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Category Financial

Teenager stores

The Apple stores are now 13 years old.[1] In the first full year of operation (2002) the stores generated revenue of $282 million. In the last full year (2013) the revenues were $20.228 billion. Quarterly sales during the last seven years are shown below:

Screen Shot 2014-05-20 at 5-20-11.16.21 AM

Additional details regarding average visitors per employee per quarter, average visitors per store per quarter, average retail profit/employee and visitor, average revenue per store, employment and visits correlation, employment per store and in total, stores open over time, visitors over time, average revenue per visitor, capital asset purchases and estimated cost structure per visit are shown below:

Screen Shot 2014-05-20 at 5-20-11.19.51 AM

The Apple store concept has reached teenage years and it seems a good time to renew their character.

Notes:
  1. The first store at Tysons Corner in  McLean, VA opened on May 19 2001 []

Surprise

After n quarters of predictability, Apple surprised with sales performance that was 3.74% above the top of their guidance. This may not seem significant but since instituting a new range-bound guidance method in Q1 of last year the company reported revenue within about 1% of the top of the range.

This is in stark contrast to the wide variance in prior years. The following graph shows the “error” in guidance as the percent difference between reported sales and guidance[1].

Screen Shot 2014-04-25 at 4-25-10.18.06 AM

So prior to last quarter we were lulled into thinking that guidance was very nearly perfectly predicting the company. As I tweeted, it took the “sport” out of trying to do any forecasting. All an analyst had to do is tweak the main product growth figures to hit the sales target and then subtract the (generously provided) operating expenses and (also provided) tax rate to get the earnings. Only unknown to getting to an estimate of EPS was how many shares would still be outstanding.[2]

Knowing Apple also means that average selling prices are also very rigidly set in stone so the degrees of freedom in analysis were becoming highly constrained.

But just when you think you spotted a pattern, it changes. The company surprised with performance outside the band. The following graph shows the estimate ranges it has given and the actual revenues delivered.[3]

Notes:
  1. Upper end of range in quarters where a range was given. []
  2. The company itself would not know shares outstanding as their buying was opportunistic during the quarter. []
  3. Next quarter is also pencilled in. []

On the future of Google. Part 2

In Part 1 of a look at Google’s future I showed that Google’s revenues have been highly correlated with the population of Internet users in the markets it serves. If there were a causal relationship between population of users and revenue growth then the company would face a growth inflection point when that population becomes half penetrated.

In Significant Digits Episode 1 (Part 1) I showed data which suggests that the inflection point will come in 2016. Essentially the argument is that Google’s growth is ultimately limited by the population of users and that itself is a predictable number. I also used the example of the PC and smartphone penetration curves to show how the perception of the fortunes of companies whose revenues are based on those technologies were affected by inflections in their respective adoptions.

However, correlation is not causation. These users we count are not the customers who pay for Google’s services. Users (or usage) is therefore only a proxy. It may be a good proxy and intuitively it makes sense that it’s a driver of growth but fundamentally the company lives on a stream of revenues paid by advertisers[1]. In order to really evaluate the opportunity we need to “follow the money” and track down where it comes from.

We don’t have visibility into the exact sources of these revenues but we have a top-level geographic segmentation (shown below.)

Notes:
  1. This is true to date and certainly it could change but hints of how that might change are still not visible to me []

The billion dollar hobby

During the latest shareholder meeting Tim Cook revealed that Apple TV sales were above $1 billion in the last fiscal year (ending September 2013). The company later clarified that this figure includes device and content sales.

This poses a problem. In previous statements the company cited device (unit) shipments rather than value. The statements made to date suggested that cumulative volume of 3rd (current) generation Apple TV totaled 6 million units as of January 1, 2013.

The following graph includes an estimate of quarterly Apple TV sales based on comments made to date.

Screen Shot 2014-03-02 at 3-2-8.07.43 PM

As there were no additional comments during 2013, the “Billion Dollar” quote is all we have to go with for the year.  The problem with trying to separate content from hardware is complicated by several factors:

A margin of error

Prior to Apple’s earnings report I read at least one article suggesting that the most important indicator to watch was Apple’s margin. I suppose this was due to a recent decline in margins from a peak gross margin of 47.4% in Q1 2012 to 36.7%.

As the graph below shows, margins began to recover by Q3 2013 and are nearly on par with year-ago levels.

Screen Shot 2014-02-12 at 10.32.50 AM

The guidance for the present quarter is a gross margin between 37% and 38%. This would imply a flat q/q GM line (blue line above.)

This is not quite catastrophic.

