deagol's AAPL model

Mac: The Limits to Growth (Part 2)

2012-01-31T21:13:00.012-05:00

To give full growth to that which still doth grow?

(this post is a continuation of this one)

If you haven't read the first part of this exercise, please at least skim through it so you can take better advantage of whatever insights might come from the analysis presented here.

I'm going to try to observe the evolution of the size of customer installed bases, which should gradually expand (or contract) in typical s-shaped patterns (aka sigmoid, logistic or other similar functions) when plotted over time. This derives from the notion that significant, long-term changes in customer adoption driven by innovative technologies require time to play out, as different segments of customers react differently to change, even assuming immediate information transfer about the innovation (which is not the case even in the internet age).

I'll tend to focus the charts around easily visualizing the yearly variation of the customer bases considered (y' continuously but ∆y given our discrete data) which should roughly fit a bell shaped curve. The shapes don't need to be exactly as the figures shown previously since those were just two very simplified examples given arbitrary theoretical assumptions on how the relative growth rate y/y should moderate as y gets bigger (notice the subtle distinction between y'/y=relative rate of change refers to the continuous modeling notation and "y/y=year over year"or "q/q=quarter over quarter" as the discrete modeling shorthand for the same measure).

So, for this second part I'll start with a broad historic view of all computing, and later dig into the adoption of traditional personal computers highlighting Apple's participation of such adoption, while aiming to give some perspective on the Mac's potential opportunity for expansion within that market. I'll leave a more detailed scrutiny of the recent mobile revolution for a later post.

Apple: The Limits to Growth (Part 1)

2012-01-29T14:21:00.009-05:00

‘Rule Forty-two. All persons more than a mile high to leave the court .’

Everybody looked at Alice.

"Population, when unchecked, increases in a geometrical ratio, Subsistence, increases only in an arithmetical ratio."

–Thomas Malthus

"Evolution is the result of a sequence of replacements."

–Elliot W. Montroll

Over the last 8 years Apple's revenue has grown from $6.6b in calendar 2003 to $128b in calendar 2011, a 19.4x increase, or an annualized compound rate of 45% per year. Most astonishingly, EPS (including some substantial share dilution) has grown from 13 cents in 2003 to a whopping $35.11 in 2011, a 270x increase, or annualized to a compound rate of 101% per year. That's more than the equivalent of doubling every single year for eight years (2^8=256 times).

In light of such an impressive long-term performance, last quarter's 73% and 116% Y/Y growth, in revenue and EPS respectively, may seem like par for the course. Indeed, this is the way many "savvy" yet uninformed investors characterize Apple and AAPL: as a momo growth stock bound to fall off a cliff (so many examples from last year: NFLX, RIMM, FSLR, APKT, SINA, just to name a few) as soon as the scorching growth cools down a bit (and it will sooner or later, that's an undistputable fact).

What has caught everyone off guard is that this isn't supposed to happen, ever, from a company this big. It was perhaps acceptable during the iPod era when Apple was small and EPS could easily grow at 3-4 hundred percent for a couple of years off of a low base. It could be explained away as a one-hit wonder and the lost opportunity dismissed as such.

But not now. That old "Law of Large Numbers" (cleverly nicknamed the "LoL Numbers" in a comment at Apple 2.0 by someone to whom I wish I could give proper credit, since I forgot their user name) prohibits it. Thus, because this unprecedented growth certainly can't go on, professional analysts, on average, have pegged Fiscal Year 2013 EPS growth at a "reasonable" 11.7%. And as such, AAPL now commands a run-of-the-mill PE multiple of 12.7 times trailing EPS. Makes perfect sense! Regardless, they can continue to estimate 19% long-term growth over the next 5 years, since no one really takes that one seriously.

/s
Read more »

Fiscal 1Q 2012 Final Estimates

2012-01-09T10:43:00.001-05:00

Apple shares today are flirting around the record all-time intraday high price of $426.70, yet that still represents a record low valuation of 8.6 times my forward-looking EPS estimate (6.6x ex-cash).

A cash balance of $409 per share is estimated by June 2016, and $432 by the end of that Fiscal Year in September 2016, still surpassing the current market price within 5 years from now (this assumes no dividends so if you're reading this in 2016 remember to add back any of those plus interest).

