AAPL 4Q13 Preview; Expect a Beat

Revenue: $37.6 billion (AAPL guidance: high end of $34-37 billion range/Consensus: $36.8 billion)

  • I expect Apple’s revenue to increase 4% year-over-year.
Gross Margin: 37.1% (AAPL guidance: high end of 36-37% range/Consensus: 36.9%)
  • I expect Apple’s margin to increase sequentially to 37.1% from 36.9% last quarter, reflecting a modest boost from the newest iPhones. Management’s margin guidance is approximately 300-400 basis points less than the 40.0% margin reported in 4Q12.
EPS: $8.20 (Consensus: $7.93)
  • I expect Apple to report a 5% yoy EPS decline. I am including a 908 million share count (implying around $8 billion of buyback).

Product Unit Sales and Commentary

Macs: 4.4 million (10% yoy decline)
  • Mac sales continue to slow as tablets and smart phones satisfy many consumers’ computing needs. I assume 10% declines in both desktops and portables.
iPad: 12.4 million (12% yoy decline)
  • I expect Apple to report weak iPad sales ahead of the iPad refresh in October. With modest channel inventory fill, I expect iPad sell-through to stay somewhat consistent with 3Q13, reflecting some benefit from back to school shopping.

iPod: 3.7 million (30% yoy decline)

iPhone: 34.4 million (28% yoy growth)
  • I ordered my gold iPhone 5s online seven minutes after launch and my phone didn’t ship until September 30, two days after quarter end, so it’s clear that a large number of iPhone 5s launch sales will be pushed into 1Q14. Partially offsetting delayed 5s launch sales was solid 5c supply. My 34.4 million iPhone number assumes 13-14 million units of iPhone 5s and 5c and 20 million units of legacy iPhone (5, 4S and 4) selling at roughly the same weekly sales pace seen in 3Q13 (2.6 million).
I expect Apple to beat consensus EPS on Monday. In terms of 1Q14 guidance, I am expecting approximately $55-58 billion of revenue and 37.5-38.5% margins (which would equate to EPS of approximately $14.50, or a 5% increase from 2012, marking the first quarter with earnings growth since 4Q12). The Street is nearly complete with the Great Apple Expectations Reset of 2013. Heading into 2013, most (including myself) were thinking Apple annual EPS was running around $60. The iPad mini’s lower ASP and margin along with high-end smart phone market saturation resulted in EPS closer to $40. Expectations now appear to be closer to reality as consensus EPS for 2014 now stands at $43. I am around $41-$42, which reflects no China Mobile announcement (I will include the additional $3-$4 when the deal is announced), no change in margins (most likely conservative given the new iPhone lineup), 11% unit growth in iPhone, and 15% unit growth in iPad.

Initial Thoughts on iPhone 5s

I’ve been using my new gold iPhone 5s for a few days. Here are my initial impressions:

Size: I like the 5s, not sure I would enjoy a bigger phone. Upgrading from the 4S, it took a little bit of time to get use to the slightly farther thumb reaches required to touch the upper left corner of the 5s.  Even though the extra screen real estate is a positive, I have doubts that I would want a bigger screen than the 5s. I often find myself in one-handed use situations and I simply would not be able to use a bigger screen. If Apple is to go bigger with iPhone 6 (seems like its more than a 50/50 probability at this point), I suspect Apple will also maintain the current iPhone size, which would be noteworthy in that Apple would be maintaining and updating two different iPhone sizes. It may just finally be that time though as the smartphone market continues to mature. 

Slo-Mo: This year’s Siri.  The new slow motion camera mode will be the feature everyone is demoing at the Thanksgiving table or holiday party, just like how Siri was so much fun to show friends and family. I have taken at least 15-20 slo-mo videos so far and still can’t get enough. Of course, this fascination may very well die off in a few weeks, but by then it wouldn’t matter much since everyone I know would have seen the feature. 

Color: White is the new Black.  Up to now, it felt that the black iPhone was the unofficial default iPhone, the color you get to be like everyone else, while the white iPhone was the designated color to stand out from the crowd. I think the 5s changes that dynamic and white (sliver and gold) will become the default color, while the space grey is the color to stand out from the crowd (even though it doesn’t stand out as much as white did in previous years).  Of course, I am not taking into account case usage, which may make this a moot point, but nevertheless I think there will be quite a few gold and silver iPhones in the wild in coming months and momentum will only build. 

