obvious why Apple’s P/E ratio is 16.1 while the S&P 499 P/E ratio is 19.8.Notes:
- Algebra [↩]
Apple’s Net Sales grew at the rate of 30% in the last quarter. Earnings per share grew at 47%. Both of these figures are the highest since 2012.
It should be noted that although the rate of growth is extraordinarily high, the company never actually stopped growing in the past three years. As the table above shows, net sales has always had positive growth.
Compared with the fourth calendar quarter of 2011, Apple’s sales are 61% higher and earnings per share are 54% share.
This degree of growth at this stage in the history of the markets it participates in is a revelation.
- The PC market is more than 30 years old. In this mature market the Mac has been outgrowing the Windows platform for 34 out of the last 35 quarters.
- The iPhone was announced eight years ago and it still managed to grow at the rate of 57%.
- The market shares of its Mac, iPhone and iPad products are all remarkable only for their paucity.
- The pricing of all their products is more than double the median for their categories.
- Regardless of extreme growth, pricing power, headroom and, most importantly, customer loyalty, the company’s prospects are seen as dismal in contrast to its underperforming peers.
- Such is the plight of the anomalous.
This year’s Thanksgiving and Black Friday data from IBM shows a continuing pattern of growth for mobile devices. As the graph below shows, in the five years since 2010 mobile devices grew from 5% of the online shopping traffic to 50%. Traditional computing (desktop and laptop) made up the difference.
The graph also shows that sales value via mobile devices crossed over 25% of online spending. The fact that mobile shopping is not equal to mobile spending is due to the convenience factor of mobile. It’s more likely that users will spend idle time scanning for bargains or tracking down ideas from friends but wait until they are at home to make the final purchase decisions in front of a computer.
The transition to spending directly from a device is a slower process, but that process was also one that online had to undertake as buyers became comfortable with online commerce. When it comes to payment, buyers are understandably more cautious.
This does not change the prediction made last year that “the transition to post-PC consumption will also be practically completed by 2020″. That leaves six years for mobile saturation and a total transition time of one decade.
At that point I expect 90% of browsing and perhaps 75% of spending to be happening on devices. Some of this will undoubtedly be enabled by biometric authentication as shown by Apple Pay. Trust and ease of use in this technology will undoubtedly accelerate the transition making mobile payments more comfortable and secure than on the legacy computer.
What is less predictable is how much those devices will also be used to transact payments for the physical retail stores. In some scenarios it’s possible that by 2020 a majority of all shopping will be enabled by devices. That would subjugate the retail segment to the power politics of mobile platforms.
It is interesting therefore to note the mix between the platforms in the graphs above.Notes:
- There is also the matter of in-store discovery and advertising via NFC and bluetooth i.e. iBeacon [↩]
Apple has declared that what used to be “Other Music Related Products and Services” plus “Software, Service and Other Sales” which was formerly known as “iTunes/Software/Services” is about to become “Services”.
“We’ll also have a category that we refer to as services and this will encompass everything we report under the heading of iTunes software and services today including content, apps, licensing and other services and beginning this month it will also include Apple Pay.”
“Services” will therefore encompass a massive amount of revenue. The reported revenues for the fiscal 2014 were $18 billion. Including all billings, the turnover in sales is over $28 billion. For next year, assuming that Apple Pay, which is just getting started, is unlikely to contribute greatly to revenues, Services turnover will top over $35 billion. That figure would make Apple Services alone one of the top 90 companies in the Fortune 500.
Regardless, as a component of overall sales, the group formerly known as iTunes/Software/Services (shown in red above) was a modest 7% of total sales in the last quarter. Using all available information regarding downloads, payouts and reported financials, an estimate can be obtained on how this 7% is itself divisible into nine sub-segments:Notes:
- Includes revenue from sales from the iTunes Store, App Store and iBookstore in addition to sales of iPod services and Apple-branded and third-party iPod accessories. [↩]
- Includes revenue from sales of Apple-branded and third-party Mac software, and services. [↩]
- Includes revenue from sales on the iTunes Store, the App Store, the Mac App Store, and the iBooks Store, and revenue from sales of AppleCare, licensing and other services [↩]
12 months ago I asked How many iOS devices will be produced in the next 12 months?
Based on the analysis of Capital Expenditures (as forecast by Apple in their annual 10K report) I concluded “iOS unit shipments should be between 250 million and 285 million.”
The answer turned out to be 247 million. Including Apple TV the total would probably be around 251 million.
Since last year, I adjusted my model by observing corresponding iOS unit shipments for the calendar year corresponding to each fiscal year. Since the calendar year is offset by one quarter (FQ1 = CQ4) looking at calendar year means looking forward one quarter post-spending. I believe this is more accurate as spending generally happens in advance of production.
The resulting pattern is shown below:
- Including an iPod touch estimate of 9.5 million [↩]
Prior to implementing a dividend and share buyback plan, Apple had accumulated about $120 billion in cash and marketable securities. In the eight quarters since implementing the cash return plan, Apple has paid about $21.5 billion in dividends and spent another $53 billion of its shareholder’s money buying its own shares and retiring them. That’s $74.5 billion in cash that’s been removed from its balance sheet.
To avoid some repatriation taxes it also borrowed about $29 billion.
