Apple’s Dramatic Risks and Ambitions 18 comments
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News from Apple (AAPL) is often big news. Apple released its second quarter results on Wednesday. Revenue was $7.51 billion, down 22% q-o-q and up 42% y-o-y driven by strong demand for Macs and the ever-popular iPhone. Net income was $1.05 billion, or $1.16 per diluted share, up 36% y-o-y. International sales, which were 44% of the revenue, grew 47% and U.S. sales grew 40%.
Apple sold 2.29 million Macs with a growth of 51% y-o-y that is about 3.5 times the overall PC market rate of growth. Macs accounted for 59% of the revenue in the quarter, up from 47% last quarter. Our household now boasts a beautiful, large-screen iMac on which we’re playing with photos and music to create iMovie clips of our travels, horse, and such. We still have two Vista laptops, which are a source of continuous annoyance. Those two are probably on their way out.
With revenue mix shifting towards the Macs, music products and services accounted for 36% of revenue in the quarter, down from 50% last quarter. Sales of iPods at 10.6 million seem to have saturated with a growth of just 1%. A price reduction helped improve the sales of Shuffle. The iPod Touch which is an iPhone without the mobile capabilities helped in the 8% y-o-y iPod revenue growth.
Now to what everyone wants to know about – iPhone sales. Apple sold 1.7 million iPhones in the quarter taking the total to 5.7 million since the launch. In fact, there was shortage of iPhones towards the end of the quarter as demand far exceeded expectations. When AT&T (T) reported net adds of just 1.3 million, there were concerns about iPhone sales crossing the 1 million mark. However, unlocked iPhone sales seem to have bridged the gap and Apple seems confident of meeting the 10 million target for this year.
The iPhone 2.0 software, which is expected to launch in June, would help in its goal. People buying iPhones in the interim will be provided a free upgrade. Therefore, revenue recognition of iPhone sales will be delayed till iPhone 2.0 software is delivered. Total revenue from sales of iPhone, iPhone accessories, and payments from carriers was $378 million. Total deferred revenue from iPhone and Apple TV was $1.93 billion, compared to $1.44 billion in the previous quarter.
Apple launched the iPhone in Austria and Ireland during the quarter, but things are not so rosy in Europe. O2, the U.K. carrier, recently cut the iPhone price from £269 to £169, and T-Mobile had earlier in the month cut the price from €399 (£319) to €99. There are reports of Apple pushing for price cuts in France with the carrier Orange to increase sales. Apple will probably change its distribution model of exclusive carriers outside of the U.S.
Starting with only a 4% market share when it was launched last year, Apple now has 9% of the smartphone market share against Research In Motion’s (RIMM) 42% according to ChangeWave Research. And with the iPhone being made compatible for use in the enterprise, it would be interesting to watch its race with RIMM. For the moment, most of Apple’s market share wins are coming at the expense of Palm’s (PALM) Treo and Motorola’s (MOT) RAZR, another product that we have two of in our house. Those two, in due course, are also moving on to the iPhone.
For the third quarter, Apple is targeting revenue of around $7.2 billion, or 33% y-o-y growth over the prior June quarter. EPS is expected to be about $1.00.
Meanwhile reports of Apple’s $278 million acquisition of microprocessor design company PA Semi has overshadowed its earnings reports. PA Semi is known for its design of low-power chips. This acquisition has thrown cold water over Intel’s (INTC) hopes of securing a design win for Atom, its latest low-power lineup and will cause a shift in the iPhone component ecosystem. But more than that Apple has taken on a significant risk by vertically integrating into semiconductors with the hope that they can achieve differentiation in their core electronics, not only in design, OS and applications. If Apple’s move succeeds, then we’re going back to a vertically integrated computer industry, which is where it all started. The interim Wintel model will come to be looked upon as the detour. We can always trust Steve Jobs to create drama, and to be ambitious.
Apple’s stock is trading around $162 with a market cap of around $143 billion. After dropping to nearly $120, it started picking up in March since its enterprise announcement, and on Thursday morning, the upward climb looked resolute.
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This article has 18 comments:
Raised Price Target:
Merrill Lynch raises its price target from $180 to $186, maintaining their Buy rating.
Deutsche Bank raises its price target from $225 to $235, maintaining their Buy rating.
Citi raises its price target from $218 to $248, maintaining their Buy rating.
ThinkPanmure raises its price target from $165 to $195, maintaining their Buy rating.