As for the most recent past, and immediate future:

3mo ending Dec-2011   Rev($M)   EPS($)
-------------------   -------   ------
Apple guidance         37,000     9.30
Analysts consensus     38,280     9.87
Deagol estimates       41,895    11.58


3mo ending Mar-2012   Rev($M)   EPS($)
-------------------   -------   ------
Apple guide (est.)     34,500     8.60
Analysts consensus     31,530     7.87
Deagol estimates       39,133    11.13


12m ending Sep-2012   Rev($M)   EPS($)
-------------------   -------   ------
Analysts consensus    138,120    32.68
Deagol estimates      165,349    46.03


Valuation (12mo ending on)   EPS($)  Y/Y  10x  Cash  Tot
--------------------------   ------  ---  ---  ----  ---
Trailing        (Dec-2011)    32.82  83%  328    98  426
Fair value      (Dec-2012)    49.85  52%  498   147  645
1yr target      (Dec-2013)    64.31  29%  643   209  852


Revenue breakdown ($M):
Mac        6,359 ( 5,005 × $1,270)
iPod       2,710 (16,000 × $169)
iPhone    20,531 (32,500 × $632)
iPad       8,819 (14,500 × $608)
iTunes     1,932
Periph       737
Software     808

Income statement ($M):
Revenue   41,895
COGS      24,280
GM        17,615
OpEx       3,341
OpInc     14,274
OI&E         112
Pre-tax   14,386
Tax        3,453
NetInc    10,933
Shrs.        944
EPS       $11.58

Ratios:
GM%        42.0%
OpInc%     34.1%
Tax%       24.0%
NetInc%    26.1%

AAPL analysts: pros' telescopic aim low, blogs' eyeball aim true

2011-10-17T23:43:00.019-04:00

Tomorrow Apple will report its financial results for Fiscal Q4 2011. My estimates were published a couple weeks ago. Most savvy AAPL investors already know what to expect thanks to the excellent work of Apple 2.0's Philip Elmer-DeWitt, in compiling and contrasting all estimates made by professional analysts working for the biggest banks, brokerages, and financial research institutions, as well as those made by independent (aka bloggers or "amateurs") AAPL analysts.

PED - Our Apple whisper numbers

These days the gap between these two types of analysts has grown immense. According to Yahoo! Finance, Wall Street analysts are expecting EPS of $7.28 on $29.45b in revenue, on average, while PED's compilation of pros shows an EPS average of $7.31. But the 16 independent bloggers/amateurs he polled are expecting EPS of $9.07 (24% higher than pros) on $33.47b in revenue (a cool $4b higher), on average. For the last few quarterly "smackdowns" pitting bloggers vs. pros, PED's been using a "two billion gap" mantra in his titles, which already seemed preposterous. Well the gap has now widened to $4b and it seems to me this trend will continue.

PED - Wall Street still doesn't understand Apple
PED - Bloggers vs. Pros on Apple's Q3: Yet another $2 billion gap

Most financial websites which provide stocks' forward-looking valuation information do so based on Wall Street's professional analysts data. This means widely quoted forward P/E multiples you'll see in almost every article panning (or even recommending) AAPL as a potential investment, are blindly following the blind. Fortunately we have PED's work and the couple dozen independent analysts trying to get a better sense of AAPL's financial performance, and most importantly, sharing and publishing the results.

FY2008: Q2, Q3, Q4
FY2009: Q1, Q2, Q3, Q4
FY2010: Q1, Q2, Q3, Q4
FY2011: Q1, Q2, Q3

This has gone on for more than 3 years now, and it's amazing to me that the mainstream investment community and media don't appear to have caught on at all and still rely on Wall Street's "experts" on Apple and AAPL. The good news for the small investor is the opportunity remains there, and armed with these publicly available data we can take advantage of the information asymmetry (to borrow from one of asymco's ideas) and continue reaping the rewards. Despite all the naysayers along the way, look what us small AAPL investors have achieved:

Apple Stock Chart by YCharts

Back in April I did some extensive analysis on this dichotomy in performance between pro and blogger analysts, and it's time for an update. Since then, I've seen several arguments attempting to invalidate the obvious conclusions:

1. This is a fluke based on just one quarter. Let's see what happens in the long term.

False. There's now more than 13 quarters worth of reliable data (I have more than 6 years worth of estimates but that's just one blogger). There's data for 48 different pro analysts and 16 different bloggers (keeps expanding every quarter), and estimates for up to 7 categories (EPS, Revenue, unit forecasts, and GM%). A total of 2155 estimates including 546 made by bloggers. This is plenty of data.

