Apple and Tariffs (Part 3)
Hello everyone. Happy Wednesday.
After a few days of little to no clarity on tariffs, there was quite a bit of news today. We will keep going with this week’s format of having one multi-day discussion. Let’s jump right in.
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AAPL Earnings Recap; iPhone Growth Accelerating
Apple reported a 4Q14 earnings beat to consensus and my estimate with strong guidance driven by iPhone sales strength.
Few takeaways and notes:
Mac. Over the past few weeks I was noticing that the Peak Mac theory, which stated that Apple will never sell as many Macs in a single quarter as occurred in 1Q12 (5.2 million Macs), was at risk of breaking apart as my long-term 4Q15 estimate was for 5.4 million Macs. Apple ended up reporting 5.5 million Mac unit sales last quarter, representing strong 21% year-over-year (yoy) growth, and a new quarterly unit sales record. Recent price cuts and upgrades resulted in strong Mac sales to college students.
iPad. Apple reported a 13% decline in iPad unit sales, which was in-line with my expectation. People calling for iPad’s death will likely be disappointed though given the likelihood of a new iPad Pro model in 2015, along with the recently announced cheaper iPad mini and refreshed iPad Air 2. I still think iPad sales will pale in comparison to iPhone over time and the iPhone 6 will continue to cannibalize iPad sales, but Apple management seemed confident that there are enough niches (education and enterprise) to at least keep iPad sales from collapsing. I think it is appropriate to view iPad more like Mac, and given Mac’s respectable growth last quarter, the iPad is far from over.
iPhone. Apple’s overall earnings per share (EPS) beat my estimate by $0.10/share on stronger iPhone sales (39.3 million vs. my 36.5 million estimate). Management provided very bullish iPhone commentary with the expectation that iPhone will remain supply constrained through the end of the year. Apple shared other data points that reinforce iPhone momentum is accelerating from 13% yoy unit growth in 3Q14 to 16% growth last quarter to expected 30% growth in 1Q15.
Margins. According to management, the stronger dollar will be a “significant headwind” for Apple in the near-term, but the 37.5-38.5% guidance range already reflects the FX impact. On a normalized basis, I wouldn’t be surprised if margin is closer to 40%, compared to 38.6% in 2014, on iPhone 6 strength.
Apple Watch Disclosure. Apple caused a minor Twitter uproar with new disclosure commentary concerning the way operating segments will be reported, including Apple Watch being lumped in with a few other products within the ”Other Products” segment. Is Apple trying to hide something? I suspect the main reason for the classification is that Apple doesn’t want to release too much information to competitors. If Apple disclosed Apple Watch revenues and unit sales, it would be possible to obtain average selling prices (ASP) and then back into which models were selling well, thereby giving key data to both low-end and high-end watch competitors. It isn’t clear if Apple will disclose Apple Watch unit sales, such as opening weekend sales. I think it is reasonable to think if the sales are good, Apple may want to say how many units are sold without breaking out revenues.
Guidance. Apple provided strong guidance beating my revenue estimate and consensus. Most of the beat can be attributed to iPhone, where Apple could sell upwards of 65-66 million iPhone units, which would be the strongest yoy growth (30%) in over two years. The exact sales number will depend on how many iPhones Apple can produce, but it is safe to say that iPhone’s growth is accelerating.
Apple is now trading at 13x forward EPS with net income growing 15-20% yoy.
Apple iPad Event Notes
1) The iPad mini got 10 seconds of stage time. At this point Apple is keeping it around just to make sure they are selling tablets for less than $300. Watch the iPad average selling price (ASP) over the next few quarters to see if there is any evidence of people buying the cheap (and old) iPad mini instead of other iPads. I doubt it.
2) Most of Apple’s iPad Air 2 sales pitch focused on the camera and corresponding apps. While I’m sure there are some neat use cases (children’s sport events, physical therapy sessions, etc.), does an iPad really do a better job than an iPhone 6? For some the answer is yes, and those people will buy iPad Air 2, but for most, I suspect the answer is no.
3) Notice how “iPad apps” just doesn’t have the same ring and excitement it once had. Apple had a few demos onstage and “this is okay” seemed to keep ringing in my head. The app ecosystem is tired (not just iOS).
4) Apple announced a new retina iMac for $2500, $700 more than the non-retina option. I’m sure once you use a retina iMac you never want to go back, but as I look at my non-retina iMac, and it’s pretty decent screen, $700 seems steep.
5) New Mac mini with a lower $499 price. I’m sure there are people who were waiting for this and it will open up the Mac to new customers, but nothing too noteworthy when compared to the rest of the Apple product line. Look at the specs and no wonder it’s $499.
6) Overall, a pretty laid back Apple keynote, especially when compared to last month’s blockbuster of an event. I published my latest thoughts on iPad a few days ago and I have nothing to add after watching this event. I would expect a larger iPad Pro next year and I think Apple should get rid of the iPad mini and reduce the price of old iPad Airs.
Random bits:
- Tim Cook almost called the Apple Watch, “iWatch”. He has already called it iWatch in public before (which is rare for an Apple executive to do). Seems likely that “iWatch” was used internally to describe the watch while it was being developed.
- We may have seen our first Hitler reference in an Apple keynote (can thank Stephen Colbert). Never understood why someone would reference Hitler to anything, but that’s another topic.
- Just another confirmation Apple is an iPhone (and Apple Watch) company. I suspect that is where most of the excitement and attention will be focused on for the next 2-3 years.
Thoughts on iPad
The iPad is at a crossroads. Introduced by Steve Jobs four years ago, the iPad has gone on to become a phenomenal success (225 million units sold bringing in $112 billion of revenue and approximately $30 billion of profit), but I suspect Apple management will alter the iPad line-up in response to wearable devices and larger-screen phones and in the process iPad’s ultimate trajectory will be more modest and niche than many expect.
Slowing iPad Sales Momentum
iPad sales growth has slowed dramatically from 65% year-over-year unit growth in 2013 to a 10% year-over-year unit decline last quarter. Such a contrast is startling given how promising iPad seemed in early 2013. When I first discussed my iPad concerns in 2013 (Apple had just reported a much weaker-than-expected quarter for iPad shipments), I received very strong pushback as many said iPad was fine and just suffering from varying release cycles. I knew that was not the reason for the sales weakness, but it was still hard to see why iPad sales and the overall tablet market were slowing so dramatically. Some pointed to longer upgrade cycles, which has some truth to it, but I wasn’t convinced that variable had enough explanatory power to turn 50%+ growth into sale declines within a few months as iPad was not near saturation (there are plenty of people who don’t own an iPad). I suspect there has been a much broader ongoing trend for why iPad has been struggling to gain new users; larger-screen phones have been cannibalizing iPad sales and iPhone 6 is going to make things worse for iPad.
A Different World
For a new product category, iPad’s sales pitch was fairly straightforward; a device that sat between your phone and PC; able to do a few tasks better than both your phone and computer. Web surfing and email were highlighted as prime examples, as well as reading ebooks. Initial sales were very strong and the iPad was off to the races. Fast-forward four years, and iPad faces a much different consumer tech landscape.
2010 Environment
- iPhone (along with most phones) have small displays.
- MacBooks are thick, heavy, and non-retina.
- People are completely mesmerized by new apps.
2014 Environment
- Phones are much bigger (iPhone now comes in 4.7-inch and 5.5-inch display options).
- MacBooks are thin, light, and retina.
- The paid app (and even free app) ecosystem is tired and somewhat stale.
Apple now has a much harder sales pitch to make for iPad. Why buy an iPad when you could have an iPhone with a screen that doesn’t seem that much smaller than an iPad mini? Why buy an iPad when you can have a more powerful and just as easily transportable Macbook Air? The space between a phone and PC is smaller now than in 2010 primarily as the phone has become more powerful and larger. Tablets are getting squeezed.
