Mathias Holmstrøm

Mathias Holmstrøm
Contributor since: 2012
Thanks a lot.
Doh... . That was a big blunder - But just makes Nokia appear even cheaper. The new "Business P/E"-ratio of HERE and NSN is actually just 6.63.
Jlumme: Good point. I will try to look a bit into that.
Hey Macdeutsche. Thanks for taking your time to read the article a couple of times
"Third, it's 900m, not 700m."
Its a 700M sequential effect, which is what I am interested in.
"Finally, it's not clear to me that why you expect 40% although you have two things lined up. Your key issue is still iPhone, you expected 53%. Given the trend of ASP, why so high? But since consensus seems to be 40%, so ok. "
iPhone C is cheaper to produce than the iPhone 4s was last year (higher gross margin on middle-range phone).
iPad Mini should also have a much higher gross margin.
Further, remember that the Apple benefits from a great product mix in Q1 (lots of iPhone sales --> raises average margins).
"Also missing would be the confirmation value that you can drive from your last forecast to last earnings. Can't you confirm a bit about your 53% by reading the financial? What does 1Q14 say about iPhone 5s/5c margin?"
So the 53% was my previous forecast based. That would likely have been correct if the 5S costed the same to produce as the iPhone 5. However, I think it is probably $10-15 more expensive to produce.
"Anyway, still a valid point, since same as you, and it looks like everyone expected 40%. The deferral accounts for 1.5%. So there is still a gap of 1-2%. So do I read this into what? Are they lowballing again? Is the gap genuine problem? You clearly took a position that it is a genuine problem."
So if we look at lasts years gross margin of 40.x% and subtract the 1.5% from deferred revenue, the reamaining effect can be explained by a combo of lower margins on iPads and lower margins on Macs.
Thank you for the your comment Humble Eagles. Let me try to clarify what I imply by valuation call and what I imply by short-term effect of earnings report/guidance;
Valuation: I attempt to assess long-term earnings/free-cash flow of Apple. Its possible I come up with a fair value of $600 even if the share price is just $530.
Effect of earnings report: How does our valuation change now? If it was $600 before, maybe it should be reduced to $580?
So in the above example, I actually still think Apple is undervalued, but in the short-term the share price should decline.
As it turned out, it was exactly what happened yesterday as the share price dropped by 2%.
Thanks for you comment James.
You make an important point with regards to the iPad Air which is an actual upgrade over the iPad 4. Also, I like that they gave it a new name. It was always a bit confusing to mention it as the 5th generation iPad (not a very catchy name).
$577 iPhone was very much in line with what I had expected ($581). Apple's low-end phone is simply selling pretty well which reduces the ARPU.
In terms of the $60bn - I agree its doable, but it all comes down to the iPhone. If Apple can have a perfect "no supply issues"-quarter, then they may hit iPhone sales of 56M+ - that should be enough to take revenue above $60bn. Btw, my iPhone ARPU for Q1 is $611.
Yeh I guess you could rephrase it in that way as well. I definitely agree with you, and I think the new iPad lineup is perfectly priced and positioned. However, I had just expected that the new lineup was even more profitable.
I was disappointed because I was optimistic ahead of the earnings report. Obviously the guidance/earnings report wasn't bad in terms of normal standards. Its just... I was considering going long Apple if I saw some real possibility for the gross margin to increase. However, I no longer think that's a realistic possibility.

Hey Alphaneria
I think my model takes into account roughly 100 input variables when determining the proper gross margin of Apple.
After the earnings report, I think I tweaked around 15-20 of those input variables, but since iPad and especially the iPad variables are the most important ones, I only discussed those in the article.
It is $900M in total deferred revenue, yes. But it is $700M in sequential effect since Apple already deferred revenue of $200M in Q4. I admit though I could have been more clear about that.
I keep mentioning poor iPhone sales - What do you mean? I didn't talk about that at all. I think iPhone sales were impressive for the quarter and very much in line with my estimate. The guidance for next quarter though is a bit below what most people had expected.
"final point on gross margins....they are always going to be pushed down a little bit on new product releases but over time they go back up."
That's true for some companies where the costs of producing the services/products reduces faster than the ASP/ARPU. However, in the case of Apple, the contrary is true. Apple's best quarter is Q1 since this is where most consumers purchases the new iPhones/iPads.
Hey coterotie.
Remember I am trying to replicate Apple's management model. This is not me being bullish/bearish on Apple's earnings for this quarter. Instead, it simply shows how I expect proceed in order to end up with a gross margin between 36.5% and 37.5%.
Apple has the best knowledge to provide us with the best guidance. What I learned from this guidance is that its product isn't as profitable as one could have hoped.
Obviously they can still beat the guidance (as you point out), but that will likely be in terms of sales. If we look at in terms of profit per device, Apple is less profitable than I had expected.