Touch ID: Awkward at first, but still cool.  It took me two days to get use to Touch ID, or should I say, break my habit of simply pressing the home button and then typing my passcode.  My issue dealt with pressing the home button and not leaving my finger on the button long enough for the fingerprint scanner to do its job. I also tried to show the feature to another 4S user and they had to be walked through the installation steps and even then they had trouble, so clearly Touch ID is not the easiest feature to demo to normal non-tech users, but nevertheless it’s pretty cool.  

Weight: Wow.  After a few days of using iPhone 5s, my iPhone 4S feels like a brick. It’s remarkable and incredible. Not sure much more has to be said. 

Battery: An improvement.  I’m able to get through a day of pretty constant 5s use (a few tasks per hour, all day) without a trip to find the power cord.  I wouldn’t be able to say the same with my iPhone 4S. 

Speed: Hard to see a difference with LTE; iOS 7 feels faster with 5s. LTE was one of those features Android fans mocked the 4S for not supporting. I don’t see the big deal. I often find myself on Wi-Fi with fast enough speeds to make any differences with LTE negligible. I do see a difference in terms of iOS 7, especially animations. Even though my 4S was feeling a tad sluggish with iOS 7, I don’t find myself complaining with 5s.

Free iPhoto & iMovie: Useful and fun. A few seconds after launch I was asked if I wanted to download a slew of free Apple apps, including iWork, iPhoto, and iMovie.  While many users may just play around with these apps here and there, I think they are plenty capable and will put a dent in third-party paid photo and video editing apps.  

Big Picture: Refinement is king with 5s.  When I upgraded to 4S from 3GS, the speed blew me away. Not only was the phone’s improved performance noticeable, but Siri was a pretty darn cool feature.  The 5s doesn’t have that same wow factor surrounding speed improvement, but instead the subtle refinements in terms of battery, camera, apps, and color, add up. I would have a difficult time moving back to the 4S, which is the easiest way to know that the 5s is a winner and another step forward in Apple’s iPhone refinement journey.

Twitter's Problem; Not Connecting with Mainstream Users

Twitter is going public. If you are an employee, investor, or simply a tech IPO lover, this is a very exciting time. While there is much to like about Twitter, I’m noticing a trend that is somewhat concerning; Twitter isn’t connecting with mainstream users.

Twitter had 215 million monthly active users (MAUs) as of June 30, 2013, a 44% increase from 2012. In today’s mobile world, an ecosystem with 215 million users is a very respectable number, but a 44% user growth rate isn’t superb.  In the U.S., Twitter saw only 32% year-over-year user growth to 49 million MAUs, adding just 1 million users in the second quarter. For a well established ecosystem, these numbers aren’t exactly thrilling. 

Earlier this week, one of my Facebook “friends” posted a question on her timeline, “What’s the deal with Twitter? Should I do it?” Within one hour, five people answered - all with a “no”.  Surveying my non-tech social circle, Twitter usage is abysmal.  A quick check with my high school teacher acquaintance led to an expected answer, no one at school talks about or uses Twitter.  At a recent state fair that saw upwards of 160,000 visitors on a Saturday, tweets mentioning the event numbered in the dozens. The list of anecdotal data points showing Twitter’s lack of connection with mainstream users goes on and on. 

While Twitter is proving valuable to a select group of users, the platform is not exactly hitting mainstream usage similar to how Facebook (1.1 billion users) conquered the world, or even messaging apps such as WhatsApp (300 million users) are trending.

What is going on? I suspect Twitter is not appealing to the masses in a world where Facebook made it socially acceptable to share and more intimate social apps, like Snapchat, are using their “coolness” and “ease” to flourish.  Many are confused with the concept of Twitter since the company really isn’t a classic social network, but instead an information aggregator. When a user joins, they are bombarded with suggested follows. If a user bypasses the suggested follows page, it is somewhat unclear what is the next step, especially if their current social circle is not well represented on Twitter. It takes time to find interesting channels (people, companies, concepts) worth following. Rather than being a social network where people use Twitter to update friends with actions and ideas (that’s more for Instagram and Snapchat), I think of Twitter more like an improved form of television, where a user creates a list of channels to watch or follow. Corporations, brands, and news organizations desperately want a Twitter presence to reach potential customers, further highlighting the television metaphor. The big question is if such a concept can appeal to mainstream users.

Heading into Twitter’s IPO, I suspect user growth will remain a key topic and concern among investors. While management will be judged on revenue and profit growth, including user utilization rates, I think the company faces an uphill battle with user growth as competing services continue to fight for mindshare in the maturing mobile computing era.  I see the value in Twitter, but I’m concerned that mainstream users will never give the service a chance.