Slowing iPad App Innovation
I can’t remember the last time I downloaded an iPad app. Curious to see how others were doing, I posed a question on Twitter, “How many iPad apps have you downloaded in the past month?” On any given question I get a decent number of responses, but this time I received a very muted reaction with a few “0” responses. Why am I not downloading iPad apps? I consider iPad app innovation to have slowed with iPhone continuing to take a disproportionately high amount of attention in the app ecosystem. Most of my daily mobile usage now occurs on an iPhone.
Messaging: iPhone (iMessage, Facebook, Twitter)
Email: iPhone
Web surfing: iPhone (Tweetbot)
Games: Not many games, but the latest fad is usually on iPhone
Photos: iPhone
Weather: iPhone
Traffic: iPhone
Maps: iPhone
Video podcasts: iPad (for the larger screen)
I suspect one reason for suboptimal iPad app innovation has been that app developers have been too preoccupied with iPhone’s explosive usage to focus resources on iPad and if everyone is focused on iPhone, can you blame them? Of course, I’m not suggesting there is not intriguing software for iPad. Anyone in a specialized field (medicine, sports, film, music, etc.) will be able to point out apps that harness iPad’s potential, but that is niche – and even Apple’s latest iPad commercials reiterate the niche factor. However, for the average person interested in basic tasks like web surfing, email, and photos, phones are very capable devices and are consequently winning a larger share of app innovation. As I wrote after a few days with my iPad back in 2011, the device is all about apps. If I have no interest in downloading or even using iPad apps, I view that as an ominous sign for its future. My interest is moving elsewhere, namely to iPhone, and soon Apple Watch.
iPad’s Primary Use Cases
I don’t want to paint such a grim picture for iPad. Apple is still selling millions of iPads (likely around 12 million during the past three months down from the 14 million last year). How could this be if the space between phones and PCs has been shrinking over the years and there isn’t the same quality of app innovation?
1) Laptop/Desktop Replacement. Many people are using iPads as their main computer, replacing old laptops or desktops. Interestingly, more people are telling me their parents and grandparents love iPad as it’s the first computer that is truly easy for them to use. In many ways, this is exactly what some saw when the iPad was unveiled – a laptop/desktop replacement. Looking ahead, however, I don’t see there being much to prevent phones from doing a better job at replacing laptops or desktops. Why buy an iPhone and iPad, when you can just buy a larger iPhone?
2) Education. While there have been high profile cases where large school districts, and even countries, considered implementing iPad programs, success seems to be underwhelming due to logistical concerns as well as budgetary limitations. I also think a lesser discussed reason is the proliferation of larger smartphones leading many students to use their phones much more in 2014 for tasks that the iPad was initially positioned to do. There’s clearly still a market for iPad in education, but I suspect it’s much smaller and more niche than many imagined a few years ago.
3) Enterprise. iPad in the workplace remains the unknown factor. I suspect iPad sales to the enterprise may represent a growing share of iPad sales. In this context, Apple’s recently announced partnership with IBM takes on a new light - one of offense to find use cases for iPad.
iPad Has a Future; It Just Needs Help
The iPad is a great device that needs some changes to reflect the current landscape.
1) Apple should stop selling the iPad mini. As a low-margin response to cheap Android tablets and given the lack of a large iPhone, the iPad mini served its purpose keeping Apple in the tablet game, but today there really aren’t many reasons to keep the iPad mini around. Consensus seems to think Apple will add Touch ID to iPad mini later this week along with some other updates, but beyond that, unless sales trends improve (I wouldn’t expect them to), I don’t see the iPad mini staying in the line-up for too long and I think that is only for the better. In order to keep product offerings in the same price range as iPad mini, Apple could work on lowering iPad Air pricing to approach that $299 level over time.
2) Introduce an iPad Pro. An iPad with a 12.9-inch retina display, new software that moves beyond just rows of app icons, and capable accessories including keyboard stands and styli. Once again, Apple’s IBM partnership comes into play. A large iPad Pro with customized software and accessories would certainly be more interesting to enterprise users than an iPad mini with basic office utilities.
Even with a product line-up consisting of an iPad Air and iPad Pro, I would still suspect phones to eventually cannibalize the larger iPad Pro, but Apple would at least be able to get another couple of years of respectable sales out of iPad. When you add Apple Watch to the equation, the scenario where people keep their large iPhones stashed away in a backpack, purse, or satchel, while their Apple Watch handles communication and notification functions doesn’t seem too much of a stretch. Maybe now you can see why I think so highly about Apple Watch’s potential while being more pessimistic towards iPad.
iPad Was the Right Product At The Right Time
I’m convinced if Apple had to do things over, they wouldn’t change a thing. The iPad was the right device at the right time. The past seven years in mobile has essentially boiled down to people discovering which sizes of glass they prefer in their pocket. In 2010, it seemed like consumers would want a phone, tablet, and laptop/desktop, with the tablet eventually replacing the laptop/desktop, although many in Asia and emerging markets disagreed. As phones become larger and more powerful and wearables become more popular, I suspect consumers will be content with just a phone and wearable device. I still see a future for iPad, but it looks more like Mac instead of an all-encompassing mobile device next to iPhone and maybe that is what Apple had in mind all along.
Bendgate Is Closed
Last night Consumer Reports chimed in on Bendgate, concluding iPhones don’t bend under normal use. I think this report, coming from the consumer review site that infamously hit Apple hard with its Antennagate analysis, marks the unofficial close of this completely ridiculous witch-hunt.
The question all along hasn’t been, “Do iPhones bend?” Of course they bend. iPhones are made of material that will eventually succumb to a certain level of applied pressure. I haven’t tried it, but if I took my heavy-duty tools and machines to my iPhone 5s, I’m sure I will be able to get something to bend. If I really wanted to, I could gather enough arm strength to do something stupid to my phone as well. One could ask, “Why would I do such silly things?” and I would only be able to shrug my shoulders. The real question everyone should have been asking (if they were desperate to find a question to ask) is, “Do iPhones bend during normal use; walking, running, basically living your daily life?” All of the evidence (both empirical and anecdotal) support the “no bending” claims. Now a very select few have claimed their iPhones have become bent (although they also claim to have sat on them a lot - they aren’t sure). These same people admit the bending is hard to see at times and you need to look at it in a certain light. I’m skeptical. If these people are genuine, they can return their iPhone and get a new unit. Apple sells a lot of iPhones and if your phone is one of the very few bad apples that made it through the rigorous quality assurance tests (Apple claims only nine people reached out to them complaining of a bent iPhone), I would just consider myself lucky, exchange the phone, and move on with my life.
Over the past week I received many jokes from Android users about Bendgate. Nearly every phone marker chimed in with their own unoriginal bending jokes, tweets, ads, and musings. Mainstream media picked the story up and ran with it. Curiously all of these reports were missing something - evidence. No one bothered to take a step back and think about this whole debacle for a second and actually see if their iPhones were bending. I suspect one issue is there weren’t many iPhone 6 Plus units out there in the wild to even observe possible bending. Notice how these “-gates” only take place a mere few days after launch.
It’s 2014. We shouldn’t be surprised that we had to live through another iPhone “-gate”. These spectacles only reinforce my view that iPhone continues to hold significant global phone mindshare (which is much more important these days than market share, but that topic is for another day). Stories of iPhone’s demise have been in the news since 2007. Some have even tried to ridicule iPhone buyers, maybe one of the weirdest, and counterproductive, types of envy a competitor can possess. When you are in the lead, and running forward, competitors can only pin a target on your back and Apple seems to be wearing quite an effective shield.
It’s reassuring to know that while the world has been preoccupied with Bendgate, Apple engineers have been busy creating the product for next year’s iPhone “-gate”; iPhone 6s.
Apple Keynote Notes
My notes from Apple’s keynote:
- Development. The tech landscape saw this wearable device coming from a mile away. Over the past year, competitors have come out with their own watches, and in many cases, have already shown a few reiterations. I suspect Apple Watch development started in earnest back in 2011 with most features at least thought out by 2013 and everything largely set by early 2014. The growing phenomenon of people using the iPod nano as a watch in 2010 most likely got the ball rolling. Yes, that means Steve Jobs was around for at least the early watch discussions, although Tim Cook told ABC News that Apple Watch development began around late 2011/early 2012.