Further, I am not even valuing Apple. I am just looking isolated at the effect of the earnings report.
In terms of gross margin one would have expected increase an increase due to higher margins on iPad + iPhones. Deferred revenue + fx tailwinds offset some of it, but not everything.
50M iPhone sales seems to be what Apple's expects for next quarter. Not bad at all, just below what I had expected.
dissapointing guidance. implies iPhone sales of roughly 50M which is below analysts estiamte of roughly 55M.
Just discovered an error: Earnings after taxes in the table shows diluted share Count and not earnings after taxes. The EPS is still correct though.
Hey heliskiier
Your point about hardware division for free is pretty good. I am in the proces of doing a DCF valuation on the company and even when I am not modelling any significant growth in tablet sales and expecting Xbox One to be somewhat of a dissapointing, the fair value of the stock Price is still above $35.
Hey ssnlive
Yes I could have been more clear about this, but there are also Xbox royalties and revenue from Xbox live subscription service in it. I didn't want too spend too much time in the article showing all the calculations - maybe that wasn't the right decision though.
Yeh too some extent that may also be true. But im not sure Windows hybrid sales are that significant (?)
I also assumed sales of 12M iPads (or so) orginally, however given the way I interpret the 170M figure, it seems that Apple sold around 14M iPads the year.
Personally I am also lowering my iPhone sales estimates to around 32.5M units. For next quarter, I expect guidance of revenue between 56B and 60B with gross margin in the 38-42% range.
Hey Wiesje:
I think Ballmer gets a bit too much hate. He is definitely not the most succesful CEO out there, but I think he should get more credit for Microsoft's cloud position which looks extremely strong at the moment.
I actually had written about this initially. But when just before I submitted it, I decided to remove it, as I felt it simply made the article too long given the fact that it had relatively little relevance for the valuation (according to my estimations it will increase EPS, holding outstanding shares constant, by 4 cents).
Hey Eric
I am glad your looking at this area, because this is ultimately the most important aspect of the valuation of ATVI to assess. The problem I have with relying on Blizzard to come up with a super profitable business model is that they don't have any good track record of monetizing through microtransactions. The D3 RMAH was the first attempt, but it failed miserable. In my opinion Bnet 2.0 should simply have been designed with two features in mind;
1) The social experience
2) Money
, however it did neither particularly well. And I simply can'tsee how it can earn that much money on Titan. I guess it can make it possible for players to purchase new clothes to their characters? Or maybe make it possible for gamers to buy new characters?
What are your thoughts here?
I guess I could have been a bit more clear about this. But, if we assume that Titan and Destiny will gradually replace WOW and Titan over the next 10 years --> Earnings will decline by a lot.
The problem here is that Wow and COD could/can produce stable earnings on annual basis, while both Destiny and Titan will only produce "real" earnings when a new game in the franchise is released.
IMO that's something that all analysts and long investors have simply ignored - For some reason they apparently think the multitransactions model can generate hundreds of millions of dollars on annual basis.
Alternatively (my theory), they have no idea about how the industry is changing.
The comparison here is based on the fact that Activision has a tendency to milk rather than innovate. I would give more credit to Activision if it had a history of constant innovation. When that is said, there is nothing about the franchise that makes me think sales won't increase in the near future.
Christopher: Earnings over the last of those two franchises doesn't really add up. For Sc2 Hots was released, which I estimate has sold 2.5-3M copies (at most)
Besides, I don't think my article contradicts anything you wrote. Regarding CoD, all I am saying is that I expect it to decline at a relatively low rate over the next couple of years.
Good point, though I have taking into account (it is one of the drivers in my earnings model) that products costs will decline somewhat in the future.
Michael: I agree with your view on a longer term (2-5 years), however sales seem to continue to increase, thus I don't see any reason to expect a steep decline in market share. The iPhone 5c doesn't need to be a big seller. All it needs to be is a high-margin middlerange phone.
I don't use IDC forecast. I use their estimates with my own forecasts. I described my methodology in this article.
No I am saying that short-term losses aren't particularly concerning if they are less than expected synergy effects.
The problem with 4s atm. is that it serves as a low gross margin option for consumers in developed countries that "steals" sales from the newer phones. I would have prefered a slightly cheaper iPhone 5c that could replace both the iPhone 5 and iPhone 4s at the same time (rather than just the iPhone 5).
Then in developing markets I believe Apple should priortize market share over profits for the short-term. The current strategy doesn't really accomplish that.
iPhone 5 is discontinued (iPhone 5c) replaces it. iPhone 4S is still for sale.
I specifically wrote that if Apple didn't change come up with a new strategy for the iPhone business segment, it would be in trouble. Obviously new product launches could offset this loss as you point out.