Monday, May 31, 2010

Two Million iPads Sold Through May, AAPL Revenue Record Ahead

Earlier today Apple announced two million iPads had have been sold since the product's  April release. I estimate the company is on track to sell three million (or more) iPads in the June quarter, positioning the company for record revenue.
The early success of the iPad sets the stage for three consecutive quarters of record revenue and earnings per share. I expect Mac sales to continue the pace of unit sales growth experienced in the March quarter and for the company to reach $65 billion in revenue this fiscal year with September quarter revenue reaching as high as $20 billion.
In April I posted an updated 12-month price forecast for AAPL and suggested the shares will reach between $300 per share and $325 by the end of July and to move above $400 per share by late April 2011. I stand by those forecasts as the two million iPads sold to-date are in range of my original forecasts and expectations.

Robert Paul Leitao 

Sunday, May 30, 2010

AAPL Earnings and the Value of Rising Revenue

It's a seemingly obvious axiom the greater a company's revenue, the greater its earnings. But this outcome isn't guaranteed. Witness Dell's margin and profit collapse in the consumer PC business. While increasing revenue can and perhaps should lead to rising profits, in a competitive global economy for the sales of goods and services managing operating costs and the costs of products and services are as important as growing revenue.
In the PC and digital device markets product prices remain under pressure. Particular to the PC market, the emergence of the netbook has further pressured prices. Price capitulation for the sake of revenue growth can be a disastrous temptation. In the lower-cost PC market, Acer alone is adept at squeezing profits from razor-thin margins.
In the smartphone market margins have been pressured by promotional giveaways to boost market share and by service providers seeking to combat the popularity of the Apple iPhone. RIM's earnings have been impacted by this promotional activity.  What may be a quick commoditization of the Android handset market will also pressure profits for smartphone market participants. 
I've said many times Apple doesn't sell products. Apple crafts customer relationships and those relationships sell Apple products. Each customer product purchase increases the value of the relationship to Apple and the customer and the customer relationship transcends the value of each individual Apple product purchase transaction. It's why Apple has avoided price capitulation as a means to increase revenue. Apple has historically high gross margins on its hardware products sold. This is due in part to the value of the customer relationships and the transcendent value of that relationship in the minds of customers relative to product price. At the center of Apple's success crafting customer relationships are the company's retail stores. 
The release of the Apple iPad even at aggressive price points maintains relatively high gross margins while the pricing on the product is a competitive defense against potential competitor market intrusion. Though the Apple iPad may not deliver the average 40%+ gross margins Apple has recently experienced at the start, there are other factors positively impacting the iPad's revenue profitability. 
Apple's investment per revenue dollar in research and development has remained relatively constant and hovers around three percent. This is despite a consistent increase in research and development expenditures in support of new products. In year-over-year comparisons, for the first six months of this fiscal year Apple's SG&A (selling, general and administrative) expenditures relative to revenue have dropped slightly suggesting these costs will progressively consume less of each revenue dollar as revenue rises and especially as the Apple iPad boosts revenue significantly over the next several quarters. SG&A expenses are now comprising less than ten cents of each revenue dollar. 
The Apple retail stores are essential to Apple's customer relationship development. They also decrease the expenditures otherwise needed for product advertising and marketing. The operating costs of the stores are mitigated by the retail margin on products sold (Apple products and third-party products offered for sale) and have been proven to increase Apple product sales in the geographic areas surrounding the stores. The stores are also the primary means to introduce Macintosh computers to new customers. Because the retail margin on products sold supports store operations, advertising and marketing costs per revenue dollar will decrease as revenue scales higher. 
One of the challenges in accurately forecasting Apple's earnings per share as revenue rises at a torrid pace is determining the marginal profit value of each additional revenue dollar.  Due to Apple's strong customer relationships, the growth in Apple retail store locations and the company's ability to avoid price capitulation to increase revenue, each additional revenue dollar has a greater incremental contribution to operating income. 
While much attention has been focused on Apple's gross margin ratios and recent decline in tax liability per net income dollar, little attention has been paid to the decline in operating expenses per revenue dollar and the resulting increase in operating income.
In Apple's case rising revenue creates more than a proportional increase in earnings. It's why the rate of Apple's earnings per share growth will continue to exceed the rate of revenue growth and why the Apple iPad and its strong revenue contributions may be the catalyst for three consecutive quarters of record earnings results even if at introduction gross margins on the product are slightly below recent averages for the company. 