- AskTog. In early 2013, former Apple employee Bruce Tognazzini wrote what I term “the iWatch manifesto”, a highly detailed, yet supposedly hypothetical, wish list of what an Apple smartwatch could or should do. As I expected, most of his commentary turned out to be true and was announced today. I suspect some of his points that were not released today will be included in future versions. One has to imagine competitors were aware of the article and knew most of the features announced today were coming.
- Hardware & Software. From a hardware perspective, the Apple Watch doesn’t strike me as overly magical (like the iPhone did). However, the software is differentiated from peers.
- Battery. People are worried about battery life. Apple didn’t say, but implied an Apple Watch battery will last roughly a day. I think a 12-14 battery life is probably the most likely answer and I don’t see much issue with such a span for a first release. I don’t wear a watch in bed now, so I think it would be common practice to charge your Apple Watch every night. What does this mean for sleep tracking or those with extra long daily schedules? Maybe buying two watches is their answer.
- Use Case. Apple didn’t go into much detail about why someone should use an Apple Watch, instead demoing a few features that seemed cool or at least interesting. I think most of this is taken from the iPad playbook - show users various things you can do with the device and then step back and see what sticks. At one point Apple even mentioned there is much more to say about the device, but there wasn’t enough time.
- Goal. Apple is going after the watch, not the smart watch.
- Competition. I suspect Samsung (and many others) will come out with various watches that look very similar to Apple Watch in a few months (some larger or smaller than Apple Watch).
- Pricing. Apple said Apple Watch would start at $349. I imagine some of the higher-end models will likely go for over $1000. I would not be shocked if over time, you see Apple watches retail for thousands of dollars (a special Marc Newson $5000 edition anyone?). Of course, Apple will also work to lower the entry-level price to a more manageable $99 etc.
- Future. I see a world where the watch will eventually replace the phone. We aren’t there yet, but I think it’s coming and most major tech players will have a wearable tech platform up and running by 2015-2016.
- Retail. Apple will need to figure out a way to showcase dozens of Apple Watch variations in Apple stores, requiring a new way of thinking of wearable retail. Angela Ahrendts has her hands full.
- iPhone. New models largely as expected. The iPhone 6 Plus (5.5-inch screen) seems a tad large, especially when compared to the iPhone 6 (4.7-inch screen). The gold version does not look as good with these larger phones. I suspect the 4.7-inch iPhone 6 silver will be a top seller. These news phones will likely maintain Apple’s iPhone unit sales growth in 2015, especially from strong sales in Asia.
- Apple Pay. Apple introduced a mobile payments platform and while I am interested, I am a tad skeptical at how this is going to trend in real world implications. If I still need to carry credit cards because there are various retailers who don’t support Apple Pay, how effective is such a service? Certainly Apple Pay represents the strongest movement yet for the mobile payments arena, but for now I am taking a wait-and-see approach.
- U2. I still don’t quite understand the point of Apple subsidizing a U2 album. I get that Apple wanted a musical act to close out the event, but U2?
- Summary. Apple did what it had to do to give Apple Watch a solid chance of succeeding. The hype for today’s event seemed higher than the initial iPad event and I think it’s clear Apple wanted people to know Apple Watch is a big deal and should garner the corresponding attention. For now, I think Apple early adopters will buy Apple Watch (5-8 million units), with a decent uptake in some market niches (another 5-10 million units). While some are expecting 60 million units sold in the first year, I am taking a more measured 2-3 year horizon before we see those kind of sales numbers. Ultimately, I think Apple has a winner with Apple Watch.
Wearable Device Now, iWatch Later
John Paczkowski over at Recode is reporting Apple will announce a wearable device in two weeks. Tim Bradshaw over at FT is saying Apple’s new wearable won’t be called iWatch. While things can obviously change, and Apple product naming is notorious for being kept close to one’s chest, both journalists have solid track records.
I have three observations.
1) No Leaks Suggest Delayed Launch. We have seen no leaks of a new Apple wearable device. While it certainly is possible that Apple doubled down on secrecy, I highly doubt that we would have no leaks of any kind for a brand new product that had entered mass production (2-4 million+ units) weeks ago. I suspect this new Apple wearable device, if announced in less than two weeks, will not go on sale anytime soon. I still would expect demos to be available at the event as Apple is fully capable of producing a few hundred devices internally. While the new Arizona sapphire plant certainly is intriguing and may play a role with wearables, there would be too many other partners involved in a wearable device for there not to be any leaks. While I still wrestle with the exact timing of shipping (I fully expect Apple to announce the ship date or at least a somewhat narrow timeframe), I think there is a low probability of an immediate launch.
2) Sharing the Stage. If Apple introduces a wearable alongside iPhones, I think the “wearable as an iPhone accessory” mantra makes a lot more sense that having a huge iWatch-only event, similar to the first iPad, where a wearable device can stand alone on its own merit and not require another iOS device. If a wearable device requires an iPhone to function, it makes more sense to announce alongside new iPhones. Over time, I expect wearables to become fully capable of moving beyond accessories, but we are only talking about the first version of a still unannounced product.
3) iWatch vs. Wearables Category. Apple may view the wearables category as requiring training wheels as consumers may not understand or connect with a full blown “iWatch” right out of the gate, so an in-between wearable device would be required to make the learning curve more manageable. For example, an iPad introduced in 2005 probably would not have done as well since people wouldn’t have been familiar with a touch interface - not to mention the lack of an app ecosystem. It is possible Apple will initially sell a wearable device similar to a fitness band, but focused on the much broader and mainstream subject of health, only to expand the lineup in subsequent years with various editions, price points, and styles. I have a growing suspicion that Apple’s wearables category will not be comprised of just one or two models but an array of devices as wearables will usher the era of fashion into personal technology. Apple’s recent retail hires support my thesis that a new way of thinking is required to sell a range (maybe up to dozens?) of wrist devices.
At this point I expect a “wearable” device to be introduced in two weeks, with the goal of getting users acquainted with this new wearables product category, while the more powerful and much more important “iWatch” is kept for 2015 or later.
Current Tech Musings and 2014 Predictions
Let’s take a step back and see how things look around the world.
Apple is Fine.
Similar to 2012, Tim Cook back-loaded Apple’s 2013. Apple went so far as to release the retina iPad mini pretty much as late as it could and still guarantee that supply would be adequate before the key holiday shopping season. From all indications, the new hardware is selling well - as one would expect - although many Apple bloggers whiffed when judging 5c popularity. While the sales gap between the 5s and 5c may shrink going forward, I would be quite surprised if the 5c becomes “the real iPhone” as many predicted. The sheer uproar over 5c pricing appears to have quieted down as well. Apple’s redesigned iOS 7 doesn’t seem to have created any new “–gate” controversies, with the only complaints coming from design snobs (I say that with genuine respect). Apple accomplished a lot in 2013, and 2014 looks to be just as jam-packed with what I would expect to be iPhone bifurcation (two distinct iPhone form factors with simultaneous development – a really big deal). An iPad pro (think larger iPad Air with possible dedicated accessories for professionals) would also seem to fit very well in Apple’s 2014 resource timeline.
Tech Industry Hardware Becoming a Snooze.
Take a look around and there really isn’t much in the way of exciting and flashy hardware innovations geared for the masses. Yes, the 5s is forward-thinking, and has the internal composition that will rival next year’s iPhone 6, but it’s hardly something to get people talking at the holiday party. The iPhone 5s fingerprint scanner is nice (continues to work well for me), but I’m not finding it nearly as much of a salesperson as Siri (those initial demos were unbeatable). On the tablet front, it has become an even bigger bore. I use an iPad 2 and have absolutely no desire to upgrade to a newer iPad anytime soon. Outside of Apple, Google is busy publicly beta testing hardware products with the ultimate intent of controlling our data and attention. Amazon is busy spending money left and right in an attempt to sell Amazon Prime subscriptions, and Samsung is twiddling its thumbs waiting for Apple to release new products.
Smartwatches Selling Like Cold Cakes.