To better understand margins, it helps to compare them with other companies. When Apple reached that peak of near 50% gross margin I noted that such a level was higher than Microsoft’s and Google’s. The irony being that Apple was nominally an (implied) low-margin hardware company while Microsoft was an (implied) high-margin software company and Google was an (implied) high-margin internet services company.

Here is the picture with the last two years added:

Apple’s Growth Scorecard

Apple revenues grew at the rate of about 6% in Q4, while earnings grew at 5%. These were improvements over Q3 and Q2 but the rate of top line growth is has not been this low since 2009. The bottom line is also slower than it’s been for the entire “epoch” or era of the iPhone.

The components of sales growth are shown in the following table:

Screen Shot 2014-02-05 at 12.05.10 PM

The company delivered performance inline with its own guidance so there should not have been surprises in the top and bottom lines. However, the disappointment might be in the low growth for iPhone (at 6%) and iPad (at 7%). The Mac and iTunes grew at moderate rates (16% and 19% respectively) while the iPod continued its decline with -55% growth and Accessories remained fairly flat.

As the graph below shows, the iPhone and iPad are the bulk of the business so their performance is a large part of what is observed.

Apple Fourth Quarter Estimates

As Philip Elmer-DeWitt is still interested in my estimates I provided the following:

Revenues ($B) 57.8
EPS ($) 14 (908m shares)
iPhone (units) 56.4 million
iPod (units) 7.6 million
Mac (units) 4.14 million
iPad (units) 26.5 million
iTunes/Software/Services ($) 4.2B
Accessories ($) 2.2B
GM% (percentage) 37.1%

I arrived at these estimates without looking at anyone else’s (except for Apple’s own published guidance). Soon after sending them I noticed that Daniel Tello published his own.

In the same format as above, I quote them for comparison. Please visit his post for additional detail.

Revenues ($B) 59.0
EPS ($) 14.92 (895m shares)
iPhone (units) 56 million
iPod (units) 9 million
Mac (units) 4.65 million
iPad (units) 25.5 million
iTunes/Software/Services ($) 4.3B
Accessories ($) 1.8B
GM% (percentage) 37.8%

The graph below shows the history of revenue guidance vs. revenue reported. The last quarter shows my estimate for net sales.

Screen Shot 2014-01-15 at 1-15-4.06.58 PM

Note that the company achieved at or slightly above its upper guidance ever since they started offering a range for guidance (i.e. since Q1 2013). My estimate for sales is therefore very near the top of guidance. The figures for units earnings and margins all result from this assumption.

How many years does Apple have?

The graph below shows the Revenue and Operating Income for a select group of companies. The large numbers represent the share price to earnings (trailing twelve months) ratio (P/E or PE ratio).

Screen Shot 2013-11-06 at 11-6-2.56.25 PM

Of course the P/E ratio hides a lot of subtlety. It mostly fails to account for the fact that earnings are largely a matter of opinion. A company can defer income (as Apple and Microsoft do), it can invest earnings (as Amazon does) and can otherwise avoid declaring it since it’s taxable.

How many iOS devices will be produced in the next 12 months?

Apple’s capital expenditures for product tooling, manufacturing process equipment, corporate facilities and infrastructure has followed very closely their production of iOS devices. The pattern is shown in the graph below.

Screen Shot 2013-10-30 at 10-30-2.12.28 PM

Note that although reported expenditures did not match forecasts for 2012 and 2013, the differences nearly cancel each other.[1] The company’s forecast for fiscal 2014 is shown as well.

The orange line shows iOS unit production[2] with the scale on the right-side axis. Note the correlation with forecasts on CapEx. The relationship can be seen more clearly in the following scatter plot.

Screen Shot 2013-10-30 at 10-30-2.33.26 PM

I added the 2014 Forecast ($10.5 billion from the latest 10-K filing). If the relationship holds into next year then the iOS unit shipments should be between 250 million and 285 million.[3].

Notes:
  1. I suspect that the difference might be caused by a payment being brought forward in 2012. []
  2. Technically, shipments []
  3. The equation for the trend line shown suggests 285,908,000 units []

iTunes users spending at the rate of $40/yr.

In the latest quarter the iTunes top line grew by 32%. Additional newly reported items:

  • Quarterly revenues topped $4 billion (a new high) and the company suggests that this rate is maintainable by stating it has a “$16 billion annual run rate”. The pattern of revenues is shown below.

Screen Shot 2013-05-12 at 5-12-8.12.30 AM

  • The content portion of iTunes revenues was $2.4 billion, up from $2.1 billion sequentially. Growth into Q1 is not unusual as many holiday iTunes gift cards are redeemed during January.
  • Revenue growth has been surprisingly steady, averaging 29%/quarter for more than six years.