2. Bloggers only seem better because they're more bullish, and since Apple has performed well recently, it's a coincidence that bloggers nail it. It's a fluke.

Perhaps. But it doesn't excuse pro analysts from being unjustifiably bearish. Besides, there's dispersion patterns in the data (see below) that show bloggers reliably aim at the bullseye (even when they have bad aim), while pros systematically aim low (and with false precision).

3. Nobody relies on WS estimates as we all know it's a rigged game. AAPL is not undervalued based on a misperception of it's financial performance. Everyone knows AAPL smashes WS expectations, yet all players always have much higher expectations to begin with.

False. Not everyone knows, and what gets reported is usually misleading. Most investors don't have the time to follow all these undercurrents in perception. Most people invested in AAPL don't even know they are (through pension/ETF funds and such).

PED:

We've taken the average estimates of the six analysts with the best records over the past year to calculate our "whisper numbers" -- defined by Investopedia as "the unofficial and unpublished earnings per share (EPS) forecasts that circulate among professionals on Wall Street ... generally reserved for the favored (wealthy) clients of a brokerage."

We're going to do Wall Street one better and offer not just one whisper number for Apple's last fiscal quarter of 2011, but seven of them. Moreover, we're not going to whisper them to some favored (wealthy) clients, we're going to publish them.

You tell them Philip!

Alright, enough rousing preamble. This post is more about revealing such data asymmetry and less about justifying its presence or convenience. So let's look at some charts!

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Change agent

2011-10-06T15:03:00.007-04:00

To suffer woes which Hope thinks infinite;
To forgive wrongs darker than death or night;
To defy Power, which seems omnipotent;
To love, and bear; to hope till Hope creates
From its own wreck the thing it contemplates;
Neither to change, nor falter, nor repent;
This, like thy glory, Titan, is to be
Good, great and joyous, beautiful and free;
This is alone Life; Joy, Empire, and Victory!

—Prometheus Unbound, Shelley

Fiscal 4Q 2011 Final Estimates

2011-09-30T19:29:00.003-04:00

AAPL now trading at [$381.32] 8.6 times my forward-looking EPS estimate (6.6x ex-cash). Here are some comparisons with previous periods:

Jul 18, 2011: [at $374.65] 10.8 times my forward-looking EPS estimate (8.6x after excluding cash)
Mar 21, 2011: [at $330.67] 10.5 times my fwd EPS estimate (8.3x ex-cash)
Dec 23, 2010: [at $323.60] 12.9 times my fwd EPS estimate (10.5x after excluding cash)
Oct 02, 2010: [at $282.52] 12.7 times my FY2011 EPS (10.5x after excluding cash)
Jun 30, 2010: [at $251.53] 12.1 times my FY2011 EPS (9.8x after excluding cash)

An alternative long-term valuation metric I introduced in my "Get AAPL for free" post from July, which had Apple's cash balance matching the then current share price within 4.5 to 5 years is maintained, with Apple's cash estimated at $381.16 per share for the quarter ending in June 2016. As I pointed out then, it's a very conservative scenario that does not assume any new product category and now involves even more cautiousness with EPS growth slowing down to 10% by then (was 15%). Just trying to somehow align that base case with the current valuation multiple and its implied market sentiment.

The rest of the details:

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Here's to the crazy ones

2011-08-24T19:36:00.002-04:00

Here's to the crazy ones.

   The misfits.
    The rebels.
     The troublemakers.
      The round pegs in the square holes.
The ones who see things differently.

They're not fond of rules.
And they have no respect for the status quo.

You can praise them, disagree with them, quote them,
disbelieve them, glorify or vilify them.
About the only thing you can't do is ignore them.
Because they change things.

They invent. They imagine. They heal.

They explore. They create. They inspire.
They push the human race forward.

Maybe they have to be crazy.

How else can you stare at an empty canvas and see a work of art?
Or sit in silence and hear a song that's never been written?
Or gaze at a red planet and see a laboratory on wheels?

We make tools for these kinds of people.

While some see them as the crazy ones,
we see genius.

Because the people who are crazy enough to think
they can change the world, are the ones who do.

Thanks Steve.

Apple at record high yet cheap as ever

2011-07-18T16:22:00.002-04:00

Ok maybe not as cheap as in 2003...

Still, despite the 20%+, 64+ point run in less than a month to a record all-time intraday high today of $374.65, those buying AAPL at that price are still getting it at a near-record low (recent years) valuation multiple of only 10.8 times my forward-looking EPS estimate (8.6x after excluding cash).

Fiscal 3Q 2011 Final Estimates

3mo ending Jun-2011   Rev($M)   EPS($)
-------------------   -------   ------
Apple guidance         23,000     5.03
Analysts consensus     24,920     5.80
Deagol estimates       26,070     6.62

Get AAPL for free - yet another opinionated valuation analysis

2011-07-01T23:29:00.011-04:00

These days there's been endless discussion about AAPL valuation, some as usual focused on Apple and its perceived risks, some scolding everyone for even talking about valuation as it's "evidently" irrelevant, and more recently some more focused on market mechanics and manipulation. There's evidence and theory and some data to back almost any combination of reasons, be that pro or con any specific issue. Precisely because of this, most points of view end up being opinion based. I won't even point you to any article as there's been too many and I don't want to bias your research by picking my favorites (check on the list of links at the right for some of them). Or just Google "AAPL valuation" and filter by "last month" with the search tools on Google's left panel.

So here, to add my take to the "AAPL valuation is nuts" opinionated pool, I've chosen to do it without addressing any of the common issues. Yup, you read that right. I won't talk about management uncertainty or competitive forces or the broader economy or sentiment or market manipulation. There's plenty on all of that elsewhere, and usually (if you're good at parsing trolls) insightful and exhaustive discussion through those articles' comment systems.

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Pro analysts' "lazy eye" - charted

2011-04-22T05:46:00.011-04:00

Sorry for taking so long to post about Apple's fiscal 2Q 2011 results. By now everyone surely has all their answers, so I'll keep it short (and you can get the gritty details in the tables below). Compared to my estimates, a huge iPad miss ($1.6b) partly offset by iPhone upside ($1.1b), among lesser effects, resulted in almost $600m revenue miss. All of it was made up through lower costs hitting operating income within 0.2%, and nailing pre-tax income. Slightly lower tax rate and share dilution than expected resulted in EPS 8 cents (1.2%) higher than expected. All margin ratios were slightly better than expected. Revenue guidance roughly inline but EPS guidance significantly higher than expected, which suggests continued high margins. Here's all the details:

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Which analysts are the biggest sandbaggers - charted

2011-04-13T17:52:00.010-04:00

Over the past year or so I've been tracking all of us analyst performance in forecasting Apple's financial metrics, and ranking us based on the 6 or 7 categories of estimates compiled by Fortune's Apple 2.0 blogger Philip Elmer-DeWitt, and the outcome has always been a consistent underperformance by pros (see here, here, here and here). The comparison and friendly "competition" has almost become laughable, if it weren't for the serious amount of capital that these "professional" analysts look over, and thus the effect of their cluelessness on Apple's share price gets felt.

However, all this time I've been applying a somewhat forgiving methodology on my rankings. By averaging out all the categories with equal weights, the resulting score improperly reflects the relative importance and sensitivity on the stock price of these variables. It should be clear to all investors that forecasting earnings and revenue is most critical, while the number of iPods sold has very little effect (for quite a few years now) on Apple's financial performance. Yet by applying the same weight to these, the effect of the most important metrics gets watered-down by the less important ones so the analyst scores and thus the rankings do not reflect what investors should be focusing on out of all the stuff analysts throw out there.