The smartwatch appears to have finally hit mainstream in 2013 as Best Buy is now carving out more square footage to the concept. Sales are, and will probably remain, “okay” for early adopters where massive sales are certainly not on the radar, but mass adoption remains out of reach. The idea of a smartwatch makes perfect sense as the phone form factor contains numerous inefficiencies, but the smartwatch industry lacks the needed design and fashion acumen to really get things moving. The technology does appear to be available though. Interestingly, one company has been beefing up their design and fashion human capital resume.
Mobile Messaging App Fever. Yawn.
I’ll be honest, I get bored with the never-ending updates on how many users certain mobile messaging apps have. In the U.S., this fascination with mobile messaging apps remains subdued as Facebook, Twitter, iMessage, (and I suppose you can include Snapchat), pretty much represent the bulk of how people communicate with each other – oh and the phone feature on the iPhone as well. Maybe I’m just naïve (and only friends with Apple users), but I really have no desire to follow which mobile messaging app is selling “stickers” or making a play for the Indonesian mobile app market. I never have used Whatsapp and don’t know anyone who has either. The mobile space is fast moving and people love stories of how start-ups will displace incumbents, but from my vantage point in the U.S. – Facebook and Twitter will remain important communication channels, while iMessage continues to be the sleeper hit. I still think mobile carriers are the big winner as my monthly bills will continue to rise regardless of which start-up does well. Of course critics will say the U.S. doesn’t matter, or is behind the times (and that I am clueless), to which I respond as long as the Valley remains the focal point of technology and entrepreneurship in the world, the U.S. matters.
Changing of the Tech Review Guard.
Yesterday, The Wall Street Journal announced Walt Mossberg’s replacements – relatively new names that probably will get paid a fraction of Mossberg’s current salary. I actually don’t think the WSJ will miss a beat with such a strategy, which may say more about Mossberg’s inflated salary than anything else. Nevertheless, WSJ tech reviews still matter and companies will continue to treat them accordingly. The overall tech product review industry continues to morph and traditional sources for the “yea or nay” for a new product are now shifting to bloggers turned journalists where personal trust outshines all else. As seen with Apple’s latest products, tech specs don’t matter as much these days and this trend will only intensify as fashion bleeds into personal technology.
Other Random Musings.
- It is now easier than ever to grab a few of your journalist friends and start a new company focused on delivering news. Oh, and charge people a lot of money to read what you have to say. I imagine this trend will only intensify as it is becoming clear that 1-5 person shops are finding a particular niche in online journalism. Some personal bloggers are pulling in more than $500,000 a year, which traditional media companies will have a hard time matching (or even justifying), while start-ups with minimal expenses require only a modest subscription base to break-even. Of course, aggregators will continue to do well in this world as well where expense growth via headcount is one differentiator versus the small shops. Slideshows put food on the table. One has to start worrying about information overload though, right? Hopefully? Yeah, I know, wishful thinking.
- A wildcard for 2014 includes Apple’s new retail chief, Angela Ahrendts, which some have already labeled as Apple’s next CEO. My response would be let’s wait to see how she fits within the Apple culture, then we can start talking. Regardless, Apple retail needs some urgent help, so Angela will be busy.
- The tech IPO window is wide open and many signs point to 2014 being another good year. Housing continues to stabilize and contrary to the perma-bears, I think the housing industry will be fine from here on out. The theme of rising interest rates (due to a stronger economy) makes sense to me as well. While I won’t comment on which companies will see an IPO in the coming quarters, I would focus on the quality of these IPOs as one would assume quality will decline as we move past the economic recovery years of 2010-2013.
- Angry Birds (and paid iOS app?) fever is over. It was fun while it lasted. I would be interested to see if Rovio can find another “Angry Birds”, although I remain skeptical. In addition, the overall paid app boom appears to be dead (was there ever a boom?). While there will still be winners going forward, companies solely focused on selling apps for money face dwindling prospects of success. App development, as part of a bigger strategy, seems to have a much brighter future.
Predictions for 2014.
- Pundits will say Apple made numerous mistakes, either in terms of product pricing, marketing, or strategy. The new iPhone will also be classified as marking the end of Apple’s popularity.
- VCs will continue to pass off personal marketing blogs as independent sources of knowledge and wisdom.
- Pundits will say Facebook is dead.
- Mobile messaging app fever will continue.
- Humans will continue to be inundated with useless information and inconsequential data points.
Apple’s Marketing Missile - iPhone 5c
I like getting reactions from normal people about technology. On Tuesday evening, after the Apple keynote, the first reaction I received was “I like these color iPhones. They come with the cases right?” After a bit of prodding, I discovered iPhone 5c cases were actually receiving more positive reactions than I initially assumed.
I suspect iPhone 5c colors and cases are serving as a marketing missile aimed at the few price layers situated below the iPhone 5s. While it may be easy to assume that colorful iPhones appeal to specific demographics, I think it is appropriate to take a step back to get a clearer picture.
In a few months it will be much easier to see iPhones in the wild thanks to these hard to miss 5c colors. Throw in wacky 5c cases and the phones will be impossible to ignore. Up to now, many iPhones were covered by generic cases that made them largely indistinguishable from Android phones. The iPhone 5c, and corresponding cases, may be a very elaborate, yet subtle, marketing campaign aimed at the subconscious. Seeing everyone use a particular phone may go a long way in helping to sway one’s purchase towards that product.
Add in this evening’s announcement of Apple partnering with Burberry for the iPhone 5s and I suspect we may be on the verge of a revamped iPhone marketing strategy focused on positioning iPhone as the premier phone brand, worthy of aspirational goals.
Here's My Platform. Vote for Me.
The first half of 2013 felt weird. Even though plenty of phones and tablets were sold, as well as several laptops, the excitement level seemed less inflated compared to last year. Consumers are content with their gadgets and remain busy uploading personal information to a dozen or so social and messaging networks. Nevertheless, there were some stories in the first half of 2013 primed for riveting Twitter debates. To sum up my stance on these issues, I came up with an easy to remember platform, akin to a politician. I am pro-iWatch, pro-expensive cheap iPhone, anti-Glass, and pro-Schiller.
Pro-iWatch. Wearable gadgets interest me and I think there is something there. Back in February, former Apple designer Bruce Tognazzini began what turned into a multi-month parade of chatter related to Apple developing its own smartwatch. I still think Bruce’s piece is the best words on the device and I have a feeling that a few years from now most of his post will have become reality. My conspiracy theory is that Bruce was frustrated with iWatch progress and released some of the work Apple had already done as a bribe to get Apple to finally decide to give the project the green light. In reality, Apple probably has been working on a gadget for the wrist for years (yes, that would make it a Steve project) and there was enough chatter floating around for Bruce to collect into a post.
I suspect Apple did give the iWatch a green light as seen by numerous talent acquisitions and other signs including industry and management chatter. I think consensus is unsurprisingly naive, if not downright clueless, when it comes to thinking of how an iWatch would look and function. People need to stop picturing a classic watch when rethinking the watch. I am not a fan of today’s smartwatch as the genre fails to answer many questions that the 21st century has placed on the classic watch; primarily purpose and functionality. The current smartwatch market isn’t seeing massive adoption and the industry lacks a cash-rich leader. Samsung and other giants are quickly rushing to market with their own smartwatch, but I am not optimistic that much will come from these early efforts. Instead, I would look more towards Nike’s Fuelband for signs of reinventing the watch. Add in device independency and fashion conscientiousness, and we start to peel the skin to iWatch’s core.
