AAPL 2Q12 Estimate

Revenue: $40.6 billion (AAPL guidance: $32.5 billion/Consensus: $36.0 billion) 

• 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. 

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.”

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. 

I love these vintage photos (if you can call a photo from the 1990s and the original iPhone introduction as vintage).  You should be able to name at least two people from these photos - most likely three.  If you can name all four: congrats, you are a true Apple believer.  Sometimes we forget what Apple is really about.  #TrueApple

Clue:  First photo:  H A T J   Second Photo: J H A

My Ping

Apple - this is what I want you to do with Ping:

1) Don’t make Ping into another traditional social network. I already use Facebook. I don’t need another one. 

2) Make Ping all about content discovery.  I am still having an awful time finding new music. Yes, I know you have genius playlists, but a lot of times it is just so impersonal and cold.  I just want to “follow” my favorite music artists and see what projects they are working on, or cool songs that they are recommending. (I don’t care what kind of music my friends are listening to - I use Facebook for this) 

3) Have more music artists debut new songs exclusively on Ping for a day or two.  I really enjoyed listening to the new Michael Jackson songs. It’s an excellent way to let fans listen and buy new music. 

4) Bring Ping to the iOS app store.  I want to “follow” my favorite iOS apps and app developers. Ping could be a great way for app developers to brand themselves. Imagine an app developer having a follower list of 25,000 iOS users on Ping. Talk about easy marketing.  I can already see myself following Angry Birds or Rovio Mobile and seeing what apps they recommend, if they got inspiration from other apps, or if they will be introducing Angry Birds updates. I can’t get this type of stuff from Twitter or Facebook. 

5) Please do all of this in 2011.  If you wait any longer, music artists and other content creators are only going to be strengthening their Twitter and Facebook presences. If I was a content creator, I would give iTunes and Ping (and all of those credit cards attached to Ping profiles) some attention. 

Thanks 

(P.S. Apple - I already know you are doing all of this, but just make believe I am the first one telling you)