In the 2011 Annual Report(10K) published October 26th Apple states:
The Company anticipates utilizing approximately $8.0 billion for capital expenditures during 2012, including approximately $900 million for retail store facilities and approximately $7.1 billion for product tooling and manufacturing process equipment, and corporate facilities and infrastructure, including information systems hardware, software and enhancements.
The history of these expenditures is shown below (the blue bars are statements from 10K reports including the one above shown as the right-most bar): Three 10Q reports so far this fiscal year have given us updates on asset values and the change in these values are shown as the right-most yellow bar. The asset value change suggests $3.9 billion has been spent so far of the $7.1 billion budgeted. Thus we can estimate that about $3.2 billion remains to be spent in the fourth fiscal quarter (thus bringing the yellow bar to parity with the blue bar in the chart above–a parity that was achieved or exceeded for five out of the last six years).
Assuming $200 million of the fourth fiscal quarter budget will be for land and buildings results in an estimated $3 billion remaining for product tooling and manufacturing process equipment and data centers.
The history of spending for various cost centers is shown below.
As the following revenue growth table shows, the second calendar quarter of 2012 was not like the recent past.
The bottom line growth (earnings) is the slowest since Q309 which had a difficult comparison with Q308 when the iPhone 3G launched and saw 800% iPhone growth. This past quarter also had a difficult comparison with 150% iPhone growth a year earlier and 122% earnings growth.
This is shown in a different way in the following graph:
Did I get anything right in last forecast?
The table below shows the scores for my various estimates
Last quarter I managed a B+ overall but this quarter was a C+. The iPad estimate was a complete failure mitigated slightly by a, directionally at least, correct call on the iPhone. The failure on iPad dragged down revenue and EPS while the accuracy on iPhone improved the gross margin. iPod and Mac estimates were consistent with recent performance.
The error on iPad is a harsh lesson which shows how the category is still unpredictable. With only four quarters where we could measure y/y growth, and with those quarters showing 183%, 166%, 111% and 151% growth, I assumed that the 150% growth was sustainable.
Here is the second Perspective “padcast” where I discuss:
- Top and bottom line growth
- iPhone, iPad, iPod and Mac revenue growth
- iPad vs. Mac
- iOS product mix
- Other product line growth
- Gross Margins by product
- Pricing and revenue per unit by product
- Cash and cash growth
- Guidance and whether results were a surprise to management
The discussion is an audio presentation with animated, interactive motion charts which can be manipulated by the user.
It’s available as an in-app purchase for $0.99 on the iTunes app store via the Perspective iPad app.
My thanks to Adam Lashinsky of Fortune for inviting me to Fortune Brainstorm Tech in Aspen this week. I was asked to participate in a panel session with Gene Munster of Piper Jaffray to discuss “The Future of Apple”. The session was moderated by Adam.
Here is a full video of our conversation: FORA.tv – Future of Apple.
As the chart below shows, the last quarter (first calendar 2012, second fiscal 2012) was robust with 94% earnings growth and 59% net sales growth. Subject to the usual superlatives, the performance was, again, unexpected by many.
Much of that surprise was due to the underestimation of iPhone sales in China during what is a holiday quarter in that nation. Growth this quarter will be more difficult to estimate. The iPhone is still the most important component but the iPad is becoming increasingly decisive in overall performance. In fact, I’m projecting that the iPad will have the equivalent of 73% of the iPhone revenues this quarter.
Markets are difficult to measure. Mainly because the information is not easy to obtain and that which is obtained is not made public. Collecting, analyzing and filling in the gaps is big business with many firms involved in selling it.
However, with all the analysts and companies selling and promoting their “numbers” it’s important to understand the difference between the methods used. There are for instance at least the following measurements:
- Units sold to end users. For example NPD or GfK data of retail transactions. Also Gartner’s estimates for phone units sold.
- Units sold to the channel. For example units recognized on income statements usually reported by companies. Also IDC’s estimates for phone units sold.
- Units in use. For example comScore and Nielsen survey data.
- Units “activated”. The measurement Google uses to describe Android performance.
- Intent to buy. For example ChangeWave surveys of early adopters.
- Utilization rate. For example browser statistics.
Each measurement tells a different story about the market but the best story is told when all data is analyzed in a combined integrated market review.
Before diving into that it’s important to understand the difference between the first and second measurements or the difference between shipped and sold.
What does “Sold” mean?
During my talk at the first Apple Investor Conference in January I said that I would pay very close attention to the Machinery, equipment and internal use software line item from its PP&E during the next quarterly report (it appears on Page 13 in the latest report).
The reason I consider this important is because capital spending has provided reliable foreshadowing of iOS device production. This is itself because Apple invests in the equipment used in the manufacturing processes for its devices. The more spending on equipment, the more production capacity is brought to bear and the more units are produced. Since iOS devices tend to be supply constrained, the more units are produced then the more are sold.
The first quarter of the fiscal year saw a very small increase in CapEx which caused me to “backload” spending later in the year. By watching this spending, we can assess approximately when and for which products is investment allocated. If the spending happens early then we can anticipate an early update to the iPhone. If it happens late then we can anticipate a late release. So has the ramp-up begun as of the second quarter (first calendar quarter)?
The following chart begins to give us the answer. It tells the story of spending by tracking the change in asset values:
Stripping out the Machinery and Equipment portion (in yellow above) and overlaying the following quarter’s iOS shipments yield the following composite graph:
I first noted a correlation between Apple’s share price and its balance sheet a year ago. In February, when I last checked, Apple’s share price was priced nearly at 4.6 times its cash value. The stock has had a brief rally but has returned to the trend line it’s had since late 2008.
I should emphasize that this correlation between cash and price is abnormal. It should not be happening. Share prices for growing companies should be tracking its future potential, not its assets. I’m only presenting this data to highlight this abnormality. There is no fundamental basis for this happening. In fact, there is a basis for this not happening.
The relationship above is a symptom of another pattern called multiple compression that can be seen in the following charts:
I analyze my performance every quarter to see if there is any pattern of error in my analysis. I devised a scoring method analogous to the grade point average system used in most US schools. You can read about the fourth quarter here.
This quarter I made one public release of data here and a semi-public update on the iPhone shipments here.
The resulting scores for both early and late estimates are shown in the table below: