Tim Cook. The Architect.

While some have responded to Steve’s resignation as Apple CEO by recalling personal stories involving Steve or Apple, others have focused on how Apple’s culture will handle a different leader.  Let’s take a step back and reassess Apple’s current situation. 

Current Products

I have extreme confidence that Apple will successfully update its flagship products in the near-term. As I previously wrote, Apple’s start-up structure assures resources are allocated to a product in the months leading up to a refresh; breaking down the “walls” between executives and workers - the same walls that often destroy other technology companies. Having executives involved in seemingly detailed and mundane aspects of a product is the difference between having a product be “magical” or “good”. Tim Cook will continue to hash out aggressive business contracts with Apple friends and foes. Apple’s expanding supply and distribution channels will continue to be run with the dedication and intelligence that have put competitors to shame. As a prime example of how much confidence I have in Apple’s ability to execute in the near-term, I have no intention in lowering my forecasts for Mac, iPod, iPhone, or iPad sales in my AAPL earnings model following Steve’s resignation. 

Future Products 

Apple will continue to innovate and brainstorm ideas that will change the world.  While it is difficult to pinpoint why the iPod, iPhone, and iPad have been so successful, it is important for Apple to continue to make similar industry-changing strides.  I think this is where Apple will face its first significant challenge with Steve no longer at the helm.  What makes Apple so great is its willingness to take abnormally large risks and essentially bet the farm on those risks.  Apple is able to translate a big idea (big bet) into reality with very little friction and inefficiency. The biggest risk enters the equation on the demand side - whether consumers want the product. Steve made bets. Big ones. Will Tim be able, or willing, to take similar big risks?

At this time, I do think Tim is capable of such responsibility.  Tim isn’t some young gun who has been thrown into the game. Observing how the world has changed (and where it will go) is an art not a science, and while Steve mastered that art so successfully, Tim was in a perfect position to watch the master perfect his art, giving him a  significant  advantage over everyone else in Silicon Valley.  Apple will lose on some bets, but will still be able to strive to new heights if more is wagered on winning bets. 

Face of Apple

Apple is Steve and Steve is Apple and that will not change. However, there is now a debate as to who will become the new face of Apple or if Apple even needs a singular public representative given Apple’s size and power.  I do think the entire Apple executive team will gain more exposure with some SVPs acquiring new affiliations with consumers. Forstall as Mr. iPhone and iPad,  Jony as Mr. Apple Design, Schiller as Mr. Apple Brand,  while Tim remains the “Big Dad”.  Great brands create emotional connections between users and products.  People will want to connect with Apple and its leadership in new ways. When Apple is ready to unveil its next big thing, we will most likely have a few members of the Apple team explain why the world needs this new product, whereas up to now, only Steve has had the honor. 

AAPL

Concerning financials and other AAPL stock decisions, I would expect no significant changes or speed bumps with Tim as CEO.  In addition, an internal CEO promotion often results in minimal changes to prevailing capital philosophies concerning dividends and share buybacks.  

The Architect

At the end of the day, Steve built the foundation for a magnificent castle and Tim is a great architect. As I wrote back in December: "As long as most of the risk variables are monitored and marginalized to a certain extent by upper management (and Steve  Tim) - the consumer is left as the biggest risks. Apple can then rely on its brand power to turn the odds in its favor.”

AAPL Orchard's AAPL 4Q11 Estimate

Overall Quarter Metrics

Revenue: $32.0 billion (AAPL guidance: $25 billion/Wall Street consensus: $28.6 billion) 

I expect iPad and iPhone to represent nearly 70% of Apple’s quarterly revenue. Remarkable.

GM: 40.9%  (AAPL guidance: 38%/Wall Street consensus: 39.3%)

Apple’s margin in 2011 has ranged from 38.5% to 41.7%.  Management explained the 41.7% margin experienced in 3Q11 included some one-time warranty benefits and guidance of 38% for 4Q11 is primarily driven by the product mix. I don’t buy it. I don’t see many reasons for Apple’s margin to set a new low for 2011 in 4Q due to more iPhones (mostly iPhone 4 and 3GS) and iPads being sold.  I expect attractive component pricing trends will offset any modest impact from back-to-school promotions (Macs and certain iPods are discounted). Timing issues surrounding the next iPhone may very well push margin pressure out to 1Q12.  I would expect more bullish estimates to have GM closer to 41.5%. 

EPS: $8.45  (AAPL guidance: $5.50/Wall Street consensus: $6.95) 

I expect Apple to report 82% yoy earnings growth. While 82% growth is down from 122% yoy growth seen in 3Q11, I would not make much of this decline. Most of the difference is related to the ramp up in iPhone unit sales in 2010. 

Product Unit Sales and Commentary

Macs: 4.7 million (22% yoy growth)

I expect MacBook Air and Mac mini updates to contribute to another solid Mac quarter. Apple will continue to take market share from Windows (early stages of 5-10+ year trend). As the PC market struggles to grow (thanks in part to the proliferation of smartphones and iPad), I view Mac growth greater than a range of 10%-15% as very respectable. 

iPad: 11.1 million (165% yoy growth)

With iPad supply/demand still out of balance in a number of countries, I expect Apple to continue to expand the iPad channel during the quarter. While it remains to be seen if back-to-school purchases will include iPad, I don’t see many hiccups to stellar iPad demand during 4Q.  Rumors of a possible iPad Pro have been very sporadic and I don’t expect such rumors to impact mainstream consumer purchasing habits. As seen with 3Q iPad growth of 183%, Apple has expanded iPad production nicely and is capable of greater than 100% year-over-year unit shipment growth. 

iPod: 7.2 million (20% yoy decline)

