The iPad outsold the Mac after two quarters in the market. It's important to understand the effect the iPad is having on PCs. Data is trickling in that potential notebook buyers are "postponing" purchases due to the iPad. The netbook market has witnessed a significant slowing which has trickled down to the performance of everybody in the value chain, from Microsoft, to PC vendors, Intel, AMD and retailers.
So naturally we need to ask how it has affected the Mac.
The following chart shows how the iPad has outsold the Mac the past quarter. The iPad was on the market for six months while the Mac has been for sale for 322 months--a shocking achievement.
But the Mac has not slowed down. It grew faster than the overall PC market (units grew at 27.3% and revenues grew at 22%) as it has grown for most of the past 18 quarters.
The performance is also highlighted in the following chart showing the history of the Mac units by quarter over nearly five years. The Mac had a slowdown during the recession but the dip in growth in the last quarter does not seem significant.
We expect revenue to be about $23 billion compared to $15.7 billion in the December quarter last year. We expect gross margins to be about 36%. We expect OpEx to be about $2.325 billion.
We expect OI&E to be about $65 million. And we expect the tax rate to be about 25.5%. We're targeting EPS of about $4.80.
So far Apple has sold 7.458 million iPads and there is still a quarter remaining in the calendar year. The highest forecast immediately after the launch of the product was 7 million.
For the record, in January I forecast 6 million units for calendar 2010 (and 10 million in first 12 months of sales).
All analysts polled grossly underestimated the iPad. My impression is that competitors are still in denial.
In last year's third calendar quarter earnings call (October 20, 2009) Tim Cook was asked:
“So when you go from exclusive to multiple, you don’t change the charge to the carrier?”
Cook answered: “Correct.”
In this year's third calendar quarter earnings call (October 18, 2010) Tim Cook was asked again whether the future iPhone non-exclusive subsidy will affect the iPhone revenues and again Tim Cook repeated that it won't.
Chris Whitmore - Deutsche Bank
And what is your experience then when you've gone non-exclusive from a subsidy and margin standpoint on the phone, have you had to give anything up in the past?
Tim Cook
We don't give specific information out on the margins. But I think you can look at our ASPs and see that they've generally stayed above $600, and that's despite opening up several markets from an exclusive market to a non-exclusive market.
The recurring assumption that the loss of AT&T exclusivity will cause iPhone price erosion is wrong and has been evident in the sales data for over a year now. Not only did Cook state clearly that there is one price for iPhone to the channel regardless of exclusivity but the price data shows that as Apple moved to non-exclusives in many regions of the world, the ASP remained fairly constant:
Over the period when the blue line has been flat, Apple moved a number of markets from exclusive to non-exclusive. There are three main countries where iPhones have a contractual exclusive relationship. That is the United States, Germany and Spain. (China and Japan are exclusive due to network technologies). All these markets will go to non-exclusive next year. I don't expect any change in the ASP as a result.
The final data point comes from AT&T themselves when they revealed the price they paid for the iPhone was roughly the same as the ASP shown above.
The iPad was announced to a loud chorus of disapproval and disdain. It's easy to forget the overwhelming scorn and insult poured on the product for months before and after sales start. Analyst forecasts were comical. At this time it looks like all 12 month iPad unit forecasts will have missed by more than 100% (mine included).
As data on iPad performance was published for the first quarter's sales, the mood swung from ridicule to ridiculous.
Without regard to the growth of comparable products, analysts seem to have latched on to production figures which are notoriously inaccurate. The problem with production numbers is that they are only very loosely coupled with shipment numbers to customers. There are questions of work in progress inventory, finished inventory and the actual accuracy of reports. Production also follows a ramp and is not constant over time.
Another way to analyze a new product is to think about the distribution. Although late in the quarter some large distribution deals were made public, the channel did not have much time to be filled before the end of the quarter. Not only that but there is easily obtainable evidence that the iPad did not reach most international markets. Apple announced how they were rolling out a few countries every few months.
This trickle of international sales indicated to me that the iPad sales pump was not yet fully primed. My initial estimate was for in-line sales of 3.3 million which I aggressively increased to 5 based on some of the production numbers being mentioned.
This figure turned out to be 22% too high, but not as big an error as some of the other analysts.
Another way to look at it is through comparable products. The nearest comparable product to the iPad is actually the iPhone. It was a similarly "revolutionary and magical" product launched with a similar constraint on production and distribution. It was also built and marketed by the same people. They've been down this road before and have honed the process from the iPod through the iPhone over a decade.
If we look at the iPhone and compare it with the iPad, we see just how popular the iPad really is. It may not follow the same seasonal pattern as the iPhone, but it will probably ramp in a similar way. In the following chart I also show the iPhone Growth rate (right scale).
