Apple: Putting 'Soft' Mac Sales In Perspective

One of the big alleged disappointments of Apple's otherwise stellar fiscal first quarter results was the company's Mac shipments.

The issue: Apple shipped 1.6 million Macs in the quarter and that was short of the 1.75 million analysts were expecting. Of course, Apple's outlook was weaker-than-expected, but many Wall Streeters were expecting that guidance anyway. That leaves Mac sales as a big reason why Apple shares got shellacked Thursday.

Now it's time for perspective. Those Mac sales were up 28 percent from a year ago and flat quarter over quarter. In a PC industry that's showing growth of about 3 percent that's pretty impressive. Granted Apple's computer market share is about 3 percent, but Mac sales are outgrowing the rest of the industry by a wide margin.

But the big concerns are summed up by Citigroup analyst Richard Gardner:

"PC shipments of 1.6M were well below our estimate of 1.85M and consensus of 1.7-1.8M. While year-to-year unit growth was solid, it did not meaningfully exceed that of the consumers markets from which Apple derives the majority of its revenue despite a somewhat easy comparison (due to purchase deferrals ahead of the Intel transition one year ago). While notebook shipments rose an impressive 65 percent year over year, they declined 2 percent sequentially during a seasonally strong quarter."

That's a valid worry, but there's a key point that's missing. Apple has pricing power. The average selling price for Macs was $1,500 driven primarily by notebook sales (see reviews). So sure, Apple could have cut prices to get to some magic Mac unit shipment number, but why do that when demand is in line with internal projections?

To wit:

"Apple has achieved an approximate 2-5 million increase in the number of active Mac OS X users-and this while increasing blended average shipment ASPs on its CPU category by almost 10 percent versus last year," said ThinkEquity Partners analyst Jonathan Hoopes.

That's a significant point. Meanwhile, Hoopes also notes that what Apple didn't say at Macworld–it didn't talk tablet PCs, didn't showcase new OS X features and stayed clear of any next-gen Mac notebook and PC designs. The hint: These things will come later this year to drive Mac sales. "We expect the next few months to contain a few special events where new software, services, and hardware will be announced," said Hoopes.

On the conference call Wednesday night (see SeekingAlpha transcript), Apple chief operating officer Tim Cook was asked about Mac sales in the quarter.

The question:

"You saw a pretty good sequential up-tick in the ASP, and I was wondering if you were starting to think about maybe pricing a little more aggressively to accelerate Mac growth even more going forward?"

Cook's answer:

"We grew at three times the market. Underneath that, if you look in some specific markets, like the U.S., we grew at 31 percent versus market growth of 3 percent, which is substantially above. Portables grew at 65 percent versus IDC’s forecast at 23 percent. This is also now eight of the last nine quarters that the Mac has outgrown the market, so I do not see — I believe we have very, very competitive product offerings that are delivering substantially above market growth. We have no reason to change."

Cook was also asked about a quarter to quarter Mac sale decline.

His answer:

"We have an extremely strong educational business in the Q4 period that includes substantial institutional business, and that institutional business corrects significantly as we get into Q1. The sequential decline that we saw is something that is very seasonal in nature. Frankly, we were very happy to overall have the same number of total Macs that we had in Q4, because we expected that given the high level of institutional sales, including two very large one-to-ones that total 50,000 units, we had predicted the Mac to be down from Q4, and it is not."

Bottom line: Put those Mac sales in context before getting panicky.

Comments

[Julian Ivan...:]

FWIW, I have calculated the following. Based on:

1) 9m iPods sold, with a low ASP of $170 (current ASPs are around $180) to account for Shuffles being a higher proportion of the mix
2) 1.6m Macs (900k laptops, 700k desktops)
3) 500k iTVs. By my calculations, Apple are selling these at over 10k/day from the look of the Apple Store.
4) Gross Margins of 29.5%
5) $1B in revs from "Other music revs," including the iTV and increased iTS sales

.. Apple would hit 68c - 72c EPS for Q2, representing almost 45% YoY earnings growth.

For them to come in at their 55c guidance I have to cut sales as follows:

1) 7m iPods
2) 1.4m Macs
3) 250k iTVs

I just don't see this kind of decline likely. Does anyone else?

By the way, I am working with Mac ASPs way lower than Apple's current. I use $1350. Apple's Mac ASPs for Q1 07 were 10% higher than that, at $1500. If I were to change that in my model, then you can add about 5-7c to earnings estimates for Q2 06 Whichever way you look at it, I can't see Q2 coming in any lower than 68c, with the possibility of 75c.