My very first Apple estimate

2011-03-29T15:05:00.006-04:00

A few weeks ago I stumbled into the old The Motley Fool board for AAPL, and was surprised to see them open without subscription. My recollection from about 10 years ago was that they had gone to a paid subscription model, and thus I had abandoned them for good and never looked back in these 10 years (nothing against the Gardner bros. investment style but wasn't a fan of their constant spamming for their newsletters).

So it seems at some point in the last 10 years they decided to go with a freemium model. Anyway, as I was reading some of the posts, I think I recognized some of the old nicks from way back then. I got curious and decided to search for my old posts. Couldn't find them on a first try, but then I tried an alternate nick I used and there I was, in full 10-years-younger and slightly snarky-er glory, trying to be all witty and all that. (Ah, the old interwebs... hasn't changed one bit from the usenet days, it seems. Or rather, people haven't changed.)

So, here's my very first post ever on an AAPL board, and to my surprise (seriously), it's an EPS estimate:
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Fiscal 2Q 2011 Final Estimates

2011-03-21T08:20:00.008-04:00

I was planning on posting my estimates next week once the quarter had ended. However, because the last few times I posted estimates AAPL was priced closer to the next-3-months low than its next-3-months high price, and seeing as right now we're barely above the most recent low, I didn't want to let this opportunity go by.

In the last 3 estimate posts, I included a P/E blurb highlighting how extremely undervalued was the then current AAPL price. Here they are, for reference:

Jun30: Apple now trading at [$251.53] 12.1 times my FY2011 EPS (9.8x after excluding cash)
Oct02: Apple now trading at [$282.52] 12.7 times my FY2011 EPS (10.5x after excluding cash)
Dec23: Apple now trading at [$323.60] 12.9 times my fwd EPS estimate (10.5x after excluding cash)

It seemed to me that those 12-13x multiples (10x ex-cash) on my estimates were acting as a rock-bottom level for AAPL. No more. As of Friday's close, AAPL is now trading at [$330.67] 10.5 times my fwd EPS estimate (8.3x ex-cash). As I type this it's up to $336 in pre-market, which is merely inline with the Q's move.

Pro analysts: mediocrity has become a habit

2011-01-20T12:47:00.010-05:00

Horace Dediu is just amazing. He's so much more fun to read than all my dreary number-filled tables. Go read his "existential theory" of asymco. A true "entertainer," indeed.

Smooth Operator

2011-01-18T22:38:00.016-05:00

No need to ask.
He's a smooth operator

"That's a part of the magic at Apple, and I don't want anybody copying it."

"Excellence has become a habit."

"If this is cannibalization it feels pretty good."

I'm happy and relieved to see Apple finally beating my estimates after I had been slightly overshooting for the last couple of quarters.

Thanks to Steve, Tim and the rest of the Team, all Apple employees, for kicking major ass. To paraphrase a commenter in another post: me and my family and our accounts thank you, Apple.

Anyway, on to the details. Solid quarter with upside across the board, except Macs and iTunes coming a bit below my estimates. The $670m revenue upside and 50 bps GM beat was tempered by slightly higher than expected operating expenses and tax rate, resulting in a 21 cent "surprise" (3.2%).

But the real shock of the report is not that much on the December quarter but in Q2 ending in March, which looks to be another record in the making (ironically Q2 is usually the weakest of the year). Not only did they guide higher than the admittedly lowball WS analysts expectations, PO also shattered my own "sandbagged" estimate, and almost guided up into my "real" estimate of $5.07. That would have been, and is unprecedented.

All the details:

Fiscal 1Q 2011 Final Estimates

2010-12-23T10:15:00.010-05:00

Apple now trading at 12.9 times my fwd EPS estimate (10.5x after excluding cash)

I might adjust things a bit if there's any announcement in January.

3mo ending Dec-2010   Rev($M)   EPS($)
-------------------   -------   ------
Apple guidance         23,000     4.80
Analysts consensus     24,110     5.29
Deagol estimates       26,071     6.23

Apple Financial Floor Plan

2010-12-22T22:35:00.006-05:00

A slightly different take on asymco's idea of Describing Apple’s growth, cost structure, product-level and overall profitability in a self-explanatory chart (click to enlarge).