Pro-Expensive Cheap iPhone. Apple continued to show healthy iPhone sales last quarter with 20% unit growth. Average selling price (ASP) fell as consumers continued to buy the discounted iPhone 4 and iPhone 4S. It seems fairly certain that Apple will release two new iPhone models next month; a “5S”, or the latest iteration to the iPhone 5, and a less expensive iPhone (think iPhone 5 only with a plastic casing and I suspect lacking the ability to support iOS 7 features exclusive to the iPhone 5S). Price points remain a controversial topic, boiling down to two schools of thought; the cheap iPhone will be priced closer to $200 in order to gain traction in emerging markets where phone subsidies don’t exist versus priced closer to $399-$499 as Apple continues to gradually move downmarket, attempting to create demand in the $399-$499 no-man’s land of new phone pricing. Even though Apple may be able to manufacture a phone for $200 and still make an “ok” profit, I suspect Apple’s larger strategy is to make sure that all profit layers are captured as the iPhone moves downmarket. If the strategy backfires, Apple can discount the one-year old iPhone 5C for $299 next year and give it another try.
I also think a new $399-$499 iPhone fits well within a possible pro-forma iPhone lineup of iPhone 5S for $650, iPhone 5C in various colors for $450, and iPhone 4S for $350. Such a line-up could be sold across the world, including subsidy land. While a $450 “cheap” iPhone does not address the army of Android phones selling for $99, I wonder if that target is something Apple needs to even shoot for in the near-term.
Anti-Glass. I summed up my Google Glass angst in a prior AAPL Orchard post, largely questioning the product on poor industrial design. Having a product on my face, during both usage and non-usage, strikes me as terribly inefficient and ineffective, not to mention obtrusive. Regardless of design, I also suspect the widespread popularity of contact lenses represent a strong case that glasses aren’t exactly a desirable body modifier. Sure, Google Glass represents something new, but new is not the same as good. Many pundits are hedging bets with assertions that Google Glass may find its niche audience. In retrospective, such a statement can be said about any new product as long as the company making that product remains committed to funding the project. Instead, I think Google Glass will largely be ignored once wrist devices flood the market.
Pro-Schiller. This is the pro-freedom part of my platform, the idea that probably isn’t too controversial yet often goes unnoticed. I consider Apple SVP of Marketing, Phil Schiller, as the embodiment of Apple’s culture. Yes, Jony is Apple’s soul, but Schiller represents the hard work that occurs at Apple HQ, along with the fun, jokes, and general love for the journey taken. Any quick YouTube search would reveal plenty of clips showing wacky Schiller during Apple keynotes. Earlier this year, Schiller made headlines for pumping a bit of Apple PR before Samsung’s keynote unveiling the latest version of its flagship phone. In retrospective, Schiller didn’t need to say anything as Samsung relied on racist and sexist undertones to unveil a phone that didn’t live up to Apple-like expectations. Looking ahead, Schiller’s input on product pricing placement and marketing will continue to take the spotlight.
AAPL 1Q13 Preview; Near-Term Volatility Continuing
Revenue: $53.1 billion (AAPL guidance: $52.0 billion/Consensus: $54.5 billion)
- I expect Apple’s revenue to increase 23% year-over-year after adjusting for the 14 weeks in 1Q12.
GM: 37.9% (AAPL guidance: 36.0%/Consensus: 38.4%)
- Apple’s margin is expected to decline sequentially from 4Q12 primarily due to the wide range of updated products. Margin remains a key near-term unknown for AAPL. Management’s 36% margin guidance is 870 basis points less than the 44.7% margin reported in 1Q12, making EPS growth difficult to achieve. I still include expanding margins throughout 2013. Further weakness, or a shallower rebound, may result in an additional EPS growth headwind.
EPS: $12.75 (AAPL guidance: $11.75/Consensus: $13.33)
- I expect Apple to report a 1% yoy EPS decline, when adjusting for 1Q12. While my $12.75 estimate is less than the Street’s $13.33 average, I attribute much of the variance to my lower gross margin expectation.
Product Unit Sales and Commentary
Macs: 5.2 million (flat yoy growth)
- Mac growth continues to slow as tablets and smartphones satisfy many consumers’ computing needs. I expect 10% growth in portables driven by holiday shopping to be mostly offset by nearly a 30% decline in desktop sales due to the new iMac release schedule.
iPad: 22.4 million (56% yoy growth - when adjusted for 1Q12)
- I expect Apple to report record iPad sales for 1Q13. My iPad estimate assumes approximately 8-10 million iPad minis and 12-13 million iPad 2 and fourth generation units. The iPad mini went on sale November 2 with an aggressive rollout, despite significant pent-up demand and limited supply. Apple was able to sell three million iPads in the three days following the iPad mini and fourth generation iPad launch. My estimate assumes approximately 25-35% cannibalization of the larger iPad models (1 out of 3 consumers willing to buy a larger iPad purchased an iPad mini instead). Going forward, I expect iPad mini sales to approach, if not exceed, those of the larger iPad models.
iPod: 12.0 million (16% yoy decline)
iPhone: 47.8 million (39% yoy growth)
- Apple made significant progress in reaching supply/demand balance for iPhone 5 in the U.S. and other launch countries. My quarterly estimate is largely based on AT&T’s recent comments on October and November smartphone sales (and additional extrapolation). Historical averages for AT&T’s share of global iPhones (and assuming a slighter higher mix of international sales) would imply 40-50 million iPhone sales, which I would consider the high probability estimate range. I then assume channel fill of at least 1 million units, which positions my estimate in the narrower 46-48 million estimate range.
Apple has missed Wall Street consensus EPS for the past two quarters, and unless estimates come down in the following weeks, a third miss isn’t out of the question. While it is hard to point to any one factor as driving a fundamental change in Apple’s operating performance, Apple’s prior two quarters have contained a few concerning metrics, including contracting margins and declining iPad and iPhone growth. Did the weak global economy finally catch up to Apple? Were product release cycles continuing to wreck havoc with consumer demand?
The bear argument would label Apple’s two-year stretch from 2010-2011 as an outlier, when two new products (iPhone and iPad) produced a perfect storm for EPS explosion. Going forward, bears would argue margins will decline further, effectively limiting EPS growth. Future products would then lack the size to move the EPS needle.
The bull argument would focus on iPhone and iPad as product leaders in its respective industries, while a temporary margin drop is indicative of product updates and not a fundamental change in the operating landscape. Apple’s future product plans would also occupy a spot in the conversation.
Will 1Q13 represent an AAPL inflection point? I don’t think one quarter is capable of shedding enough light to figure out where Apple stands in its long, storied history. With iPhone now entering its 6th year (iPod recently celebrated its 11th birthday), the days of 100% revenue growth may be over for the product line, but should that statement even be considered controversial? There is also evidence suggesting Apple may be looking to smooth out demand cycles by updating products more frequently, a move that may bring long-term benefits, but at short-term costs.
While much of the recent AAPL discussion has been focused on slowing growth and falling margins, it is easy to overlook fundamentals that would be considered very strong for any Apple competitor:
- A smartphone pulling in $80 billion of revenue annually and growing at least 30%.
- A tablet pulling in $30 billion of revenue annually and growing at least 45%.
A few AAPL loyalists have recently declared another “bad” Apple quarter (where bad is judged merely by EPS) will signal a new Apple, an Apple not deserving of their attention and instead lumped in with the rest of the tech crowd. I disagree. One quarter, especially in the midst of an obvious change in business performance (product updates and management reshuffling), is not enough to conclude the long-term Apple story has changed. If an investor wanted to run away from Apple for near-term volatility, that decision could have been made a few months ago. Continued margin volatility may produce a scenario where EPS growth can accelerate throughout the year and 2014, even with slowing product sales growth.
AAPL’s next 3-5 years will depend on management’s ability to introduce new product categories into an ecosystem that values a set of beliefs, including two that I tried to put into words following my first days with an iPad:
That technology is too powerful of a force to enjoy without acquired perception and natural intelligence.
That product design has the power to momentarily satisfy the never-ending search for order and reason.
Anti-Apple Militia's Shifting Tactics; Attacking Apple's Cool Factor
A few years ago, I coined the phrase “anti-Apple militia” to describe the disjointed and incoherent group of SAI commenters that were not happy with Apple’s growing success. As Apple’s increasing dominance became clearer, the anti-Apple militia would desperately think of a new plan of attack, often shifting themes within weeks. Some of my favorites were:
1) iPhone 3GS will flop because it looks just like iPhone 3G.
2) Palm Pre will crush the iPhone.
