Apple captured two thirds of available mobile phone profits in Q2

The major publicly traded phone vendors have all reported results for the second quarter. Based on the data available so far we can begin putting together a picture of the market.

The first picture I’ll draw is usually the last: profitability. The following chart shows operating profit from the sale of mobile phones among the eight vendors I follow (Nokia, Samsung, LG, Sony-Ericsson, Motorola, HTC, Apple, RIM).

This quarter saw a slight sequential decline in overall profit for the sector, but four vendors did not manage a profit from selling phones. Nokia, Motorola, Sony-Ericsson and LG all saw losses. The other vendors split the slightly decreased pie with Apple getting two thirds of it (66.3%)

This share is up from 57% in Q1 and 50% in Q3 and Q4. Samsung’s share went to 15%, though that’s not a peak level historically. In Q1 2008 the company was at 21%. RIM was at 11%, a level in a range that has been unchanged for three years. Finally, HTC captured 7.4%, a new high and an increase from 6% since last quarter.  The profit share chart follows: Continue reading “Apple captured two thirds of available mobile phone profits in Q2”

The Verizon small bang

As Verizon has reported iPhone sales for one and a half quarters, it’s time to try to discern the impact on the product. There were several hypotheses floating around prior to the “big bang” of Verizon.

Some assumed that there would be a large migration away from AT&T and that AT&T iPhone sales would slump. Others that there would be no Verizon iPhones volumes at all because there were so many Android users already converted. There were also suggestions that the iPhone would explode in growth with two major operators carrying it.

What really happened?

The first chart shows historic AT&T activation with Verizon activations added. It also shows sales to “none of the above”, namely non-US sales of iPhones[1].

AT&T iPhone activations show no significant impact from Verizon and Verizon itself shows a modest start to sales[2]. What did not happen is an exodus from AT&T. We also did not see a rejection of the iPhone by Verizon customers long exposed to anti-iPhone Droid advertising. We also did not see a considerable impact of Verizon on growth.

Verizon did contribute (4.5 million Verizon iPhone users is nothing to sneeze at)  but the contribution was to a degree that was nowhere near a big bang.

That was because the real big bang was from the rest of the world. The same data in the first chart is shown below as a stacked area chart and a share chart. Had Verizon not come on board the business would still have grown year-on-year over 100% (and sequentially). Continue reading “The Verizon small bang”

Visualization of Apple's Income Statement

This graphic representation of the current and year-ago sources of income and sources of expense for the company shows how the business evolved in the last year.

The colored segments in the first column are Gross Margin contributions per product for Calendar Quarter 2, 2010. The white segments are cost of sales for those products. These costs are combined in the second column and the operating expenses are shown in the third column, taxes in the fourth and Net Income is shown in the fifth.

The same information is shown for Calendar Quarter 2, 2011. Click for larger view (1440 x 873 pixels)

The increase in the first columns is the “top line” growth and the increase in the last (fifth) columns is the “bottom line” growth

Similar charts for the last few quarters are shown here:

Combating superlatives fatigue | asymco

Summary view of Apple’s income statement [Updated] | asymco

Describing Apple’s growth, cost structure, product-level and overall profitability in a self-explanatory chart | asymco

Apple has moved on

When Apple changed its name from Apple Computer to Apple Inc. they signaled that their business has moved on. We can say it’s to devices or to mobile computing or to the Post-PC era. To understand that this is not a shift driven only by wishful thinking we can plot the change in volumes for the platform-based devices Apple sells.

The stack of products is shown in an increasing level of mobility. At the bottom is the non-portable desktop Mac, above are Mac portables (laptops) followed by the iPad, iPhone and iPod touch. The mobile computers Apple sells are explosively more popular (and important).

To gauge importance consider the following chart which shows the unit values above multiplied by the average price they are able to obtain for a picture of the sales mix. Continue reading “Apple has moved on”

How we do all this will never be the same

In a new ad for the iPad Apple once again makes the case that the tablet is a good substitute for a PC in a number of use cases (and permits some new ones.)

We’ll never stop sharing our memories. Or getting lost in a good book. We’ll always cook dinner and cheer for our favorite team. We’ll still go to meetings, make home movies, and learn new things. But how we do all this will never be the same.

This belief that the iPad “cannibalizes” the PC is a powerful concept. The growth of the PC has certainly been affected. But has the Mac’s growth also been affected?

Tim Cook seems to think so. In the earnings call he said:

In terms of cannibalization, we do believe that some customers chose to purchase an iPad instead of the new Mac during the quarter, but we also believe that even more customers chose to purchase an iPad over Windows PC. And as I’ve said before, there’s a lot more of the Windows PC business to cannibalize than the Mac.

If we look at the behavior of Mac vs. iPad, the following chart may be useful:

Continue reading “How we do all this will never be the same”

Apple's share price (adjusted for earnings and growth) reaches new low

After Apple reported earnings growth of 125% its share price dropped to a P/E of about 15. This reduction in valuation is part of a trend I’ve written about for over a year so there were no surprises. The first chart below shows how the stock has traded between increasingly lowered P/E bands.

As the second chart shows, not only is the P/E ratio declining, but when seen against the trailing twelve months (TTM) average growth rate, the P/E/TTM ratio is now at the lowest since the great recession (around 0.17–a value of 1.0 is a rule of thumb for “fair value” in a growth stock).

Those values include cash. Excluding cash, the P/E as of Friday was 12.4. On a forward basis (my estimate–which has shown be be conservative lately) the P/E is around 7.