Of course, in the meantime, it also generated cash from operations.
Before the plan’s implementation, eyeing the cash allowed for easy tracking of the accumulation of retained earnings. After the plan it’s become a bit more complicated. The following graph shows all the quantities involved:
The graph lets us answer the question “What would have happened if Apple had not paid any dividends, bought back shares and taken on debt?”
The answer is in the blue line. It would be about $210 billion today. There are about a dozen companies other than Apple worth more than that amount.
As the company is not growing as quickly as it used to, the slope of the blue line is constant (i.e. it’s nearly linear.) Though that might be seen as evidence of failure, it’s more useful to treat this vast quantity as a recognition of past successes. The company’s beleaguered status needs to be carefully preserved.Notes:
- The grey and black area of the last column is the total “cash returned to shareholders” and sums up to the $74.5 billion mentioned earlier. The grey area is only theoretically valuable as it depends on the outstanding (i.e. not retired) shares retaining their value. In this case, the value of the shares grew, making this an actual gain for shareholders [↩]
In October 2013, at the end of its last fiscal quarter, Apple stated:
The Company’s capital expenditures were $7.0 billion during 2013, consisting of $499 million for retail store facilities and $6.5 billion for other capital expenditures, including product tooling and manufacturing process equipment, and other corporate facilities and infrastructure. The Company’s actual cash payments for capital expenditures during 2013 were $8.2 billion.
The Company anticipates utilizing approximately $11.0 billion for capital expenditures during 2014, including approximately $550 million for retail store facilities and approximately $10.5 billion for other capital expenditures, including product tooling and manufacturing process equipment, and corporate facilities and infrastructure, including information systems hardware, software and enhancements.
These 10K (fiscal year annual) forecast figures for capital expenditures are shown in the following graph. Note that they also include the fiscal years from 2006 to 2012. Note also that the graph includes the actual expenditures (in green).
From 2006 through 2013 the sum of the forecasts was $23.445 billion while the sum of the expenditures were $24.662 billion. With the exception of a carry-forward in 2012, the forecasts are broadly in-line with expenditures, with about 5% more spent than forecast.
This pattern of accuracy in spending makes a $10.5 billion expenditure during the current fiscal year believable. In other words, taking the forecast at face value, and given that three quarters of the fiscal year have already passed, what does it imply for the current and last quarter? The following graph shows what Q3 spending should be relative to previous quarters (and 2011, 2012 and 2013).
There are 80 million Mac users. The last 12 months saw sales of 18 million Macs.
As of the end of June there were 886,580,000 iOS devices sold. As of today the total is well over 900 million. One billion sold will happen well before this year is out. Estimates of current iOS users vary but they are probably at least 500 million and could be 600 million.
Apple claims 800 million iTunes accounts.
Therefore, in terms of revenues:
- Mac User = $289/yr
- iOS User = $262/yr
- iTunes User = $25/yr
Adding iTunes usage to either Mac or iOS yieldsNotes:
- Measured from billings [↩]
In The Capitalist’s Dilemma, Clayton Christensen and Derek van Bever introduce a powerful new theory which explains the relative paucity of growth in developed economies. They draw a causal relationship between the mis-application of capital in pursuit of innovation and the failure to grow.
In particular, they observe that capital is allocated toward the type of innovations which increase efficiency or performance and not toward those which create markets (and hence long term growth and jobs.) This itself is caused by a prioritization and rewarding of performance ratios rather than cash flows and that itself is due to a perversion of the purpose of the firm.
For this statement of causality to be confirmed we need to observe whether it predicts measurable phenomena. For instance, we need to see whether companies which create markets apply capital toward market-creating innovations and whether companies which create value through efficiencies or performance improvements hoard abundant capital.
Over the entire global economy, the pattern of capital over-abundance is easy to see. The amount of cash or securities on balance sheets is extraordinary and unprecedented (estimated at $7 Trillion, doubling over a decade). However, growing cash is not a perfect indicator of inactivity. Cash is the by-product of earnings after investment. So if operating profits are growing and investment is growing, but not as fast, then it’s possible to grow cash while still growing investment.
The better measure is investment in capital equipment or, more specifically, purchases of plant, property and equipment. Indeed, on a global scale, capital expenditure as a percent of sales is at a 22-year low.
CapEx is a good proxy for non-financial “investment”. It’s also a measure that can be easily obtained as companies report this activity in their Cash Flow Statements.
So the best method for assessing the theory’s predictive power is to look at market creators and measure their investment in PP&E. At the same time we need to look at market sustainers and measure their (probable) lack of investment in PP&E.
So here is my first attempt:
It’s an admittedly small sample of companies that are not that dissimilar. But within this group, over the time frame of about 9 years, we can see how capital expenditures are growing. This sample shows that for a few companies, the amount spent on capital equipment grew dramatically. Especially since they are in businesses that might be thought of as not capital intensive.Notes:
- and, indirectly, in the increase in inequality and hence the destabilization of socio-political institutions [↩]
- That being the creation of customers not shareholder returns [↩]
- Operating expenditures can also be measured but they cannot grow inorganically due to most of the costs being related to skilled employment which has supply constraints. [↩]
- Note that Apple’s data extends to the end of their fiscal year and reflects their forecast given last October in the 10-K filing [↩]