Robert Paul Leitao

Saturday, May 29, 2010

Sipping The iPad Kool-Aid

Quoting adamthompson3232 of the Apple Finance Board, "I love my iPad. If you are going to drink the Kool-Aid you need to make your own."
The comment was in the context of a discussion he started about estimated iPad sales in Apple's 3rd fiscal quarter. According to his posts, he sees iPad unit sales pushing well above 3 million units in the quarter, supply constraints not withstanding. 
I've been forecasting iPad unit sales for the June quarter in the range of 3 million units. Before taking a few sips of the homemade Kool-Aid this gentleman is making, I'd like to see some empirical evidence to support sales estimates above 3 million units. I'm not suggesting demand for Apple's new tablet device puts such a sales performance outside the realm of reality. It's possible, based on the early success of the device and depending on the amount of manufacturing capacity Apple has brought online, sales could astound most Wall Street analysts and Apple enthusiasts.
At 3 million units sold the iPad would add roughly 20% to year-over-year revenue growth for Apple and position to company for possibly a record-breaking quarter for revenue and earnings. Mindful each iPad sold also creates post-purchase monetization opportunities for Apple, forecasting for iPad unit sales above 3 million units puts revenue and earnings growth into hyperdrive.
I'll be watching the iPad numbers carefully. At 3 million units sold in the June quarter the iPad will be a catalyst for AAPL to move above $300 per share by late July. Empirical data to be released from independent sources over the next few weeks should provide some indication whether or not adamthompson3232's homemade iPad Kool-Aid should be passed around for celebratory toasts when Apple releases its 3rd fiscal quarter results or should be locked away in the medicine cabinet as a RDF hallucinogen to be sipped only in small doses. Either way, the release of the Apple iPad makes forecasting Apple's revenue and earnings results a much more interesting affair. 

Robert Paul Leitao

Wednesday, May 26, 2010

AAPL FY '10 Forecast - $65 Billion in Revenue, $15 (or more) Earnings Per Share

I'm currently preparing my preliminary FQ3 revenue and earnings per share estimates for Apple. With the early success of the Apple iPad and the anticipated demand for the fourth generation Apple iPhone, I'm forecasting Apple will reach $65 billion in revenue this fiscal year and $15 (or more) or in earnings per share.
There are a few noticeable trends emerging to support the 50% fiscal year revenue growth scenario including rising revenue in the operating segment inclusive of iTunes.  Mac unit sales growth remains strong and despite the economic challenges engulfing members states of the EU, Apple's growing presence in Europe should buoy sales.
For the first six months of this fiscal year Apple has earned $7.00 per share. The prospects of Apple earning $8.00 per share (or more) in the second six months of this fiscal year becomes brighter with each Apple iPad sold and the increasing interest in the features expected in the fourth generation Apple iPhone. 

Robert Paul Leitao

Saturday, May 22, 2010

An Apple Shareholder's Perspective: Thank you, Google!