Fiscal 4Q '10 actual results vs. estimates

2010-10-20T12:43:00.010-04:00

I'll have to fine tune the iPhone and iPad projections. Everything else came in a bit soft, with iPod and iTunes the weakest. On the income statement, I started with a relatively small $219m (1.1%) revenue shortfall, but made it worse at every step (most impact was from guessing GM a bit high) and it widened to $403m (7.4%) shortfall in pretax income. Fortunately this was almost all offset by a much lower tax rate than estimated, resulting in actual EPS only 9 cents short of estimated, or within 2%. Guidance for the current quarter was impressive.

Here's all the details. I've included the combined iPad+iPhone figures to highlight how those two big errors balanced out.

Deagol vs. Market... vs. Apple

2010-10-16T10:39:00.021-04:00

Back in April I posted a couple of charts showing how my "fair value" and "target" forecasts compared to AAPL's price history over the last few years. Several readers have asked for an update, and I said I'd do one when AAPL made a credible move to catch up with its fundamentals, which is the basis for my FV and target forecasts. Seeing as AAPL has run about 80 points in 7 weeks, I was also curious to visualize how far towards a fair valuation has this recent attempt taken it.

Fiscal 4Q 2010 Final Estimates

2010-10-02T21:55:00.016-04:00

Apple now trading at 12.7 times my FY2011 EPS (10.5x after excluding cash)

3mo ending Sep-2010   Rev($M)   EPS($)
-------------------   -------   ------
Apple guidance         18,000     3.44
Analysts consensus     18,610     3.99
Deagol estimates       20,562     4.73

iPad to exceed Mac revenue in 2012

2010-09-13T06:08:00.019-04:00

And no, it's not because I think it'll eat into Mac's growth (average about 25% growth in units, 20% in revenue for the next couple of years). But by Sep 2012 (ttm) iPad would grab the #2 spot as a revenue driver within Apple, behind the iPhone. If we annualize the current quarter's estimate it already exceeds annual iPod revenue, which was the #3 driver up to now (this even after taking into account the December seasonality which benefits the iPod).

Back in early April, before few had any clue how big the iPad would be, I had this very ambitious forecast for it, along with all other Apple product lines. I was way off in underestimating its contribution (as well as iPhone's). Here's an update to that chart:

Gross margin key for EPS estimate

2010-08-24T12:59:00.015-04:00

Duh! Ok, maybe some didn't know this. Anyway, I've done some sensitivity analysis on my model by changing one variable at a time by 10%, and looking at the resulting percentage change in EPS.

First, I simply adjusted the variable by 10% and froze all the other variables, noted the EPS change, and moved on to adjust the next variable (resetting the previous one to how it was originally). Here's a couple of charts for that (click to enlarge):

It'll be OK

2010-07-29T14:32:00.013-04:00

It's ok that Apple's selling all the iPhones and iPads that it can make.
It'll just make some more. Who wants to have made more than it can sell?

It's ok if there's more competition. Choice is good. And people will keep choosing Apple.

It's ok that some or most media outlets get a kick out of bashing Apple.
That's just how journalism works: "If it bleeds, it leads."
It's ok that Apple makes them look like idiots, time and again.

It's ok that Apple's the second largest and soon THE largest company by market cap. It deserves it.
It's ok if it sells just a tenth of what XOM sells. It sells "magic," while XOM sells nasty crap.
Out of every dollar worth of "magic" it sells, it gets to keep more than 3 times what XOM keeps
of its dollar's worth of shit. And the "magic" sales are growing while the other crap's in decline.

It's ok that Steve Jobs is mercurial, and snarky, and boastful. If anyone has earned that right, it's him.
And it's ok that he's getting older, and wiser. His asset is his mind, not his body.
And when he decides to retire, be that in 5 or 10 years or whenever, it'll be ok.
Whoever takes his place will surely have logged thousands of hours with a great mentor, and Apple will do fine.

It's ok that Apple keeps tight control over its platforms. Everyone does.
Ask "open-loving" Google if they'd be willing to share, not the free apps and services, no,
their search algorithms, which drive their ad platform, with competitors. It'd be the most idiotic thing.
Just like Microsoft's "industry standard" Windows and Office are closed games, and everyone pays to play.

