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Bill Maurer
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I am a market enthusiast and part-time trader. I started writing for Seeking Alpha in 2011, and it has been a tremendous opportunity and learning experience. I have been interested in the markets since elementary school, and hope to pursue a career in the investment management industry. I have... More
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  • BlackBerry: This Isn't A True Buyback

    After the bell on Thursday, BlackBerry (NASDAQ:BBRY) announced a plan to purchase some shares of its common stock. When investors here news like this, the term "buyback" is thrown around, and many news headlines during the afternoon have that word in the title. While the company is buying some shares, this isn't a true buyback, so I'll detail why investors should avoid celebrating this news.

    First of all, CEO John Chen states explicitly that the plan is only in place to offset dilution from employee share purchase plans and proposed amendments to the company's equity incentive plan. At the annual meeting next month, management will present a new proposal to increase the number of shares under the equity incentive plan. In fact, the press release states that if the proposal is not approved, BlackBerry will not proceed with the equity incentive plan. This type of plan is basically what Apple (NASDAQ:AAPL) initially did with its $10 billion buyback. Apple's initial intent was to cover dilution from items like executive options. Later on, Apple boosted its plan in order to reduce its share count, and its buyback is now up to a planned $140 billion.

    The second item to think about is improving earnings per share. One of the keys of Apple's repurchase plan is that the diluted share count has come down tremendously, which has helped to boost the earnings per share number. Right now, BlackBerry is not profitable, so there is no help to earnings per share. In fact, when a company loses money, reducing the share count actually makes the EPS number worse. Think about this hypothetical example. If a company has a $100 million loss and 100 million shares, it loses $1 per share. If the company has just 90 million shares, it loses $1.11 per share.

    Another item to think about is that BlackBerry has a large amount of convertible debt on the balance sheet. If all of that debt is converted, 125 million shares are added to the company's total at $10 a share. That would represent about 19% dilution based on the most recent quarterly data. Thus, the convertible debt is 10 times the size of the 12 million shares BlackBerry aims to repurchase.

    There are two options with the convertible debt. First, the company could repay the debt, and then the size of its roughly $3 billion or so in cash drops significantly. On the other hand, if the shares were converted, the cash balance stays. However, then the company would need to buyback those shares to get the share count down. With BlackBerry trading near $10.50 in Thursday's after-hours session, it would be buying them back at a price roughly 5% above where it converted them. If shares rally further, the process gets even worse.

    Additionally, I don't think now is the time for BlackBerry to launch a true buyback program. The company still has not shown a revenue bottom yet, with the business still in the midst of its large transitional period. In fact, we continue to see analyst revenue estimates for all periods decline. Just as an example, here's a chart of the analyst estimate average for the current fiscal Q1, which ends on May 30th. Dollar values are in millions.

    In the end, investors should ignore the word "buyback" when it comes to BlackBerry. The company is only purchasing a small number of shares to offset dilution, which might not happen anyway if a new equity incentive plan is not approved. This type of plan shouldn't really impact shares, and it won't help the EPS number because BlackBerry is losing money. Overall, the 12 million shares the company could purchase are dwarfed by the large amount of convertible debt that could lead to large dilution. BlackBerry shares rose a couple of percent in the after-hours session on Thursday, but I really don't see this news worth that kind of move.

    May 21 6:15 PM | Link | 4 Comments
  • Apple Earnings Preview: Overcoming High Expectations

    On Monday afternoon, technology giant Apple (NASDAQ:AAPL) will report its fiscal second quarter results. After last quarter's beat, shares rallied to a new all-time high, and they are just a few dollars from that point currently. A strong rise in the US dollar will likely hurt Apple's results, a key item considering how high expectations are for the quarter. Today, I'll provide my quarterly earnings preview.

    Examining the major products:

    The iPhone 6 was a big hit in the December quarter, allowing the company to sell almost 75 million phones. The device is again key to this quarter's report, with my expectations calling for iPhone revenues to represent about 67.3% of the company's total. I think we'll see very strong sales in China around that country's new year. While I'm not as positive as those who think Apple could top 60 million units, I think 58.3 million is certainly possible, or roughly 33.35% growth. As I detailed in my iPhone article, we usually see a sequential decline in average selling prices from fiscal Q1 to Q2. Thanks to the sharp rise in the US dollar, iPhone prices will be hurt a bit, although Apple did reportedly raise prices late in the quarter to combat this issue. I'm looking for an average selling price of $650, down from $687 in fiscal Q1.

    For this quarter, I think the iPad will come in with the second highest amount of revenues. Analysts are looking for a little more than 14 million units to be sold, or a decline of 14% over the prior year period. Just like in fiscal Q1, I'm a bit more bearish, looking for just 13.1 million units, nearly a 20% drop. My bearishness comes from a disappointing refresh in late 2014, which combined with a longer refresh cycle, has hurt sales. Until the company comes out with a larger screen model, rumored to be coming later this year, I think sales will be very soft. I expect the average selling price to rise by about $6 to $425, just based on a shift to more expensive models. I think fiscal Q1's ASP was hurt by extra sales of the cheaper mini model for Christmas, so I expect a slight rebound this quarter. Any potential gains will be limited by forex issues, however.