3) People don’t want a curated Apple App Store.
4) Android will crush Apple in the U.S.
5) iPad will flop because it’s just an oversized iPhone.
6) No one is buying iPhone 4 because of Antennagate.
7) No one is buying iPhone 4S because it looks like an iPhone 4.
8) No one is buying iPhone 5 because of Maps.
Recently, I’ve seen the anti-Apple militia shift tactics and instead of attacking a specific iPhone or iPad feature, the detractors are going after the intangible; Apple’s popularity and coolness. Many anti-Apple comments are falling under the same genres, including:
"My daughter says all of her classmates are switching to Samsung and Windows phones. iPhones just aren’t cool anymore.”
"Has anyone gone to an Apple store lately? They are empty and the only people I see are older folks. Meanwhile, Microsoft stores are packed with kids. So crowded."
"I was at the market yesterday, and some kid came up to me and couldn’t stop asking about my kick-ass Samsung phone. Youth just aren’t interested in the Phone anymore."
I think one of the main catalysts for this new attack campaign was Samsung’s ads that mocked people waiting in-line for the iPhone 5, including the scene of a son holding a spot in line for his parents. Samsung is going after one of Apple’s largest competitive advantages: it’s coolness. I look at these shifting attack tactics as desperation. If using the battlefield analogy, Samsung and the anti-Apple militia are firing all remaining ammunition in the general direction of the enemy hoping something will stop the advance.
In reality:
1) Kids can’t get enough of iPhones and iPads (literally - parents are often not willing to buy new iPhones for their children until at least 8-9th grade).
2) College students continue to embrace Apple products at an alarming rate.
3) Apple stores are more packed now than ever, with some complaining about how loud the stores have become. Will the anti-Apple militia soon proclaim “no one goes to Apple stores because they’re too loud”?
4) Despite much broader product roll-outs, including massive pre-order allotments, people are still lining up for new Apple products.
Apple competitors see the writing on the wall. Not only is Apple continuing to broaden its reach across the world, including advances into enterprise and education, but it’s coolness factor is actually expanding. As for the surveys and guesstimates showing Apple’s market share is getting trounced in China and markets where Apple has a weaker presence; a true battle is one where both sides are present.
Quick Thoughts on Apple's Earnings
Apple reported another weak earnings report. Even though Apple plays the expectations game, I see no reason to spend time hating those involved in creating the game. Apple’s quarterly reports contain a lot of information, most of which is more suitable for tweets and random musings. I will leave all of the growth rates and other metrics to others and instead focus on the big picture.
Apple is still in the beginning of a massive capital investment phase (which has been detailed in 10Q and 10K filings). In the span of four weeks, Apple updated practically its entire product line. Few were expecting such widespread updates. While the iPhone 5 was the worst kept secret, as well as the rumored iPad mini, Apple surprised us with new iPods, new Macs, and a new iPad with Retina display. All of these updates are taking a toll on the company in terms of upfront costs, hurting margins. The first iPhone 5 produced is more expensive than the Xth iPhone 5 produced next year. The same can be said for every updated Apple product.
When thinking of massive capital investment plans, Disney comes to mind. As the U.S. economy was collapsing in 2008, Disney’s management team, which I regard as one of the most talented teams in this global economy, placed the bet that it was the right time to increase capital spend and make needed improvements to its Parks division. The stock market hated the idea (due to the unknown involved), but management stayed the course. Fast forward to 2012, Disney’s Parks margins are only now beginning to increase as guests enjoy the final product. Disney is now able to turn on the earnings faucet and reap the rewards.
I think Apple is following a similar path.
Once Apple perfects the processes required to make all of these new iGadgets, the costs will come down and margins will rise. The iPhone 5 form factor will most likely stay around for the new iPhone in 2013, helping margins. The iPad lineup will probably not see any additional revisions until next fall (when I expect a thinner and lighter iPad with Retina display). Constrained supplies will dissipate and the Apple earnings faucet will be operational once again. Additional implications include the high likelihood of no new Apple products until at least WWDC in June 2013, as well as continued lumpy quarterly earnings. Competition and component availability may also change product plans. In terms of modeling, I think Apple is becoming harder to forecast. I am afraid many independent (and professional) analysts will continue to forecast near-term earnings incorrectly as the number of input assumptions increase. Finally, I have been very public about my concern that product cycles were becoming too planned and orderly (i.e. iPad in March, iPhone in the fall), which artificially impacts demand as customers alter purchasing habits, but all of this is more noise than anything else, and these patterns eventually end.
It doesn’t matter if Apple is a few dollars short of expected 1Q13 earnings or if iPad mini margins are a few 100 basis points lower than normal. Such details change from quarter to quarter. At the end of the day, Apple’s most important goal is making great products. Everything else is mostly noise.
Tackling the AAPL Unknown
Humans hate the unknown. Some look towards charts and tables, while others simply create stories to turn the unknown into easy to understand answers.
Apple is currently facing the following questions (I suppose you can say its my attempt at tackling the unknown):
1) Is iPhone growth slowing? Maybe. We don’t know. iPhone 5 supply/demand is not in equilibrium. Apple is currently selling every iPhone 5 it can produce. After reporting 81% annual iPhone unit sales growth in 2011, Apple is tracking towards 70% growth in 2012. Will growth continue to decline or can the iPhone 5 stem the inevitable for a few more quarters?
2) How should we think about iPad? I’m left somewhat confused following Apple’s iPad event. Heading into today, my gut was telling me the iPad (3) was not selling too well compared to the iPad 2 - a sign that consumers’ needs were being met with a cheaper, lower quality iPad. I also assumed an iPad mini would be positioned as a content consumption device to the iPad 2 and 3.
Instead, Apple revised the iPad (4), kept the iPad 2 alive (seemingly to float in no man’s land), and unveiled an iPad mini that by all measures is as capable as a full-size iPad and just as worthy as its larger, and more expensive, siblings. Will iPad’s ASP continue to decline? Where are margins heading? Are consumers’ technology needs being met by iPad? Questions are certainly outnumbering answers.
3) Will Apple introduce new product categories? Maybe. We don’t know. We can assume that Apple has plenty of new stuff cooking in the labs, but we have few concrete details on anything. Will 2013 be the year of the next “big thing”?
4) Is the economy impacting Apple? Maybe. We don’t know. Apple was able to survive the financial crisis of 2008-2009 without much damage, however Apple was a much smaller company at that time appealing to a more niche audience. Are consumers delaying technology purchases due to economic pressures? Apple continues to have supply issues, but once demand/supply equilibrium is met, sales are increasingly disappointing as product cycles appear to be accelerating.
Now compare today’s unknown with the “AAPL story” of early 2012:
1) The iPad (3) was widely expected to be introduced and replace the iPad 2 as the top-selling iPad.
2) The iPhone 4S was selling well and the iPhone 5 was widely believed to be in the works.
3) Overall product margins were making new highs and expected to continue.
4) Management announced a dividend initiation (which may have included some front-running by AAPL shareholders).
AAPL observers had a much easier time turning the unknown facing Apple from January to April into a convenient and easy to understand story. AAPL stock also went up 50% during the same time period. Are the two related? Does a stock go up or down due to a specific reason or is that another example of humans trying to cope with the unknown?
Apple’s unknown will eventually be packaged into a clean story. It may take a day, week, month, or year, but it will happen because humans hate the unknown.
AAPL 4Q12 Estimate
Revenue: $36.2 billion (AAPL guidance: $34.0 billion/Consensus: $36.2 billion)
- I expect iPad and iPhone to represent approximately 69% of Apple’s quarterly revenue.
GM: 40.8% (AAPL guidance: 38.5%/Consensus: 40.4%)
- Apple’s margin will likely decline sequentially from 3Q12 due to the iPhone 5 and continued iPad 2 sales. A key question facing AAPL in the near-term is the margin run rate. In 2011, Apple reported a 40.5% gross margin, which increased to approximately 44% in 2012. Looking at 2013, I expect margins to decline a few hundred basis points to 42% related to the iPad mini and ongoing costs related to the iPhone’s new form factor.