It's ok that Apple hoards $46b in cash, and that it keeps adding to the tune of $500 per second.
I don't care for a dividend (it gets taxed, and Apple has much better ideas how to use it than I)
or a stock repurchase (its shares really don't need such an artificial prop, and cash is cash).

It's ok that AAPL is not part of the Dow Industrials. I see no benefit in that.
Why should it be? That's a bunch of established, mature, sometimes dying old farts.
Apple is quite the opposite: "the largest startup."

It's ok if everyone already has some AAPL. Everyone will soon wish they had more.
It's ok if it'll set them back $260 (or soon $400). It's more than worth it. I don't care for a split.

It's ok if yesterday and today AAPL fell 1% more than the market did.
It's UP a gazillion more than the market over the last 6 months, a year, 2, 5, 10 years,
or any other period longer than a few days. And it'll keep doing that for years to come.

It's ok if the sling-shot game is on. Otherwise we couldn't take advantage of it.

I'm not an Apple apologist. I'm a "fanboy" to the extent that the term implies admiration and satisfaction derived from the object of fandom, not of blind faith or sheep-like subservience. These are not by any means excuses made to justify or disregard any short-comings from Apple or AAPL. All of these, to me, are pluses.

Call me a contrarian if you want. It's worked out quite nicely for me.

Oh Oh, It's Magic

2010-07-20T22:12:00.011-04:00

Oh, I got a hold on you
Got a hold on you
I've got a hold on you... tonight

The instant my forecasts are finally good enough to match or slightly exceed Apple's performance, Apple then goes and makes me eat dust in my guidance estimates.

Apple Reports Third Quarter Results

This revenue guidance is just astounding, going by historical guidance patterns it suggests over $20b revenue for September. Analysts are at $17b. Would mean an upside adjustment for them of $4b for 3Q and 4Q combined, delivered in a single day by Apple. All of that well before Santa comes for 1Q. But I'm sure they'll drag their feet and cry all sorts of foul before updating their models to reflect this (just like a few analysts simply refused to consider iPad units above the 3m announced by SJ with 5 days remaining in the quarter).

PED: Apple blow-out: Profits up nearly 78%

Looks like bloggers kicked some pro analyst ass in that smack-down we all participate at Apple 2.0. And the winner is...

PED: Earnings Smackdown: The best and worst Apple analysts

Thanks for the recognition PED. And thanks to Fortune/CNN/Money/TWX. There is no other mainstream media helping the small investor like this, for free. It's not that surprising, given Fortune's history (Forbes would never go with it), but it's quite refreshing to see this sort of thing these days.

Anyway, on with my take on the current competition. Last time I made a list of all analysts with the average error over all categories. PED did a similar thing this time (see article linked above) but only using the revenue and EPS categories, which put me on top. Woo! Haha ok that's cool, but I still went and did it for all categories as before, given that the unit forecasts are ignored in PED's ranking (although I agree that top and bottom line are the most important things to get right). Here's the ranking based on all forecasting categories:


Rank  Err%  Analyst, Affiliation
----  ----  ----------------------------------------
 1    1.93  Horace Dediu, Asymco
 2    2.84  Alexis Cabot, Apple Finance Board
 3    2.85  Yair Reiner, Oppenheimer
 4    3.32  Daniel Tello, Deagol's AAPL Model
 5    3.67  Richard Gardner, Citigroup
 6    3.94  Andy Zaky, Bullish Cross
 7    4.17  Jeff Fosberg, Apple Finance Board
 8    4.21  Robert Paul Leitao, Apple Finance Board
 9    4.39  Scott Craig, Merrill Lynch
10    4.45  Turley Muller, Financial Alchemist
11    4.48  Mike Abramsky, RBC Capital
12    4.83  Doug Reid, Stifel Nicholaus
13    4.96  Nehal Chokshi, Technology Insights
14    5.23  William Fearnley, Janney Capital
15    5.28  Chris Whitmore, Deutsche Bank
16    5.48  Jeff Fidacaro, Susquehanna
17    5.67  Vijay Rakesh, Sterne Agee
18    5.97  Brian Marshall, Gleacher & Co.
19    6.27  Ralph Schackart, William Blair
20    6.40  Toni Sacconaghi, Bernstein Research
21    6.45  Keith Bachman, BMO Capital
22    6.57  Kathryn Huberty, Morgan Stanley
23    6.65  Gene Munster, Piper Jaffray
24    6.89  Dennis Hildebrand, Apple's Gold
25    7.19  Shaw Wu, Kauffman Bros.
26    7.36  Tavis McCourt, Morgan Keegan
27    7.37  Nicolae Mihalache, Trader's Neighborhood
28    7.57  Mathew Hoffman, Cowen & Co.
29    7.78  Ben Reitzes, Barclay's Capital
30    7.99  Rajesh Ghai, Think Equity
31    8.07  Ashok Kumar, Rodman & Renshaw
32    8.77  Mark Moskowitz, J.P. Morgan
----  ----  ----------------------------------------
 9.9  4.35  Bloggers
19.1  6.08  Professionals
----  ----  ----------------------------------------
       40%  Pros error increase % on bloggers