Their guidance of 55c is obviously laughably low, and the Street will be all "amazed, shocked, and surprised" when they beat by 20-40%, as usual. Apple is the uPOD company: Under-Promise, Over-Deliver.

2007 Jan 19 08:18 AM

[Julian Ivan...:]

Richard Gardner's (from the AAPL-bearish Citigroup) comments on easy comparables with 2006 is not justified, as Q1 06 was a very strong season for Mac sales, as was Q3, and Q4 was incredible. Only Q2 06 was weak. Saying he is disturbed by sequential weakness of Mac sales growth comparing Q1 07 with Q4 06 while admitting that annual sales growth is very strong but trying to diminish its importance by wrongly saying it was an "easy comparable" is just stupid and shows how arrogantly he is wedded to his negative view of the company. 30-35% growth is 30-35% annual growth, no matter how you want to analyse it. Deal with it, Richard.

So long as Apple can keep up around 30% YoY Mac sales growth I'm very happy. They're on-track to do that as far as I can work out, so I'm not concerned at this point. Comparables with Q2 06 will be easy, and Q3 sees the K-12 buying season kick in, which should be strong this year now that the intel machines have had time to bed in and prove reliable. Full availability of Leopard, Boot Camp, and Parallels will make the Mac appeal to cross-platform environments in a way that could only have been dreamed of hitherto. I don't think this has been taken into consideration yet, and will play a big factor in the Mac's education market share gains not just in the US, but globally.

Anyway, onto the "comparables":

In Q2 06 Apple shipped 1,112,000 Macs.
To maintain the 30% YoY growth DawnTreader would like to see, they only need to hit 1,445,600 macs sold for Q2 07. If Apple see sales of 1.6m for Q2, then that would represent 44% YoY sales growth.

Frankly, I'd be delighted with anything in-between.

For Q3 06, Apple sold 1,327,000 Macs. 30% growth would need to see the figure rise to 1,725,100 for Q3 07, so all I can say is that Apple had better have a plan to get Mac sales going for Summer! K-12 deals anyone?

Comparables with Q2 06 are going to be a walk-over as that saw the deepest sales trough arising from the Intel transition. Comparables with Q3 will be a lot tougher, but K-12 sales will see to that.

I think it goes without saying that Q4 07 - peak buying season - to be an absolute blow-out mac sales-wise, as it was in 2006. In the meantime though, I think Apple have an easy ride of it for the next quarter as it has a comparatively modest number to beat. I'm modelling for around 1.5m macs unless there's a significant new model introduced asap. That would represent 35% YoY growth and more than make up any shortfall from Q1.

2007 Jan 19 08:45 AM

[Tom B:]

The Big Shoe wil drop when Enterprise gets over their irrational Apple-hatred.

2007 Jan 19 08:58 AM

[dana maryla:]

f you look at what happened in the US between the 3rd and 4th quarters in computer sales, you do see that the Major Trend was for Dell to lose "units shipped"..and other vendors to gain by taking their share.


These, I believe . are Gartner quarterly US data, 3rd vs 4th of 06, posted on one of the blogs last week [I'm sure you know which]...Perhaps on MacDailyNews




More precisely [in thousands] Dell lost 1,042. Where did this go?

Well, of the 1042 units HP picked up 566 units.

Gateway gained none, itself losing 7 units.

Toshiba picked up 101 units.

While little Apple picked up 194 of the units shipped.

The difference [1042 & 7 = 1049 LOST minus 566 minus 101 minus 194 =871 GAINED == approx 170....indicates the cumulative industry loss in PC sales quarter over quarter.

So, HP, with it's already large units sales, picked up a bit more than 50% of the Dell loss, while little Apple picked up about 20% of this Dell drop in sales. With Toshibaapparently doing well, and picking up 10% of the Dell drop.

How is this a pessimistic picture? What if Apple were to continually take 20% of the drop in Dell [or other vendors shipments] each quarter?

Both Apple and HP are gobbling up Dell's drop off, but HP is gobbling up more [50%] while Apple is picking up 20%. However note that Apple's quarterly pickup is 40% of the much larger HP's pickup at Dell's expense.

This is pretty stunning, I think!!!!!

2007 Jan 19 09:02 PM

[Terrin:]

Moreover, analysts always discredit Apple's guidance. The 1.7 number was way over Apple's own internal guidance.

2007 Jan 19 11:08 PM