EPS: $8.95 (AAPL guidance: $7.65/Consensus: $8.85)
- I expect Apple to report 27% yoy EPS growth. Interestingly, my $8.95 estimate is close to the Street’s $8.85 average, with 17 analysts projecting EPS higher than my $8.95. I attribute my low estimate to weaker iPhone sales, a lower iPhone average selling price (ASP), and a lower overall margin.
Product Unit Sales and Commentary
Macs: 5.5 million (12% yoy growth)
- Mac growth is slowing as tablets and smartphones satisfy many consumers’ computing needs. I expect double-digit growth in portables, driven by back-to-school purchases, to be partially offset by a modest decline in desktop sales due to stale models.
iPad: 18.4 million (65% yoy growth)
- I expect Apple to report record iPad sales for 4Q12. My iPad estimate assumes approximately 1.5 million iPads sold per week (including iPad 2 sales), which compares to the approximate 1.4 million weekly run rate last quarter. Supply/demand is in balance. Anecdotally, iPad 2 sales in education and business appear robust following the price cut, while lower component and manufacturing pricing should help limit drastic margin compression.
iPod: 6.1 million (8% yoy decline)
iPhone: 24.8 million (45% yoy growth)
- My estimate reflects 7 million iPhone 5 units and approximately 18 million iPhone 4S units (and to a lesser extent iPhone 4 and 3GS). Apple is currently suffering from a supply/demand imbalance for iPhone 5, which will limit sales in the near-term (including 1Q13). Other unknowns include the iPhone 4S sales run-rate prior to the iPhone 5 introduction and iPhone 4S popularity following the price drop. My 18 million iPhone 4S estimate reflects the impact from consumers delaying iPhone purchases ahead of the iPhone 5 release. I am including a declining ASP due to robust iPhone 4S sales following the price drop (an observation partially derived from Verizon’s earnings which showed strong non-iPhone 5 sales, which I attribute to the price drop).
When Apple releases earnings on October 25, investors will focus on product ASPs and margin. Publicized iPhone 5 supply shortages and iPad mini rumors should go a long way in explaining any moderate misses in iPhone and iPad unit sales, respectively. Nevertheless, any evidence of continued margin weakness and declining ASP in iPad and iPhone may push observers to reduce forward earnings, which have a high sensitivity to margins. A 100 basis point change in margin corresponds to a 3% change in Apple quarterly EPS.
iPad Invading Enterprise. Re: Urban Outfitters
Urban Outfitters, a clothing retailer with $2.5 billion in annual sales, held an analyst/investor day on September 27 and to say that iPad and Apple played a minor role would be an understatement. Management outlined how iPad is increasing customer satisfaction, in addition to improving Urban Outfitters’ efficiency and financial performance. I found the presentation quite revealing and helpful in trying to understand, straight from the source, one example of how iPad is invading enterprise.
All quotes are attributed to Calvin Hollinger (Chief Information Officer), unless noted otherwise.
Two years ago, we deployed iPad point-of-sale into all the stores. An iPad point-of-sale is pretty much — it looks like your iPhone. It has a little case around it. You can scan bar codes. You can swipe the credit card, and it does everything that a normal point-of-sale system does, except you can’t take cash obviously. We don’t have a debit device. You can’t take debit transactions, and you can’t take checks. But it does everything else that a point-of-sale device can do.
When we deployed it, again, two years ago, it was very well received by our customers. There’s a very personal interaction between a sales associate and the customer. It was well received by sales associates. They had fun having a customer sign their signature with their thumb. And it was especially well received by Frank Conforti, our CFO, because this device, fully loaded, fully installed, is about $500 and register is about $5,000. So it also made financial sense.
Not only are iPads improving customer satisfaction (which is an important piece of brick and mortar retailing), but Urban Outfitters is saving money by moving to mobile point of sale. What is a drawback? An iPad can’t physically hold cash. As more customers move away from cash and towards other forms of payments, this “drawback” will become less relevant and judging from how cash is handled in Apple stores (hidden cash drawers), a cash-paying customer can still have a carefree transaction with mobile point of sale.
And in fact, we told the stores, “Give us back your fixed register that we can refurbish and use somewhere else. Give us back one register, we’ll give you five of these devices.” I don’t have the exact numbers. John [ph], you can correct me. Between the brands, I think we’ll be sending about 1,100 of these devices for peak of this year.
Compared to the millions of iPads Apple sells each quarter, 1,100 iPads are drop in the bucket. However, more importantly, Urban Outfitters is planning on replacing every cash register with five iPads, expanding iPad’s usage and relevancy within each store.
Richard Hayne - Co-Founder, Chairman of the Board of Directors, CEO, and President:
Right now our store associates can better service our customers by selling merchandise from the web inventory using an iPad in stores. This is a very impactful thing that we have rolled out this year, and it’s been incredible for us. And vice versa, the web can now sell merchandise that’s from our stores, so customers can be shipped items from their local store, which is resulting in fewer broken sales in the web, better use of slow turn merchandise in the stores and faster delivery times for the customer. So all in all, a happier customer.
Helping customers while improving business fundamentals, all the while saving cash - hard to say no to that proposition. The ability to seamlessly sell web inventory in a physical store is a big deal as the retailer is able to save in inventory costs, while not losing a potential sale. Anecdotally, I have heard the ability to order different clothing sizes, colors, and styles from the web (after first trying on in-store) is a big deal.
The iPad is a very, very powerful device. So in addition to being a register, we can download a lot of content down to the stores, maybe training videos, maybe, Hey, this product sells or this product, the whole market buys it, all the reports, sales reports, a lot of information because it’s a very, very powerful device, and it’s very, very easy to use. A big screen, very, very intuitive.
That’s a lot of verys. Not only will Urban Outfitters use the iPad as a point of sale, but it will truly transform the way business is done at the brick and mortar retailer.
Now although this is a mobile device, iPad is a mobile device, we have to set up with the pilots to have it on a swivel arm, so it’s very clean. If it’s not in use, you can take the swivel arm and put the iPad away and you can use this as a packing space or maybe to display more items to sell, et cetera. And then from a customer’s point of view, here’s the customer, return the iPad to the customer, she’s confirming her shipping address. We could also use it to — well, and used to be, for example, a gift registry. A very, very powerful device.
Gift registry. Yet another use for iPad.
2 or 3 weeks ago, we placed our very last register order. We’re out the register business. Going forward, we had placed the orders. We’ve got some new stores coming up. But once we successfully make sure this iPad works in all the stores, all stores will be designed and equipped with iPod Touches and iPads. And Frank is, again, happy, because the iPad is $1,000 fully installed versus $5,000. But all our stores going forward will have iPads and iTouches.
Regardless of a fully installed iPad’s cost - ranging from $500 to $1000, the price pales in comparison to a cash register’s $5,000 price tag.
Similar stories and case studies of iPad being used in enterprise are occurring in a range of industries and companies as iPad’s disruptive capabilities are becoming more valuable. iPad’s invasion into enterprise is only getting started. A full transcript of management’s presentation can be found here.
AAPL 3Q12 Estimate
Revenue: $41.3 billion (AAPL guidance: $34.0 billion/Consensus: $37.4 billion)
- I expect iPad and iPhone to represent approximately 75% of Apple’s quarterly revenue.
GM: 45.5% (AAPL guidance: 41.5%/Consensus: 43.3%)
- Apple’s margin jumped to 47.4% last quarter, from 40.5% in 2011. Weaker iPhone sales should serve as a headwind for sequential quarterly GM expansion in 3Q12, although attractive component pricing will continue to provide support for yoy improvement (Apple reported 41.7% margin in 3Q11).
EPS: $12.30 (AAPL guidance: $8.68/Consensus: $10.34)
- I expect Apple to report 58% yoy EPS growth.