This week Federal regulators cleared Google's purchase of AdMob based in part on Apple's recent acquisition of Quattro Wireless. While much is being made of some kind of Apple vs. Google rivalry in the smartphone market, journalists and the media continue to miss the point.
Apple has a fully integrated iPhone OS economic model. Everything from the handset to the OS to the digital store offering commercial content flows through Apple. The company's emerging iAd service further advances Apple's monetization of the handsets the company makes. The popularity of the iPhone and continuing market share gains was pushing Apple towards a precarious perch. The release of the Apple iPad and the aggressive nature of Apple's iPhone OS monetization model was also bringing Apple's influence in its product markets into public view and under scrutiny. Further, Apple's decision to forego Flash integration raised the ire of regulators and heightened concern over Apple's control of the economics in the digital handset market.
Google's combative approach to Apple in the smartphone market has begun to allay concerns about Apple's economic influence and for all of the bravado and tough talk recently from Google it doesn't in any way impact Apple's success. Rather, Google's approach of positioning the Android as a successful competitor to the iPhone will ultimately work more to Apple's favor than it will enrich Google. The more Google focuses attention on its presence in the smartphone market, the easier Apple can maneuver freely to advance its monetization model.
Google has successfully convinced the public there's a competitive market in smartphones that may not exist to the extent Google would have it appear. For all of the adrenaline pumping persuasion, Google is doing Apple a huge favor.
The Android market is fractured among multiple handset makers each vying for sales and market share. While the Android market is wholly dependent on Google, the company will not be able to deliver the economic goods handset makers need to establish a margin-rich presence in the marketplace. For handset makers it's a matter of picking your poison. 
One of the reasons a Verizon deal for the iPhone did not work is because of Verizon's penchant for controlling the branding presence of the customer relationship. AT&T yielded to Apple. The iPhone is preeminent in the relationship with the carrier and the customer. Google, for all of its hard work, will not be able to position the Android in a way that's preeminent in the relationship with the carrier and the customer. It's impossible to accomplish absent being a handset maker in the market and without greater control of the user experience.
The Android user experience will vary by handset, by software version and to some extent by carrier. There's no way for Google to avoid this trap. Commoditization of the Android handset market is a present danger. Without participation in after-purchase revenue streams handset makers are left in the third position in a three-way contest for revenue with Google and the service providers. It's similar to the plight of Windows PC OEMs seeking acceptable margins in a highly competitive market for unit sales. Hardware differentiation is challenging at best with Google branding its OS, carriers continuing to brand their services and seeking to lock in customers to long-term contracts regardless of the underlying handset being sold. Carriers have choices in the handsets they sell and offering an Android product does little for the manufacturer in an increasingly crowded field.
Google's aggressive attacks on Apple in positioning the Android illustrates the inherent weakness in the platform. If Google's approach is to position the Android OS for what it's not (an iPhone), it leaves unanswered the question of what an Android phone is for potential customers. Realistically it's the only practical approach in an environment in which Google can not wholly control the quality of the user experience and must grapple with a hodgepodge of handset makers each seeking to lower costs in competition with one another. Google will spend lavishly on Android advertising and marketing but several questions are left unaddressed. For example, how does Google plan to challenge Apple and RIM in the enterprise market and how does Google plan to compete with the 800 lb. economic gorilla in the room? Microsoft and Google are locked  in an economic war with points of conflagration in each major market in which the two companies compete.
Android has become a smoke and mirrors campaign to obfuscate one otherwise glaring fact. Android is a stop gap as Google works to deliver Chrome. For all of the bravado and tough talk, a one product strategy can't deliver the revenue solution Google needs. Apple's multi-product iPhone OS monetization model is at least two years ahead of what Google can deliver.
In the meantime with Google convincing the media, the public and even regulators the Android presents real competition to Apple, the folks in Cupertino will continue building the company's multi-product monetization model unfettered by perceptions of competitive concerns. 

Saturday, May 15, 2010

Apple's $65 Billion Fiscal Year

I'm working on my preliminary estimates for Apple's FQ3 performance and my estimates for the balance of Apple's FY 2010 that ends in September.
For the June quarter my estimates suggest Apple will report the highest revenue and earnings per share for any quarter in the company's history. This is due to the emergence of the Apple iPad and the possibility Apple will ship three million or more units of this new digital device before the end of June. 
Further, the fourth fiscal quarter will again set records for revenue and earnings per share due to the continued global rollout of the Apple iPad and the expected release of the fourth generation Apple iPhone at the start of the quarter. In total my estimates suggest Apple will reach $65 billion in revenue in FY 2010, a 50% increase in revenue over the prior fiscal year. For the first six months of this fiscal year Apple has reported revenue growth of roughly 40%. I expect revenue growth momentum to accelerate during the June and September quarters.
While information on iPad ASPs may not be available until Apple releases its June quarter results, my estimates on pricing suggest Apple iPad's ASP will at least slightly exceed the ASP for the Apple iPhone. In other words, for purposes of estimating revenue, on average each Apple iPad sold has a revenue value equal to or greater than the value of each iPhone sold. The Apple iPad alone may account for 20% revenue growth in the quarter versus the prior-year period.
For the first six months of FY 2010 Apple has reported earnings per share growth of about 63%. Earnings per share growth may also accelerate in the June and September quarters.

The pace of Apple's revenue and earnings growth for the balance of the fiscal year will support appreciation in the share price even if the p/e multiple remains constant. I expect AAPL to reach $300 per share by the end of July and reiterate my forecast AAPL will reach $400 per share by early May 2011. 

