Things Overlooked In Apple's Q4 Conference Call

| About: Apple Inc. (AAPL)


We have had time to digest Apple's Quarterly numbers reported Monday, but the conference call and statements were filled with a treasure trove of future-looking information.

Apple is reorganizing several categories of past reported information to disguise valuable financial information that competitors an advantage in new product categories.

Even with blowout numbers for the quarter, the underlying metrics within key markets and geographic regions suggests a strong future within existing product categories.

Analysts and investment media have been covering the Apple ("AAPL") Q42014 results over the past couple days, citing the tremendous financial numbers from the back-to-school quarter beating all analysts predictions. As discussed plenty elsewhere, Apple recorded $42.1 billion in revenue, up 12% y/y, and $8.5 billion in net income (or $1.42 EPS, up 20% y/y). Apple shipped 39.3 million iPhones (growing 16% y/y), a record 5.5 million Macs (21% growth, y/y), and 12.3 million iPads (declining 12.7% y/y) in the quarter, reporting Gross Margins of 38%.

And while there's a lot to dissect in these numbers, there was also a tremendous amount of valuable information one could obtain by listening to more than just the first few minutes of the call. The purpose of this piece is to highlight some of the more important overlooked bits of information, and how investors can color their future expectations with this information.

As I argued a few weeks back, because many institutional investors do not know whether to classify Apple as a growth, value, or hybrid stock, they are significantly underweight in Apple, creating an undervaluation of the company. They are waiting on hints from both the Q42014 and Q12015 results in order to paint the larger picture of the company's future growth potential. I believe that after Monday, this picture has become notably clearer.


We've heard a tremendous amount about the sales numbers of iPhone, but with Apple making significant investments in emerging markets, which comprised of 25% of their revenue, the take away from the quarter call is that if the company can continue to expand the market, we should continue seeing huge growth numbers for Apple's biggest product.

Tim Cook was pleased to announce that in FY2014, Apple sold 250 million iOS devices. That means that since 2007, Apple has sold over 950 million iOS devices in total and is on track to sell it's billionth iOS device sometime in Q12015. The only other platforms to ever reach the billion milestone are Windows, Facebook, and Android. This is a significant milestone and unlike with Facebook, the billion dollar figure does not suggest the same penetration as Android or iOS, since the latter two act more as an annuity, where consumers purchase upgrades in rather regular cycles.

While bears have reported on smartphone saturation, Apple is not seeing that story with their own data. In China, for example, 80% of iPhone 4S sales three years ago were to first time iPhone users. In the past year, nearly 50% of iPhone 5S buyers in China were new to iPhone. Even in the U.S., 25% of iPhone 5S buyers had never bought an iPhone before. In Greater China, the expansion of the middle class along with a new 4G network rollout this year, there's a staggering upside for the company as it rolls out iPhone 6 in China this week.

Most importantly, Apple has survived the global slowdown in key regions and experienced double digit growth in BRIC nations and both Western and Eastern Europe.

This data, while less discussed than the typical sales and revenue numbers, provides us with much more guidance about the relative health of the company.

iPad & Macs

Most analysts seem to be spending inordinate amounts of time focusing on the year over year decline in iPad sales. But CEO, Tim Cook provided interesting commentary on blowout Mac numbers that might be useful when thinking about iPad's future. Cook stated,

We're especially proud of our Mac results considering the overall contraction of the global PC market this year and we achieved our highest quarterly market share since 1995.

This means that while Apple has increased its share of personal computers by capturing more of the high-end market, the rest of the market is in relative decline. Consider that with the comment he made later in the question and answer.

And so, to me I view it as a speed bump, not a huge issue.

Perhaps iPad isn't a growth story anymore. But perhaps many consumers sort of perceive iPad as a low-end PC and this is a story of a macro issue in this segment than one of a permanent downward trajectory for iPad. Combined with synergies possible within enterprise with the IBM partnership, it's much too soon to write-off iPad for good.

Reclassifying Categories

The most startling changes announced in this quarter is the decision to reclassify several major products into a larger umbrella category "Other Products". Up until this announcement, Apple classified Accessories, peripherals, and Beats headphones and speakers into this "other" classification. But starting next quarter, iPod, Apple TV, and Apple Watch will join this category.