The iPhone has been able to maintain over 100% y/y growth on average. I don't see a reason why the iPad can't repeat this pattern over the next three years.
Apple sales are growing faster than its operating expenses. Although all eyes are on gross margin, the company continues to run a tight ship in fixed costs (costs which do not vary with the output).
In terms of R&D, spending has dropped to 2.4% of sales, a level seen only once since 2005. Sales, General and Administrative costs also dropped to 7.7% of sales, a new record low.
The total operating expenses as a percent of sales stands at 10.2%. The following chart shows the trend.
Keep in mind that, in many ways, the leadership of Apple in both marketing and product development means are doing the job for all the knockoffs, copycats and ripoff artists in the industry. Including that fat chunk of the industry means that those few engineers and designers and marketers accomplish a feat of efficiency that boggles the mind. Thanks, I say.
One of the most hotly debated subjects in the mobile phone business is the importance of market share. It's also a topic of lore in the PC industry. Briefly the two arguments are:
Market share matters more because it drives network effects which ultimately drive competition out of the market, creating the opportunity for monopoly rents.
Profit share matters more because profit is the only fuel that can drive innovation. Any macro downturn or shift in strategy can cause a company to cease investing in unprofitable projects.
The old disruptor's adage: "Be hungry for profits and patient for growth" is challenged by the equally disruptive: "Grow share with lower prices in exchange for new revenue sources."
There are many rich anecdotes to support each strategy, but how about some data? Fortunately we have some: the market and profit shares for vendors covering 80% of the world's largest technology market over a three year period. The vendors are a good proxy for the market, the time frame is long enough to cover seasonality and anomalies and the market is very big (over 1.2 billion devices) and very broad (world-wide).
The only question is how to measure success. One measure is how various strategies benefit the asset owners, i.e. the share holders. Benefit to society, employees and consumers are very difficult to measure. But share holder benefit is easily obtained by measuring change in share prices.
So, here are two charts:
The percent change in market share vs. percent change in share price for the top mobile phone vendors.
The percent change in profit share vs. percent change in share price for the same vendors. (see note 1 for time frame discussion).
I showed the R-squared value of the correlations. (See note 2 regarding LG and Samsung). At r-squared of 0.36 share price is not well correlated to market share while at 0.76 it is rather well correlated to profit share. To a financial analyst this would seem obvious. After all, share price reflects the present value of future cash flows which are clearly coupled to profit and hence to profit share growth. However, as many technology observers would point out, market share determined the success of Microsoft and Google, and to some degree Nokia.
High market share can cause competitors to be starved of components or ecosystem developers. At the same time, high profit share can cause competitors to be starved of capital.
What does this analysis add to the argument? Note that this data covers a hardware business. Is hardware relevant? It does not scale as rapidly and has a short shelf life. It's also notoriously difficult to distribute. However, outside of the service revenues for cellular voice and data, device hardware is the only pool of money that has any material dimension in the industry. It's also the pool of money with the highest margin in the industry. For the time being and the foreseeable future, hardware is the only business model worth anything in mobile computing.
The data shows that in this particular but substantial market profit share is closely correlated to shareholder value creation. It also shows that profit loss is closely correlated with shareholder destruction. The dominant data comes from Apple and Nokia, which appear to be polar opposites in performance on both measures.
In other articles I've shown how profits have shifted from incumbents to entrants in the smartphone disruption. This shift has resulted in direct benefit and loss to the owners of the two asset classes. To suggest that market share alone is a determinant of "success" in the device market must exclude the effect on shareholders and, ultimately, the management and employees of the companies concerned. The virtuous/vicious cycles will be fed by the profit variable more than any other.
I don't think the market share argument holds water in this market and this data supports my belief. It may be that as value shifts over time away from hardware the benefit will shift as well, but business models alternatives to hardware have not emerged after ten years of experimentation. If anything, the idea of selling hardware as a way of capturing service revenue was pioneered by RIM and perfected by Apple. Nothing I've seen so far is challenging this model. Whoever attempts to siphon the device pool of money (which has remained fairly constant over the smartphone disruption) needs to solve system-wide problems like the dependence on the network and the life-cycle of portable electronics.
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Notes:
The dates when performance was sampled are are July 1 2007 to July 1 2010. The latest quarter (3Q10) has not been included in this data as it has not been fully reported. The data will be updated with the latest quarter as soon as it's possible.