Robert Paul Leitao

Saturday, May 8, 2010

AAPL Bears Beware

At Friday's closing price of $235.86 AAPL is trading at a trailing 12-month price-earnings multiple of about 20 times earnings. Essentially the shares now are trading at less than one-third of Apple's earnings per share growth rate for the first six months of the current fiscal year. To make the point more dramatic, removing the company's cash from the current share price drops the price-earnings multiple to below 17 or about 26.5% of the current earnings per share growth rate. 
Additionally, the earnings per share growth rate for the first six months of the current fiscal year in not influenced by the apparent early success of the Apple iPad. The Apple iPad will only accelerate the pace of revenue and earnings per share growth for the balance of this fiscal year and beyond. I've mentioned several times the Apple iPad alone in the June quarter may represent 20% of the comparative prior year period's revenue total, pushing Apple's revenue growth in the quarter well beyond the almost 40% revenue growth experienced in the first six months of the current fiscal year.
Transcendent Revenue Growth
In the March quarter Apple's revenue segment that includes iTunes store sales represented about 10% of the quarter's revenue. For the first six months of the fiscal year this segment represented about 8.5% of the company's reported revenue. iTunes revenue from music, apps, movies and now electronic books grew 27% in the March quarter, nearly double the first fiscal quarter's rate of growth. iTunes revenue transcends the individual hardware product lines through which revenue is created and this revenue segment will continue to grow and grow almost unnoticed by analysts and journalists. For the first six months of the fiscal year this segment has produced almost $2.5 billion in revenue. 
The Non-Competition Competition
It's not that Apple is exempt from competition. Competition is an elixir that promotes innovation and competitive influences keeps Apple focused on product development. The news is filled with stories of reported iPad and iPhone competitors but competition in a practical sense doesn't exist for now. There isn't a product maker in the market today that can earnestly compete with Apple in a multi-product war. The closest Apple has in competition to the iPhone OS eco-system is coming from Google and its Android OS for smartphones. 
The challenge Google faces in competing with the iPhone is that the iPhone OS eco-system consists of multiple product offerings including the iPod touch, the Apple iPad and the iPhone. Further, Google is not a hardware device maker. It's revenue benefit derives indirectly from hardware products sales in a potentially fractured product market for which uniformity can not be established. For handset makers no matter the reported success of Android OS-based smartphones, the monetization revenue streams post purchase are diverted from handset makers to Google. This not only puts margin pressure on handset makers, it deprives these handset makers of recurring revenue from app and content sales that's necessary to compete in product development with Apple. 
Through at least the holiday season 2010 the Apple iPad lacks a major competitor in the market. HP's acquisition of Palm and its interest in developing WebOS-based devices removes the world's largest PC maker from the tablet market for now. Apple's aggressive pricing on the Apple iPad has Microsoft changing course on its tablet device strategy and not a single potential manufacturer can bring a tablet to market that provides a robust app and content store environment to attract consumers. 
For at least the next eight months Apple has the tablet market to itself, adding to the array and number of iPhone OS-equipped devices in the market. 
Competition for the iPad will come, but not until after the 2010 holiday season and not before Apple's 2nd quarter of FY 2011 begins. While Android OS-based smartphones will compete with the Apple iPhone for sales, the growth of the iPhone OS eco-system will not be impeded. The eco-system is supported by multiple hardware product lines working in concert to create iTunes-related revenue streams.
AAPL Bears Beware
The recent sell off in AAPL only makes the share more attractive relative to the company's current rates of growth and continuing growth potential. Although the Apple iPad's revenue and earnings contributions beginning this fiscal quarter will mask the pace of growth in iTunes-related by temporarily diminishing its percentage contribution to total revenue, this revenue segment will enrich gross margins for the foreseeable future. 
I expect the pace of growth in iTunes-related revenue to quicken as iPhone OS-equipped device sales continue to grow. This is no longer a battle of hardware devices. It's a contest to develop the most efficient monetization models for recurring revenue following initial handset sales. 
Due in part to the release of the Apple iPad early in this quarter, the June quarter's revenue growth for Apple will be greater than the 40% average for the first six months of this fiscal year and earnings per share growth should at least keep pace with the 63% rate for the first half of this fiscal year. 
I reiterate my 12-month price forecast for AAPL. Bears beware. 