I expect strong iPod touch sales to be offset by the continued decline in Apple’s other iPod models.  Going by historical trends, Apple will refresh the iPod line up near  the end of 4Q11, possibly at the same time as the expected iPhone refresh. I would not necessarily expect a large move in iPod shipments one way or another because of this refresh event, unless Apple moves forward with a plan for a low cost iPhone that includes changes to the iPod touch. 

iPhone: 23.3 million (65% yoy growth)

I expect Apple to unveil the new iPhone in September.  Traditionally, I would include a significant supply drawdown of the old iPhone model, followed by a slow ramp up of the new iPhone model to go along with an iPhone refresh, but last quarter’s amazing iPhone sales lead me to believe Apple will continue to post sequential quarterly iPhone unit growth. I expect Apple will continue to sell iPhone 4 (and possibly iPhone 3GS) into 2012, therefore I am not expecting a significant drawdown in iPhone shipments in the weeks leading up to the iPhone refresh as iPhone 4 roll-out continues to new carriers and countries. Additionally, I would expect pent-up iPhone (4s or 5) demand will continue to grow during the quarter. Similar to the iPad 2 supply debacle, I expect the next iPhone to experience the same craziness and supply shortages in its first few months of sale, which will only help Apple’s 1Q12 iPhone numbers.

Similar to other sell-side analysts, I will most likely be revisiting my estimates following the end of the quarter. At this point, I would attribute any significant differences to my EPS estimate to differences in iPhone unit shipments. Questions can be addressed to me through twitter. 

Apple CEO Succession 101

Daring Fireball’s thoughts on Apple’s CEO succession:  click here.

My thoughts?

Issues like Apple CEO succession show how little people understand Apple. 

This is Apple’s next CEO: Tim Cook

From Apple:

"Cook is responsible for all of the company’s worldwide sales and operations, including end-to-end management of Apple’s supply chain, sales activities, and service and support in all markets and countries. He also heads Apple’s Macintosh division and plays a key role in the continued development of strategic reseller and supplier relationships, ensuring flexibility in response to an increasingly demanding marketplace."

This is Apple’s backup CEO:  Jeff Williams

From Apple: 

"Jeff Williams is Apple’s senior vice president of Operations, reporting to COO Tim Cook. Jeff leads a team of people around the world responsible for end-to-end supply chain management and dedicated to ensuring that Apple products meet the highest standards of quality.

Jeff joined Apple in 1998 as head of worldwide procurement and in 2004 he was named vice president of Operations. In 2007, Jeff played a significant role in Apple’s entry into the mobile phone market with the launch of the iPhone, and he has led worldwide operations for iPod and iPhone since that time.”

I have my reasons supporting this Apple CEO succession hypothesis. Stay tuned to AAPL Orchard for more commentary on this issue in the future. 

I publish a daily email about Apple called AAPL Orchard. Click here for more information and to subscribe. 

A New AAPL Era

Apple reported its most recent quarterly earnings this evening.  Impressive would be an understatement.  

Here are some talking points:

1) Emerging Market Growth.  Skewed perspective is making it hard to understand how fast Apple is growing. Many tech analysts are situated in developed countries and economies where the Apple brand is well established, and accordingly have a harder time conceptualizing how Apple can maintain dramatic growth rates.  The combination of rising standards of living and the increasing availability of lower-priced Apple products is a new trend for emerging markets, and it is reasonable to expect this scenario to drive Apple’s growth in the future. 

2) Product Line Diversification. Similar to the iPod, we are seeing the emergence of the iPhone product line: a series of iPhones with a sliding scale of features and capabilities. By the end of 2011, iPhone 3GS, iPhone 4, and iPhone (4S or 5) will most likely round out Apple’s iPhone line. Importantly, each iPhone utilizes iOS apps and has access to the iTunes store.  I see the same trend happening with the iPad in due time; multiple versions sold simultaneous at different price points.  Apple will rely on this product line diversification to cater to different market segments using price as a key differentiator. Emerging markets will have iPhone 3GS, mainstream will be content with iPhone 4, and early adopters will go crazy over iPhone (4s or 5).  In addition, Apple’s overall margin benefits from the continued sale of “older” products as component pricing generally declines over time.  

3) Big Losers and Winners.  Apple management was very clear on the earnings conference call: iPads are eating away at Windows PC sales and iPhone continues to grow like a wild weed.  Companies focused on selling consumer hardware (Dell, HP, RIMM, Motorola, and Samsung) are in a very difficult position as each is starting to understand that having good software is just as important as selling sexy hardware. Big winners (besides Apple) include companies who luckily aren’t competing in the consumer market, and are instead focusing on selling enterprise services or infrastructure needed to foster commerce and further innovation (IBM and Oracle come to mind).  It is no coincidence that Dell, HP, RIMM, Motorola, and Samsung have indicated (or will indicate) an interest in entering the enterprise services market. 

Random Bytes:

-) Look for Android activation numbers to become less relevant as time goes on. I have this growing feeling that Google is nervous that Android is becoming nothing more than a large void, taking up mobile space, and is relying on activation numbers to impress app developers to dedicate resources to the platform. It’s not working. iOS reached critical mass a few quarters ago and Android will not stop iOS momentum. 

-) While I will keep AAPL stock thoughts to myself (at this time), it is important to remember that the large institutional holders control Apple stock and many of these entities are not interested in quick 5-10% stock moves, but instead the attractiveness of AAPL 5-10 years out.  Potential AAPL dividend payout ratios, cash flows, and cash holdings will begin to matter just as much as iOS market share, iOS user statistics, or other random Apple product data points.  The big boys will continue to support AAPL as long as they feel confident they will receive an annual return that beats other asset classes (fixed income, real estate, etc.) over an extended period of time.