For many competitors the share price is dependent on more than performance in the mobile phone market. In particular, LG, Samsung, Motorola and Apple have diversified product lines which affect their share prices. Two of those companies (LG and Samsung) are conglomerates and their share performance is dominated by businesses other than mobile so I did not include their data in the correlation measure (though their place on the chart is shown). Motorola and Apple's stock prices were, to a very large extent, driven by their mobile phone performance over the same period so their data is included in the correlation analysis. The other vendors have been primarily focused on mobile phones.
"Media tablet hype around devices such as the iPad has also affected consumer notebook growth by delaying some PC purchases, especially in the U.S. consumer market. Media tablets don't replace primary PCs, but they affect PC purchases in many ways," Ms. Kitagawa said. "At this stage, hype around media tablets has led consumers and the channels to take a 'wait and see' approach to buying a new device."
Fascinating. I'd love to hear more about the non-iPad "media tablets" that delayed PC purchases last quarter. Maybe I don't get out enough.
But more to the point, let's combine the data from Gartner and the forecast for iPad.
I show below the impact of the iPad on PC vendor sales. I'm using my own estimates of world-wide PC sales (you can see other estimates here (Apple 2.0))
The world-wide PC units shipped without and with iPad:
When including the iPad Apple goes from 7th to 5th ranked, and with 50% growth clearly within shot of top rank next year.
Now I look at PC unit shares:
With the iPad Apple goes from 4% share to 10% share. Again, within striking distance of number one or two in a year.
Finally, growth rates:
Apple's share growth goes from second to first but also several times higher than any of the others.
When Gartner spins the iPad as a "Media Tablet" it's clear that the device is disruptive. Reminds me of what Gartner thought about Smartphones four years ago.
I cannot think of a better endorsement for an investment than a snub from Gartner.
I notice with interest that it's called a Google Phone Gallery not an Android Phone Gallery.
What's more, there is a distinction of All Phones and Phones "with Google". Of course that implies that we can get a list of Google Phones "without Google" (or maybe more accurately, "with partial Google").
To clarify, according to Google there are three categories of Android Phones:
Google Phones "with Google" have been optimized for use of Google Mobile Services, providing easy access to Search, Voice Search, Google Talk, Google Maps, Gmail, Sync, YouTube and Android Market (where available).
Google Phones "without Google" list includes Android phones that have the Android market, Search, Maps and Gmail. You can get this list by subtracting the Google Phones "with Google" from all the Google Phones.
Non-Google phones. Android phones that have no Android market or any Google services. You can get this list by taking a list of all Android phones (e.g. from pdadb.net) and subtracting all Google Phones.
I would also add a fourth category of Google phones:
Non-Android phones that serve up Google services just fine.
Since the list is not complete, I won't tally it here, but it suggests a large number of Non-Google phones is possible.
[I drew the following Venn diagram to help explain the situation. The shaded areas are those which generate revenue for Google. The interesting struggle (marked with arrows) is between the non-Android Phones with some Google and the Android Phones without any Google.]
Now the question that needs to be asked is: How many of the Non-Google Android phones are built to compete with Google (e.g. on Search, Voice, Maps, Media and App sales)? And a second question: How are the Non-Android phones "with some Google" competing with the Non-Google Android phones.
In other words, from Google's point of view: how successful are companies other than Google at delivering Google services in spite of competition from companies with Android phones delivering services that compete with Google?
The classic example being: how effective are iPhones with Google services at competing with Verizon Droid Android phones that deliver Microsoft services? In this scenario Apple is delivering value to Google shareholders while Verizon (using Android) is taking it away.
Is this trade-off a net positive?
In other words, is Google's income from the iPhone offsetting its losses from Android?
12.1 million phones shipped, 11 million sold through (estimated iPhones for this Q range from 11 to 13 million)
Net subscriber account additions were 4.5 million which was lower than anticipated (41% of units sold through were to new subscribers which implies nearly 60% were to existing users)
Revenue grew 31% over the same quarter last year and GAAP earnings grew 76%.
The BlackBerry subscriber account base grew 56% year-over-year to over 50 million
RIM has shipped approximately 115 million handhelds to date. (note: 120 million iOS to date)
BlackBerries are available through over 565 carrier and distribution partners in approximately 175 countries and international markets (vs. 150 carriers and 88 countries for the iPhone)
Approximately 52% of revenue in the quarter was generated outside the United States and over 45% of BlackBerry subscriber account base is outside of North America. (70% of iPhones were sold outside the US through the first half of this year)
Torch was launched with one carrier but will expand to 75 next quarter
To date over 35 million BlackBerry Smartphones have downloaded App World at an average of over 1.5 million Apps are being downloaded every day which is up 40% sequentially (iOS apps are running at 17 million downloads per day)
Average selling price for RIM devices was $304 (vs. $600 for the iPhone)
Gross margin was 44.5% (upward of 50% for the iPhone)
