Saturday, September 22, 2012

Apple, iOS Devices and the Precipice of Success

On August 11th, I published my updated AAPL 12-month price target of $950 per share. Since that date, AAPL has moved from $620.73 to $700.09 per share. On Friday the shares set an all-time intraday high of $705.07 as the rollout of the iPhone 5 began in the US and select markets around the globe. Apple's newest iPhone handset is an early and unqualified success. 
I've mentioned several times in prior articles I expect the iPhone 5 to sell on a scale not seen before even by iPhone standards. Apple's early September announcement of a September 12th iPhone event essentially froze the domestic smartphone market while competitors scrambled to ship product to carriers before the iPhone 5's release on September 21st. Through at least the holiday quarter, there isn't a competing handset on the market that will generate anywhere near the iPhone 5's global appeal. 

In addition to the release of the iPhone 5, the iPhone 4 is now available on AT&T, Sprint and Verizon at a post-subsidy price of $0. This is the first time all three major domestic carriers have an iPhone available at that pre-tax price. The iPhone 4 at its new price will deliver a boost to unit sales over the next four fiscal quarters. 

Just prior to the iPhone 5's retail availability, Apple released iOS 6, the company's latest iteration of its operating system for the iPhone, iPad and iPod touch. No matter the early complaints about Apple's first major effort at mapping services, iOS 6 downloads and installations can be counted by the tens of millions. With all of the attention lavished on the iPhone 5, it's the iPhone and iPad combined that is driving the company's share price and market cap significantly higher.

iOS Devices As A Global Franchise
At my Posts At Eventide web presence I provide graphs and table data illustrating and detailing unit sales by quarter for each of Apple's major product lines. Today I am publishing a chart-based overview of iPhone and iPad sales to illustrate Apple's high rates of revenue and earnings growth depend on more than the iPhone alone. iOS devices have become a global franchise. Because Apple does not break out the unit sales of the iOS-based iPod touch, I am including only the iPhone and iPad product lines in today's analysis. 

The graph below illustrates the growth in iPhone and iPad sales over an eleven-quarter period beginning with the first quarter of FY2010 (fourth calendar quarter of 2009):
From a low of 8.737 million iPhone units sold in FQ1 2010 prior to the original iPad's release, to a high of 52.478 million iPhone and iPad units sold two years later in FQ1 2012, in seven of the eleven quarters covered, year-over-year unit sales growth reached or exceeded 100%. The accompanying table data is available at Posts At Eventide through the link posted above.

Combined iPhone and iPad Revenue
Apple's quarterly results include revenue totals and unit sales for the company's four major device lines. The revenue numbers include the benefit of sales of accessories and product-related services. 

The graph below illustrates the growth in revenue from iPhone and iPad sales over the same eleven-quarter period: 
From a low of $5.445 billion in the quarter immediately prior to the original iPad's release, to a high of $33.57 billion in last calendar year's holiday quarter, the iPhone and iPad continue to deliver stunning year-over-year revenue growth for Apple. Coming off the launch of the iPhone 5 and through the next iPad release, Apple's iOS devices will deliver another twelve months of robust revenue and earnings growth for the company.

Apple's Revenue Concentration
The graph below illustrates Apple's high revenue concentration in its iOS device lines. Over the most recent three fiscal quarters, the iPhone and iPad have delivered close to 75% of the company's reported revenue:
Over the most recent four fiscal quarters, the iPhone and iPad delivered 71.31% of Apple's nearly $150 billion in reported revenue. In the fiscal year that begins at the end of this month, the iPhone and iPad may deliver over 80% of the company's reported revenue. 

iOS As An Eco-System
During the September 12th iPhone 5 event, Apple CEO Tim Cook announced there are now more than 435 million iTunes accounts and more than 200 million iTunes in the Cloud customers. There are now more than 700,000 apps available for iOS device owners, 90% of apps are downloaded at least once per month and customers average over 100 apps each. In the iTunes Music Store, 66% of download requests are made from iOS-based devices.

When one looks at the revenue Apple generates from iOS-based device sales and the commerce that's conducted by customers through these devices, it becomes clear Apple's iOS strategy is more than a tale of two devices. iOS is an eco-system story and a platform for continued product development. 

Apple At The Precipice of Success
Although next fiscal year the two product lines may represent more than 80% of Apple's reported revenue and this might be viewed by some as a revenue concentration risk, the iOS eco-system is the foundation for new products that have yet to be announced. Over the four fiscal quarters ended in June, Apple realized revenue growth of 48.3% and earning per share growth of 68.4% primarily from the success of the company's iOS-based products. 

Over the next four fiscal quarters, inclusive of the current September quarter, I expect revenue growth equal to or greater than 50% and corresponding earnings per share growth in excess of 60%. Combined, the iPhone and the iPad will deliver yet another year of extraordinary rates of growth.

The question for Apple's management is how the company transforms this precipice of success into a plateau for new iOS product development. Management's response will determine whether or not the company will sustain robust rates of revenue and earnings growth beyond next fiscal year. I reiterate my $950 price target for the shares. 

Robert Paul Leitao

Disclosure: The author is long Apple shares