Product Unit Sales and Commentary
Macs: 4.7 million (19% yoy growth)
- I expect Mac shipments to show continued strong yoy growth following updates to the laptop lineup at WWDC. Pent-up demand and early back-to-school purchases should help offset MacBook Pro with Retina display shortages.
iPad: 21.3 million (130% yoy growth)
- Apple will report record iPad sales for 3Q12. My iPad estimate assumes approximately 1.8 million iPads sold per week (including iPad 2 sales), which compares to the approximate 1.2 million weekly run rate during the last holiday quarter. Management commentary regarding continued iPad supply/demand imbalance bodes well for record iPad sales. Anecdotally, iPad 2 sales in education and business appear robust following the price cut, while lower component and manufacturing pricing should help to limit margin compression.
iPod: 6.6 million (13% yoy decline)
iPhone: 29.5 million (45% yoy growth)
- My estimate reflects an average 2.5 million weekly iPhone sales run rate. At the end of 2Q12, Apple reported 8.6 million iPhones in the channel inventory, a sequential increase of 2.6 million units. Backing out the inventory build, Apple reported an average 2.7 million weekly sales run rate last quarter. With supply/demand in balance and rumors of the new iPhone building, I expect the weekly sales run rate to decline into the fall.
When Apple releases earnings on July 24, iPad and iPhone sales, along with reported margin, will represent investor’s primary focal points. Apple’s prior commentary foreshadows a strong iPad quarter, surpassing the 15.3 million units sold in 1Q12. Any iPad sales number solidly above 17-19 million units will be looked at positively by the Street. With iPhone supply/demand having been in equilibrium for some time, Apple will not benefit from any significant inventory build this quarter, although carrier and country distribution expansion will result in solid yoy growth. Sell-side iPhone sales estimates have been set at somewhat realistic levels and one should not be surprised with sales between 25-30 million units, although iPhone sales estimates become somewhat irrelevant as we get closer to the new iPhone launch.
Siri's Been Busy
"Customers love [Siri]. It’s one of the most popular features of our most popular phone. But there’s more that it can do. And we have a lot of people working on this. And I think you’ll be really pleased with some of the things that you’ll see in the coming months…we’ve got some cool ideas about what Siri can do...[w]e’re doubling down on it.” - Tim Cook at D10
13 Days later:
Siri introduces WWDC
Siri learns sports
Siri learns restaurants
Siri learns movies
Siri learns how to launch apps
Siri learns more languages
Siri learns how to tweet
Siri learns how to Facebook
Siri learns how to help you on your iPad
Siri learns on how to accompany you in your car
Siri’s been busy.
AAPL 2Q12 Estimate
- I expect iPad and iPhone to represent approximately 75% of Apple’s quarterly revenue.
GM: 42.9% (AAPL guidance: 42%/Consensus: 42.7%)
- Apple’s margin jumped to 44.7% last quarter, from 40.5% in 2011. Continued strong iPhone sales should benefit overall GM in 2Q12, with attractive component pricing providing additional support.
EPS: $11.45 (AAPL guidance: $8.50/Consensus: $9.81)
- I expect Apple to report 79% yoy EPS growth, which is slightly less than the 83% yoy EPS growth observed in 2011.
Product Unit Sales and Commentary
Macs: 4.3 million (14% yoy growth)
- With no Mac updates during the quarter, I expect Mac shipments to show continued yoy growth, albeit at a slower pace than 1Q12. iPad cannibalization is also picking up as consumers bypass Macs for lower-priced iPads.
iPad: 12.0 million (155% yoy growth)
- Apple sold three million new iPads during opening weekend (includes pre-orders that shipped for the 12 days leading up to the March 16 launch, but not iPad 2 sales). My iPad estimate is primarily based on weekly sales run rates, using Apple’s new iPad opening weekend sales as a benchmark between slower iPad sales in January and February and the supply/demand imbalance at the end of March. Unlike last year’s iPad launch, Apple seemed to have a better handle with new iPad supply, as online shipment waits did not reach 2011 levels, even with a more extensive international rollout. My estimate assumes approximately 6 million new iPads sold during the last 3.5 weeks of March and an additional 6 million iPads sold in January, February, and the beginning of March.
iPod: 6.8 million (25% yoy decline)
- Representing only 2.7% of estimated 2Q12 revenue, the iPod is a footnote.
iPhone: 36.4 million (95% yoy growth)
- My estimate reflects an average 2.2 million weekly sales run rate and the addition of approximately 6 to 8 million iPhones into the distribution channel (approaching Apple’s desired 4 to 6 week range). For some perspective, Apple saw a 1.6 million weekly iPhone sales run rate during 2Q11 (pre-iPhone 4S). My 2Q12 estimate assumes 38% yoy growth in the weekly run rate, which I think is reasonable given the iPhone 4S and increased iPhone penetration at newer carriers (including Verizon and Sprint) and countries (China).
When Apple releases earnings on April 24, many will look at iPad and iPhone sales as an indicator for continued strong consumer demand. I suspect Apple may be allowed some breathing room on iPad sales given the supply/demand imbalance and trickiness surrounding a new product launch. Meanwhile, iPhone lacked any significant interferences during the quarter, with results dependent on demand, and to a lesser extent, the number of units added into the distribution channel.
Thoughts on the new iPad
Software and Hardware
Why has iPad been so successful? Intriguing software? Gorgeous hardware? After using iPad 2 for a year, my connection with the device has been formed by the seamless interaction between software and hardware. The iPad form factor seemingly disappears as I interact with iOS apps. Meanwhile, iPad competitors have focused on only one aspect of the software & hardware duplex; either shipping okay software (“okay” can be an overstatement) with mediocre hardware, or okay hardware (again, I am being generous) with buggy software. The new iPad’s improved hardware features, along with new apps, combine to form a package that can appear to be “magical” to the user.
Motorola RAZR Syndrome
One of the bigger risks Apple faces is the “Motorola RAZR Syndrome”, or reliance on your current success at the detriment of your future success. After three generations of iPads, it is clear that Apple understands its biggest competitor is Apple. The new iPad’s biggest competition will come from iPad 2, while the original iPad was iPad’s 2 biggest competitor. Even though the original iPad sold well, Apple continued to push the envelope with iPad 2, and now the same can be said with the new iPad. Cameras, a Retina display, faster guts, amazing software, improved battery life, and 4G LTE, all at the same $499 entry-level price point.
iPad 2 Price Drop
Although Apple devoted only a brief minute to iPad 2’s new $399 price, consumers will give the $100 price drop much more attention. For many, price remains king. While $399 is still a lot of money, consumers are starting to compare iPad to regular laptops, in which the $399 price tag doesn’t look nearly as steep. Similar to the iPhone 3GS and iPhone 4 being bought by former feature phone owners, the iPad 2 will continue to sell well as laptop owners look at iPad for the first time.
More iPads in the Wild?
Up to now the iPad had been looked at as largely an “inside the home” device, confined to the living or play room. With the original iPad not having any cameras, using an iPad at a social event, such as a family occasion, picnic, or concert, was questionable. Apple’s new video and picture software (and improved cameras) will give people a greater incentive to bring iPad to different gatherings and events. While iPad is still no where near as convenient to transport as iPhone, it is easier to transport than any other computing device. As more iPads find their way into the wild, a whole new marketing realm will kick in. While advertisements can be effective, seeing friends or family enjoy their iPad outside the confines of their home represents a brand new marketing angle.
Jony Ive and New Product Form Factors
The new iPad’s form factor has subtle differences from iPad 2 (the minor variances might even be hard for a normal consumer to see or feel). While Apple’s SVP of Industrial Design, Jony Ive, is intimately involved in any form factor change, no matter how minuscule, my gut tells me we might see some interesting new form factors for most, if not all, of Apple’s product lines over the next year. I think this is what Tim Cook hinted at at the end of the new iPad’s unveiling when he said, “Across the year, you’re going to see a lot more of this kind of innovation. We are just getting started.” What is the point of changing form factors that seemingly don’t need to be fixed? How much can you change a phone or tablet form factor? Apple doesn’t settle. New product form designs will focus on greater functionality and feasibility, all while keeping design at the forefront. Dimension barriers will be dismantled. A new round of product design and manufacturing innovation is on the horizon and Jony is guiding the ship.