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. 

Great Use for Apple's Cash

 City                Urban Core Population    # of Apple Stores 

Shanghai, China          9,495,701                           2 

Beijing, China              7,296,962                           2

Hong Kong, China       6,780,000                           0

Tianjin, China              5,066,129                           0

Wuhan, China              4,488,892                           0

Guangzhou, China       4,154,808                           0

Shenyang, China          3,981,023                           0

Chongqing, China       3,934,239                            0

Nanjing, China            2,822,117                            0

Fuzhou, China             2,710,000                            0

Harbin, China              2,672,069                            0

Xi’an, China                 2,588,987                            0

Chengdu, China           2,341,203                            0

Changchun, China       2,223,170                            0

Dalian, China               2,118,087                            0

Hangzhou, China         1,932,612                            0

Jinan, China                 1,917,204                            0

Taiyuan, China             1,905,403                            0

Qingdao, China            1,867,365                            0

Zhengzhou, China        1,688,681                            0

Shijiazhuang, China      1,632,271                           0

Kunming, China            1,549,593                           0

 Lanzhou, China            1,527,383                           0

Zibo, China                   1,514,070                           0

Changsha, China          1,489,259                            0

Nanchang, China          1,386,454                            0

Urumqi, China              1,358,986                            0

Guiyang, China             1,341,243                            0

Anshan, China              1,287,136                            0

 Tangshan, China          1,279,226                            0

Wuxi, China                  1,245,129                            0

Jilin City, China             1,244,725                            0

Fushun, China              1,244,144                            0

Suzhou, China              1,170,618                            0

Baotou, China               1,146,506                            0

Qiqihar, China              1,125,948                            0

Xuzhou, China              1,120,534                            0

Hefei, China                  1,107,143                            0

Handan, China              1,069,146                            0

Shenzhen, China           1,058,531                            0

Luoyang, China             1,043,243                            0

Nanning, China             1,016,013                            0

West Des Moines, Iowa       46,403                            1

 Newark, Delaware              28,547                            1

Leawood, Kansas                27,656                            1

Tukwila, Washington           17,392                           1

Buford, Georgia                  10,668                            1

Emeryville, California            9,859                            1

Apple expects to utilize $650 million for retail store facilities in 2011, opening 40 new stores worldwide, 70% to be located outside the U.S.

And people wonder what Apple will spend its cash on…

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. 

Facebook Gets It

While Facebook’s presentation skills were lacking during today’s new features event, I thought there were some interesting tidbits that came out of Zuckerberg’s ramblings. 

1) Facebook gets it.  Over the past few years, Facebook has unveiled incremental design changes and new features, which by themselves aren’t earth-shaking, but collectively have served to move the platform forward and give Facebook the freshness users demand. Doesn’t this strategy sound familiar?  I was also pleased to hear Facebook’s goal to make the Skype integration and video calling “stupidly easy”. As seen with Apple’s current success, if your business is built around scale, new features and products must be easy enough to use that even people who don’t like dealing with technology will have a blast using your product. Facebook gets it. 

2) Facebook wants to redefine how we use the web. Zuckerberg is a believer of apps and while a ton of people at Apple HQ agree with him that apps are the way to go over the next 3-5 years, Zuckerberg wants those apps to run on the Facebook OS, whereas Apple wants to keep the curated app garden on Apple soil.  While Facebook’s primary goal has been to increase its user base (and I suspect this will remain a top priority until 1-1.5 billion people are on Facebook), eventually Facebook will shift its attention on third party apps and webpage connectivity (and I am not just talking about Zynga games). Down the road, the Facebook OS can be expanded outward, with the help of mobile devices, so that Facebook serves as a bridge between our daily lives and our always changing social network (re: how your social network may impact the way you perform mundane chores around town, shop for birthday gifts, or even get a new haircut). We will look at the web in a much different light.

3) I doubt Facebook cares about competitive pressures from Google+ (if there are any), Twitter, or any other social networking platform. Facebook’s biggest competitor isn’t another company, but instead user’s quest for privacy. Facebook’s success depends on people sharing information, privacy be damned.  Twitter and other social features are helping people get use to the idea of sharing ideas and thoughts.  If Google+ catches on in some way or form, Facebook would hope users will become only more willing to loosen their privacy setting because “everyone else is doing it”, or “it’s becoming the norm”.  Only a few years ago, it was taboo to have a public Facebook profile due to concerns over employers or family peeking into one’s life. Now its common to share mundane photos or interesting posts from the web with strangers.  As time goes on, people will continue to lower their privacy walls and not even realize it. 

Facebook is quietly hovering over its targets, not yet ready to attack. Showing little outward aggression and more secrecy and obscurity than clarity and straight forwardness, Facebook is content with expanding its reach and building its army. Eventually, the time will come for Facebook to attack with its foot soldiers being you and me (assuming you are on Facebook).  With a current valuation in the neighborhood of $50-$75 billion, investors are betting Facebook has its sights on quite the large battle.