Thursday, April 22, 2010

Apple's 2nd Fiscal Quarter Results: Looking Beyond The Obvious

I will do a more thorough review of Apple's 2nd fiscal quarter results this weekend. In the meantime there are a few issues that really "jump off the pages" when looking at the  quarter's revenue and unit sales results. 
Much of the media coverage on Apple focuses on hardware products and unit sales. The story that's emerging is one of a multi-stream revenue system comprised of complementary hardware product lines. Significant revenue sources are emerging that will transcend the underlying hardware product lines and provide for both revenue and earnings growth as hardware devices adapt and change to meet the needs and desires of users. 
For example, in the March quarter Apple grew its revenue category inclusive of iTunes store sales by 27% year-over-year and sequentially 12% compared to the holiday quarter. This revenue category represented roughly 10% of the quarter's revenue results.
Apple doesn't delineate sales of iPod models. But it's no wonder why iPod revenue grew 12% year-over-year despite a 1% drop in unit sales. The importance of the iPod touch not only to iPod unit sales and revenue but also to the iPhone OS eco-system should not be overlooked. As a percentage of revenue for the iPod line, the touch has become one of Apple's most misunderstood products. Similar to the way the Apple iPad is more than an oversized iPhone or iPod touch, the touch is much more than an iPhone without phone functionality. It extends the iPhone OS eco-system to consumer demographics the iPhone hasn't reached and may see increasing sales as a complement to the Apple iPad.
One of the challenges faced by AAPL analysts (pros and bloggers) is we tend to look at Apple and its prospects for growth from US-centric vantage points. Non-retail store revenue from Europe represented 30% of March quarter revenue. Operating segments exclusive of the Americas and Apple retail equalled almost 51% of the quarter's revenue take and represented 43% of Macintosh unit sales. Misunderstanding Apple's growth potential outside the US and the appeal of Apple's emerging revenue system leads to underperforming estimates of revenue and earnings.
Apple's fastest growing regions are growing with what might be best described as a post-Macintosh consumer attitude. While the Macintosh is Apple's oldest and most established product line, it's as apt to benefit from consumer adoption of the iPhone and iPad at least as much as the Mac leads consumers to other Apple products. 
As I said, the story that's emerging is one of a multi-stream revenue system comprised of complementary hardware product lines.

Robert Paul Leitao

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