Robert Paul Leitao

Saturday, May 1, 2010

Apple Revenue Growth: Why AAPL Will Surpass $500 Per Share

Within the next three years Apple's share price will surpass $500 and the company's market cap will reach $500 billion or one-half trillion dollars. There's a simple axiom that underlies Apple's continuing success:
Apple doesn't sell products and services. Apple creates customer relationships that sell the company's products and services.
One of the challenges confronting journalists and analysts following the company is a misunderstanding of Apple's global presence. Often Apple is viewed as a company with separate product lines that are assembled quarterly for financial reports. The fact is on a revenue basis Apple is the world's leader in mobile digital devices. Further, Apple's revenue share of the global PC market is far greater than the underlying market share data suggests.
Because Apple's revenue is sourced from global sales of products, focusing on one operating region such as the US will lead to a distorted view of the company's growth potential and the prospects for further share price appreciation. 
As I posted in late April, 51% of Apple's revenue in the March quarter was sourced from operating segments exclusive of the Americas and Apple's global chain of retail stores. Additionally, 46% of Mac unit sales were sourced from these international regions. While the Mac maintains single-digit market share in the US, the company's global revenue footprint continues to expand. In the March quarter about 28% of Apple's revenue came from Mac sales. In unit sales comparisons, the Mac is now dwarfed by the iPhone and will soon be surpassed in unit sales on a quarterly basis by the Apple iPad. Even in its introductory quarter the Apple iPad will surpass the Mac in unit sales performance. 
In evaluating Apple's revenue and earnings performance and in forecasting the company's revenue and earnings potential over the next three years one must consider the product sales halo effect of these economically interdependent products. In a rough look at the product revenue ratios the Mac is equal to the sales of two iPhone or two Apple iPads. 
A customer who purchases a Mac from the experience of using an iPhone or an Apple iPad has tripled Apple's revenue from that one customer relationship. Conversely a Mac owner who purchases an iPhone or Apple iPad has increased Apple's revenue from the customer relationship by roughly 50%. This revenue yield ratio does not include recurring revenue sources such as app, music, movie or book sales, etc. through the iTunes franchise. 
Although Mac sales continue to grow at an impressive pace (33% unit sales gain in the March quarter), the Mac's percentage contribution to Apple's revenue and earnings as a percentage of the totals has been reduced by rising sales of iPhones. This should not diminish the market's understanding of the Mac's importance to Apple. Quite the contrary, it should illuminate the market's understanding of Apple's growing global revenue presence. 
In the March quarter Apple's retail store operations contributed about 12.5% of the company's revenue for the quarter. This seemingly low percentage contribution to revenue from the retail stores is due to the percentage of sales of iPhones globally through contracted partners. Again, the success of the retail store chain is masked by Apple's expanding global revenue footprint. Yet the retail stores provide a vital service in the launch of the Apple iPad. 
Evaluating each product line or revenue segment outside of its interdependent relationship with other product lines or revenue segments will invariably lead to an underassessment of Apple's revenue and earnings growth potential. 
Apple doesn't need commanding unit market share in each of its product segments to fuel revenue and earnings growth. Apple needs to continue creating customer relationships while increasing the yield per existing customer relationship through the sales of products and services. It's the customer relationships that grow the company not the isolated sales of product units. Disassembled and viewed individually, each product line or revenue segment would not appear to justify today's almost $250 billion market cap let alone reveal the potential for a doubling of the share price over the next three years.
For the six-month period ended in March Apple grew revenue by about 40% and earnings per share by 63%. The Apple iPad alone may add 20% to the June quarter's revenue growth. The halo effect of the iPad on Mac sales may increase  the iPad's influence on revenue even more. 
Apple's calendar year 2010 retail store openings will add to unit sales in all product segments while boosting the prospects for Mac and iPad sales in particular. Apple's growing retail store presence in Europe will assist in maintaing strong Mac unit sales gains in the region. 
I reiterate my updated 12-month share price targets and expect AAPL to reach $500 per share within the next three years. The current pace of revenue and earnings growth in light of the release of the Apple iPad should remain unabated for at least the next 12 months supporting further advances in the value of the shares. 

Robert Paul Leitao