WR Hambrecht raises its price target from $218 to $238, maintaining their Buy rating.
Maintained:
Needham maintains its $234 price target and Strong Buy rating.
FTN maintains its $215 price target and Buy rating.
Caris & Co maintains its $170 price target and Above Average rating.
AmTech maintains its Neutral rating.
Cross Research maintains its $225 price target and Buy rating.
Piper Jaffray maintains its $250 price target and Buy rating.
Soleil Securities maintains its $200 price target and Buy rating.
Soleil - "With Mac sales up 51% y/y- a rate of growth 3.5X better than the industry-we believe our long-term market share thesis for AAPL remains firmly intact."
WR Hambrecht - "With the Mac franchise as the core growth driver, we are still optimistic about the prospects for the iPhone, and we expect Apple to use many of its levers (e.g., price, new features, new models, and new carriers/distribution partners) to accelerate unit sales throughout the year."
Piper Jaffray - "The key takeaway from Apple's Mar. qtr is that the Mac units grew at the highest y/y rates (units 51% and revenue 54%) in 17 years. Macs are the most meaningful category with the most potential and they are performing the best."
Deutsche Bank - "We expect multiple product cycles (MacBooks, Air, 3G iPhone, etc) to sustain strong FCF and EPS growth." "Mac momentum to continue"
Do you have a real job, or do you get paid to regurgitate AAPL stock projections after seeking alpha bits? I've seen you do this a couple of times.
And the website that you link doesn't even work.
Simply Pointless.
iPod Touch does actually have mobile capabilities. It's got WiFi and works just like an iPhone without the PHONE capabilities. Hackers have actually made it work with Skype.
Mine gives me portable email, stock checks, a browser, weather, calendar, contacts, notes, youtube, maps and 16 GB for (in my case) 4500 portable photographs and several thousand tunes. For $400. And it fits in my pocket.
I think those folks that think of the touch as a bloated iPod are missing the boat. You need to see one.
It isn't a Shuffle. It's different, to coin a term. On the basis of it alone, I think one could build a sizeable company.
It's funny; AAPL is a real magnet for manipulators/bears. The best 70 P/E AMZN has managed is a book reader that has some nice features, but is heavily DRM'ed, NOT back-lit, and looks like something out of the 1980's. Imagine AAPL with a 70 P/E! That would trigger some profit taking on my part, I tell you!
MacDailyNews has good stuff on the PA Semi news -- look at the comments on this and the 2006 linked article:
macdailynews.com/index.../
I'd love for you to comment (or devote a report) on the impact of the iPhone SDK, the iApps store, and aapl's slice of 30% of all iApp sales at the store.
My thinking is that this seems to be setting up as iPod/iTunes, the Sequel. I'm expecting Apple to move from it's exclusive telecom deals to open, unlimited sales to anyone. Apple will be making a play for dominance in Smartphones and pocket PCs (and a yet-to-be-shipped MID device).
If Apple succeeds in dominating these new markets, Apple's Mkt Cap should exceed $500B by 2011.
What say you?
The only cold water being thrown seems to have landed on you. You made an ass of yourself talking about things you do not have a clue about. The purchased company cannot and will not replace Intel chips in the existing product line. I doubt it will change anything in regard to Apples posable use of Atom. In the future Apple may use these designers in conjunction with chips made by Intel or Arm.
But you are right on target about jobs being able to create drama. Perhaps that is the only reason he bought PA Semi.
Hello? Have you noticed Apple's 16-year voyage of agony, where every vendor they relied on for processing chips has abandoned them? Can you spell "Taligent?"
It is a tragedy that MOT and IBM never comprehended the importance of what they were doing; MOT was fixated on "embedded"; IBM on RISC servers.
Apple is also looking to leverage their relationship with Intel, so that they can have more input to address iPhone, or Apple-specific business models. By acquiring this company, Apple could conceivably go to any number of chip manufacturers, this weighs on Intel, because they obviously want to be in the belly of Apple products, going forward.
-zach bass
www.zachbass.com
When Intel comes up with a new compelling chip design they're going to offer it around to Apple and all of Apple's competitors.
Wouldn't surprise me to see Apple doing some parallel development projects and keeping their options open. The alternative is to bet their entire future on Intel.
As Tom B pointed out, they've tried that twice before with Motorola and IBM.
I can envision new mobile products that aren't quite laptop computers or cell phones but perhaps new categories like the rumored "Safari Pad."