    Fiscal Q2 isn't a seasonally strong one for the Mac, but Apple has shown decent growth in recent periods. We saw a big decline in Q1 PC sales, and IDC reported that Apple's US market share increased from 10.6% to 10.9%. I don't think Apple will come anywhere close to fiscal Q1's 14% growth, but I still think a roughly 4% increase to 4.3 million units is possible. Mostly due to the currency issue, I think we'll see ASPs decline sequentially to about $1,240 per unit.

    Looking at the income statement:

    I am projecting about $7.5 billion in other revenues for the company, which includes items like the iPod, Apple Pay, other services, etc. In total, I am projecting $56.295 billion in quarterly revenues for the company. If it wasn't for the strong rise in the dollar, that number would probably be right around $60 billion.

    I think that gross margins will be a little under 40%, as the iPhone representing more than 2/3 of revenues should be beneficial. I do think operating expenses will come in a little high, thanks to the lead up to the Apple Watch launch. Apple's added debt will lead to some extra interest costs as well. The one positive I'm looking for is a lower than expected tax rate, because I think more revenues/earnings will come from outside the US. With a boost from the buyback, I'm looking for $2.19 in EPS. Apple definitely needs to beat its own revenue range of $52 billion to $55 billion, because analyst estimates have shot up, as seen in the table below.

    My numbers are about $235 million and $0.03 ahead of the current analyst averages. The street has definitely become more positive in recent weeks. This should be a good quarter, with the currency problem preventing it from being an exceptional one.

    Other items to watch:

    There are two other keys to this upcoming report. The first is obviously any data we receive on the Apple Watch. We could get a press release from the company morning talking about opening weekend sales, or management could wait until the earnings report/conference call. Analysts have been hiking their Q3 estimates recently, with the Watch being a key part of the near term growth story. Current forecasts call for $47.06 billion and $1.68, respectively.

    The other item is an update on the capital return plan. Apple's cash pile is tremendous, even with most of it located outside the US. I'm expecting a dividend raise into the $0.50 to $0.55 per quarter range. In terms of the buyback, I'm expecting a $10 billion to $20 billion increase, based on the notion that Apple will revisit the situation this time next year. This might seem rather small to some, but I am a big fan of flexibility here.

    Final thoughts:

    Apple should announce another strong quarter on Monday, as the iPhone 6's momentum continued into the new year. This report will definitely help to move the market, as shares are near all-time highs and now in the Dow 30. While currencies will negatively impact the numbers, the company should be able to overcome high expectations. I believe a decent dividend raise and buyback increase will come, and guidance will tell us about the Apple Watch.

    Apr 27 9:19 AM | Link | Comment!
  • Apple Is Crushing Android Where It Matters Most

    When it comes to the smartphone industry, there is a large debate over what it truly means to be a winner. Some will argue that whoever has the most market share is the true winner, while others may look at who is growing the fastest. In a recent article, Michael Blair discussed the tremendous growth of the Android platform, which currently dominates the smartphone operating space. As a result, many may believe that Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is the one name to own.

    However, Android may not be as successful where I believe it matters most. Today, I'll discuss how Apple's (NASDAQ:AAPL) iOS is crushing Android in the most important category, operating profit. In Mr. Blair's article, he discussed the tremendous growth that the Android platform has seen in recent years. The following chart was taken from Mr. Blair's article, showing how Android dominates the smartphone operating system installed base.

    However, when we look at a different metric, Apple's iOS blows away Android, and the picture is even more dramatic. In a recent release, Strategy Analytics reported that Apple took a record 88.7% of smartphone operating profits in Q4 2014. In fact, Apple showed quite a large jump from the prior year period, as seen in the chart below detailing dollars and percentages.

    (click to enlarge)

    In Q4 2014, Apple's fiscal first quarter, the company announced its most impressive quarter ever, selling nearly 75 million iPhones. Apple generated about $687 in revenues from each unit sold, a rise of about $50 from the prior year period. As a result, Apple had more than $51 billion in revenue from the phone. The high margin device helped boost gross margins, giving Apple more than $18 billion in net income from the quarter. The most telling number above may not even be the sharp rise in operating profits for Apple, but in fact the large drop that Android showed. Strategy Analytics provided the following quote in regards to the current situation:

    Apple iOS continues to tighten its grip on the smartphone industry. Apple's strategy of premium products and lean logistics is proving hugely profitable. Android's weak profitability for its hardware partners will worry Google. If major smartphone manufacturers, like Samsung or Huawei, cannot make decent profits from the Android ecosystem, they may be tempted in the future to look at alternative platforms such as Microsoft, Tizen or Firefox.

    In the end, the Android camp might point to its tremendous growth and huge market share, but Apple is the name that's winning the most important battle. When it comes to operating profits, iOS generated nearly $19 billion during Q4, representing nearly 89% of global smartphone operating profit share in the quarter. Strategy Analytics believes that major smartphone manufacturers may worry about Android's profitability going forward, which could tempt these names to look at alternative platforms. I'm already on the record stating that 2015 is an important year for Google, as the company struggles to grow its bottom line. As Strategy Analytics states, Apple continues to tighten its grip on the smartphone industry, and the technology giant is winning where I believe it matters most.

    Mar 25 10:48 PM | Link | 1 Comment
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