Perhaps some day in the future Continue reading “Apple's share price (adjusted for earnings and growth) reaches new low”

A princely sum

Apple’s cash and marketable securities increased to $76,156,000,000. The increase was 15% sequentially or $10.4 billion in three months. That’s the equivalent of an increase of $11 per share (to a current $81.2/share.)

The composition and growth of liquid assets is shown in the following chart:

There is little I can think to say about this that hasn’t already been said (see last Critical Path show.)

Except maybe that the amount is now nearly 16% higher than three months ago. And that the amount added last quarter is higher than the amount on hand 4.5 years ago. And that the cash added is higher than Google’s overall revenues in the quarter.

Footnote:

In Q1 2009 the company’s share price briefly traded at $78. A buyer of shares at that price will have recovered their investment in retained earnings in nine quarters.

How did I get the iPhone number so wrong?

Here were my predictions for the third fiscal (second calendar) quarter from April 25th.

Estimates for Apple’s third fiscal quarter (ending June) | asymco

Later in the quarter I updated them for submission to Philip Elmer-Dewitt’s blog at Fortune. The original and updated figures are shown in the following table (with actuals).


The changes were not significant except in a reduction of iPads. Three items were better in the early call and three were better in the late with one item equal. Using a simple method for scoring the results I gave myself the following report card:

 

As the Revenue and EPS figures are dependent on the other line items, the most significant error is clearly the iPhone where the error was over 30% (and hence deserves an F). The other figures were not very close either  so the overall grade point average is a very mediocre C (2.3).

So, as in previous quarters, nailing the iPhone number is everything. Having failed to guess correctly, the whole performance fell apart.

So how did I manage to get the iPhone number so wrong? Continue reading “How did I get the iPhone number so wrong?”

Apple's growth scorecard for second quarter 2011

Apple’s second calendar quarter was a record breaking performance. This is surprising because it shows super-seasonal performance. For as long as I can remember the fourth calendar quarter (i.e. holiday) was always the strongest quarter, by a large margin. This quarter was higher than the last holiday quarter. A glance at the following chart shows the anomalous performance:

iOS products make up 71% of sales (and at least 78% of profits) which makes the following growth scorecard a bit moot.

The growth in iPhone sales of 150% is hard to understand given the previous product cycle, but more about this later. The 122% growth in profits is (nearly) unprecedented. The growth in Q3 2008 was due to the launch of the iPhone 3GS and since there was no iPhone launch this quarter the growth shatters existing assumptions about the franchise.

The pattern in the table above is shown in the following chart:

This performance needs to be digested and contemplated a bit longer but I will make one early conclusion: One of the most common themes during the last year was that Apple’s growth rate was unsustainable. The theory cited was one of the “law of large numbers”. Apple’s performance shows it to be nonsense.

Instead of decelerating, Apple’s growth is accelerating.

 

 

A new way to value Apple

Almost all valuation models for Apple assume it’s a hardware company. The modeling algorithm for hardware is simple:

  • For each year in near future
    • For each product line
      • Compute contribution
  • Determine company value by summing contributions and multiplying by a P/E ratio

The major difficulty is in predicting the growth of each product line. This is difficult because buyers can be fickle. Companies employs all sorts of tools in order to secure repeat customers but if switching costs are low, the company can crash in value. For this reason, analysts pick various ways to predict device  sales. Some choose to index each product on production (channel checks), demand (customer surveys,)  or even on a top-down share of total (market research on growth of whole market and assumptions of share).

Although simple and convenient, this model does not probably match the way Apple is managed. The company does not build hardware products to sell and forget. It builds platforms which are best seen as sources of recurring revenues. Users are incentivized to continue buying devices. iCloud, iTunes and other Apple properties are expressly designed to that goal–and they are not cheap to run. So, the company must see the world through a different set of lenses than the default model shown above.

To think about the business like they do, we need to put the data through a similar set of lenses. I began with a modest proposal last month to value each user as a source of recurring revenue. Now it’s time to expand on this method.

The following chart shows the recurring revenues per user by product and the current and possible future size of user bases.[2]

Revenues/yr/user are bars with the left axis and the User bases are various colored circles indexed with the right axis.

The assumptions that went into the data are as follows:

  1. Device life span is as per previous article linked above
  2. User base growth for 1 year is: Mac 20%, iPhone 80%, iTunes 10%, iPod 30%, iPad 100%
  3. User base growth for 2nd and 3rd years (recurring): Mac 20%, iPhone 50%, iTunes 10%, iPod 20%, iPad 80%.
  4. The Revenue per user is assumed constant

Note that the user base growth figures are lower than the product growth levels seen historically. Obviously, the model is highly sensitive to these growth assumptions so they need to be scrutinized and tested rigorously.

Nevertheless, as a straw-man proposal,  the recurring revenues for all these products[1] is shown in the following chart:

Once the income is estimated, we can take that value and assume a profit margin (net) and then multiply the earnings by a multiple. Using a 20% net margin and 12x P/E yields the following chart.

(I added an assumed level of cash in green.)

This model would imply that the company today could be valued at $208 billion on the basis of its installed base alone. That value would be about $323 billion in one year and $620 billion in three years. Dividing by the number of shares outstanding (935m this year increasing at 2% a year) yields a share price of $222, $339 and $629 by mid 2014.

These values can be considered “lower bounds” on valuation since they assume income from previously secured customers. The speculative part of investment would be based on what the future bases will look like (so, for example, if one believes these assumptions, the $629 figure could be considered a target to be discounted to today).

Notes:

  1. Excludes Software, Peripherals, non-iOS devices, and any other service revenue.
  2. Compare this char to social media companies (MIT Technology Review)