This may be the biggest news out of the conference call, since what can be inferred from this change is significant. A few months ago, Apple said it was doubling down on secrecy. Until now, this didn't extend to financial news. But perhaps that's changing. In the question and answer, Tim Cook offered some insight as to one reason why this decision was made.

And also to be also straight is I am not very anxious in reporting a lot of numbers on Apple Watch because of the -- and giving a lot of detail on it because our competitors are looking for it and so aggregating it is helpful from that point of view as well.

We still don't know a significant amount about Apple Watch. We don't know how much how much the product line will truly cost, all we know is that prices will start at $349. Many believe this means that the mid-level Apple Watch will start at $349, but I believe that means the less expensive Apple Watch Sport will begin at this entry level price. If correct, we could see significantly higher prices for both the steel Apple Watch and prices rivaling some luxury watches for the precious metal Apple Watch Edition. It doesn't quite make much sense for Apple to hide these numbers if we were dealing with the typical $100 pricing increments normally seen with Apple products, as we already know rough iPod and Apple TV numbers and an averaging of the product SKUs could give us an reasonable ASP. Thus, the point of concealing these numbers becomes futile if we can roughly estimate sales via the traditional method.

But if Apple Watch's price is going to span a huge range, say something like $349 to $3499, it makes tremendously more sense for Apple to want to keep this information close to the vest as it will be incredibly difficult to determine the product mix, the ASP, and even the total number sold-all incredibly helpful numbers for competitors (both traditional tech competitors and traditional watch manufacturers) who may consider entering into the segment.

The plausibility of a large range seems fairly inevitable when talking about solid gold watches (a metal that trades at over $1200/ounce) and rarely sell below $10,000, used, from luxury watch makers such as Rolex or Omega. But the news from the conference call is the first actual comments from Apple suggesting there's a lot more to the Apple Watch pricing story than initially believed.

Including Apple TV, in this generic "Other" category may also suggest there is a lot more to come in this space in the years ahead. We can discuss this in more detail if and when Apple expands their Apple TV line. But when you read absurd "analysis" suggesting Apple has no growth potential left, ask yourself why Apple is attempting to conceal these "no growth" categories' numbers from competitors.

Merging Retail numbers into Geographic numbers

Another oddity from the call involves a similar change in how the company will report numbers from its retail stores. Instead of breaking out these numbers separately to report the health of their retail segment, Apple will now include these results as part of a larger geographic number. As Nancy Paxton, Senior Director of Investor Relations at Apple explained,

Accordingly, beginning in Q1 '15, we'll be including the results of our retail stores in the geographic segments where the stores are located providing a consolidated view of regional performance that is consistent with the way our executive team measures the business.

This means that going forward our reportable segment will be Americas, Europe, Greater China, Japan and the rest of Asia-Pacific with the retail no longer classified as a segment.

But Apple reported retail numbers this quarter and also announced that in FY2015, they would open 25 new retail stores, remodel 5 stores, and in Greater China, will be opening at least 25 news stores over the next couple years.

Perhaps this change is the result of a strategy put into place by new Senior VP of Retail, Angela Ahrendts. But considering the level of enthusiasm Apple has expressed for their retail rollout over the past 10 years, to say this is an unusual change is an understatement. And with 3 store remodels this quarter, why is Apple only remodeling 5 over the next year. What's with that?

With all that we don't know about Apple Watch and with purchases of fine jewelry not fitting the typical noisy, busy environment of an Apple Store, is there something else brewing? I believe Apple Watch will be a transformational product for the company and while we don't know a lot of the details to help guide our just how big this product category can be for Apple, I believe we're starting to see hints of just how big of a deal the company believes it to be.


While there is little doubt that Apple had a remarkable quarter, there were major hints made thoughout the conference call that help to reconfirm bullish views for FY2015. The still to be fully written story of iPad will come into greater focus after the Christmas quarter when macro pressures hopefully start to ease and the possibility of iPad in enterprise peaks it's head. iPhone's future seems particularly optimistic given Apple's continuing global expansion in the coming year. And while no one fully understands how Apple Watch will effect top and bottom lines, subtle company changes suggest that the company may be betting big that significantly larger-than-they're-used-to ASPs could provide tremendous revenue growth even with only modest iPod or iPad like sales. These important details may be missed in many analysts predictions, so beware conclusions that don't dig deep.

Disclosure: The author is long AAPL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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