The iPad grew shipments at 26% y/y but “sales” as measured by sell-through were up 44%. Detail from Tim Cook’s discussion:
“The June to September [sequential change] was 17 million to 14 million… as we had talked about in the July call, the June quarter contained 1.2 million increase in channel inventory and so … the comparison looks very different than our reported [shipment] numbers do… On a year-over-year basis, because of the year ago quarter having also a channel inventory build as we stock the channel to the [proper] level, the sell through year-over-year actually grew 44% and so the underlying sell through was extremely strong.”
Sell-through, (or “sales” vs. “shipments”) is a much better indicator of demand, obviously. Also see transcript for explanation of sequential decline (educational buying).
44% is not spectacular but it places the growth far more comfortably in the “high” bracket than the 26% units and 9% revenue growth that shipments data would indicate.
AT&T, Verizon and Sprint have all reported the number of iPhone units shipped in Q3 2012. The history of the these sales is shown in the following graph:
Foreshadowing iPhone sales | LinkedIn.
The Price/Earnings ratio is a very simple measure of the “value” a company has. The Price is the current share price and the Earnings is usually the sum of the last 12 months’ earnings per share. In other words it measures how many of the last year’s earnings are built into the share price. Put yet another way it’s the answer to the question “If earnings don’t change, how many years will I have to wait before I’m paid back for my share purchase with retained earnings.”
So a company with a P/E of 10 implies that if nothing changes, in 10 years a share owner would “earn” back the price they paid for the share. Any earnings after 10 years would be “profit” for the share owner. You can imagine it even more simply as buying not shares but an actual small business of your own. You pay up front for it and then wait until it pays you back. After getting paid back for the initial purchase you then make money that you can set aside.
Obviously this figure of P/E is very sensitive to growth in earnings. Consider paying $100 for a share of a company having just earned $10/share last year. It would have a P/E of 10. If earnings stayed at $10/yr for 10 years, you’d “get your money back” in 10 years. However if earnings grow at 20% then next year the earnings would be $12 then 14.4 then 17.3 then 20.7 etc. Adding these up means you’d get your $100 back in five years, not 10.
So with a company growing at 20% the “realized P/E” is 5. You realized the price of $100 in five years’ worth of earnings. In the scenario above you paid expecting to wait 10 years but you got paid in five. If that’s your retirement plan then you can retire five years early. Not bad.
Let’s then look at what Apple gave investors as “realized P/E.”
It takes money to make money. That’s a cliché. But it’s also true. The interesting question is how much can be gained from how little.
In previous articles I explained how Apple’s expenditures of capital for equipment used in manufacturing affects their output of products. The relationship between capital in and product out should stand to reason.
The more surprising aspect of that analysis is that we get to know in advance how much Apple spends (since they tell us their budget a year before it’s spent.) and therefore it becomes possible to get a rough idea of how much they will produce. And since demand has generally been higher than supply we can get an estimate of how much Apple will sell.
The only missing piece to this logic chain is to estimate how much will shareholders benefit from the capital expenditure. I’ll try to establish the relationship through a build-out of graphs.
The first graph shows Apple’s share price at weekly resolution.
The time frame stretches back six fiscal years. The time span includes some dramatic periods including the financial crisis and the launch of the iPhone and iPad.
To illustrate the effect of the iPhone and iPad on this share price appreciation, I’ve overlaid a quarterly resolution graph showing revenues over the same time period with each product line shown separately.
Note that I’ve indexed the vertical scale to match approximately the highest peaks of both graphs. The two axes scales are shown separately on the left.
Tim Cook is quoted as having said the inventory is not only evil but that it’s fundamentally evil.
With just-in-time production inventory can be reduced, at least work-in-progress inventory. Unfortunately inventory cannot be completely eliminated. The fact remains that you sometimes need to stockpile product for launch and need to have some on hand depending which way it’s sold. There is also substantial channel inventory (which is off Apple’s books but still evil) that needs to be in the hands of distributors.
Tight inventory management has become a characteristic of Apple and that contributes to getting ranked number one in Supply Chain Management. So we can expect that Apple runs a tight ship. In fact we have evidence of this through the ability to track our purchases from when they ship out of a factory in China all the way to our homes.
This tracking in itself shows that when product is in high demand production is initiated on direct consumer orders not just in response to maintaining a level of inventory. So with that in mind, we can revisit the question of how many iPhones 5 the company has produced.
First, we need to step back and recall the method for analyzing production. I built a model which attempts to show what a typical production run for an iPhone model would look like. I first published the process in early 2011. It used the historic data from iPhone 1, 3G and 3GS to try to predict iPhone 4 production. I’ve updated the model to show what that would look like today.
The assumptions driving the model are:
As the chart below shows, the last quarter (second calendar 2012, third fiscal 2012) was disappointingly moderate with 20% earnings growth and 23% net sales growth.
We can put all of our products on the table you’re sitting at. Those products together sell $40 billion per year. No other company can make that claim except perhaps an oil company.
We are the most focused company that I know of, or have read of, or have any knowledge of.
We say no to good ideas every day; we say no to great ideas; to keep the number of things we focus on small in number.
Tim Cook said this in February 2010 at the Goldman Sachs technology conference.
Since then the only product that has been added to the kitchen table has been the iPad. The sales level however, has increased in proportions shown in the chart below.
The revenues are shown with their contributory products and the costs of those products. The payments for costs of sales as well as R&D, SG&A and Taxes are then subtracted revealing the Net Income (in green). This is done for the second quarters of 2010, 2011 and 2012.
Since Tim Cook made the analogy, the table holding the products has not gotten any bigger but the sales level has more than doubled while profits have nearly tripled.
In his talk he cited revenues of $40 billion (for the pervious year, 2009). In the last twelve months Apple’s revenues were $148 billion.
Tim Cook went on:
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.