Click on image to enlarge. Compared to last time (see link above), everyone improved in their forecasting, almost cutting the error in half on average. The best improvement comes from Gardner (moved from last to 5th), Reiner, and Cabot, all of them cutting their average error by more than 70%, with Craig (from bottom feeder to top-ten) close behind cutting it by two thirds. Kumar had the worst sequential change in performance (from 5th to penultimate), failing to improve his accuracy at all. Next worst improvements come from Moskowitz, Reitzes, and Muller, who only managed to shave off 1/4 off of their respective average forecasting errors.

I welcome the few pro analysts stepping up to the plate and competing more seriously; Rainer, Gardner, and Craig from the broader perspective of my ranking. Rakesh in my opinion is just a fluke. He figured in the top ten in PED's ranking (garnering him a mention) just because he got closest in EPS. This is accidental, since he underestimated revenue by more than $1b, but his red-flagged (worst), outrageously high gross margin ultimately lucked him out on the bottom line. I'll give him props for almost getting the Mac units right. The rest of the lot, come on, it's not hard. Just don't estimate less than 3m iPads when Jobs already told you they had sold more than that a week before the end of the quarter. Neither go crazy and estimate triple the run rate for those last 5 days (yes, that's you, last-ranked Moskowitz).

Moving on to the details on my own forecasts, I did great on the top and bottom lines despite being somewhat off in the unit forecasts.

Apple came in 644 thousand iPhone units short (downside of about $400m mostly compensated by higher iPhone ASP leaving a $122m net iPhone shortfall), 718 thousand iPod units short (about $110m), and soft peripherals and iTunes sales (another $113m), for a total revenue downside of about $345m. This was mostly compensated by Mac upside of 134 thousand units and higher Mac ASPs ($274m combined effect), as well as minimal iPad and SW upside ($21m), leaving a negligible $50m overall revenue shortfall (0.3%).

From there, I veered off a bit by underestimating costs (both COGS and opex) resulting in my operating income estimate swelling to $169m above what Apple reported. But then I lucked out (kind of like Rakesh but on much tighter range lol) by overestimating the tax rate, resulting in a net income "miss" by Apple of just $51m, keeping my EPS estimate within 2% of the actual number (6 cents). Here are all the details.

Products         Est       Act       Err      Err%
Units(K)      ------    ------    ------    ------
Mac            3,338     3,472    -  134    - 3.9%
iPad           3,258     3,270    -   12    - 0.4%
iPhone         9,042     8,398    +  644    + 7.7%
iPod          10,124     9,406    +  718    + 7.6%

ASP($)        ------    ------    ------    ------
Mac            1,236     1,267    -   31    - 2.5%
iPad             660       662    -    2    - 0.4%
iPhone           603       635    -   32    - 5.0%
iPod             163       164    -    1    - 0.5%

Revenue($M)   ------    ------    ------    ------
Mac            4,125     4,399    -  274    - 6.2%
iPad           2,150     2,166    -   16    - 0.7%
iPhone         5,456     5,334    +  122    + 2.3%
iPod           1,655     1,545    +  110    + 7.1%
iTunes         1,258     1,214    +   44    + 3.6%
SW               641       646    -    5    - 0.8%
Periph           465       396    +   69    +17.4%

P&L($M)       ------    ------    ------    ------
Revenue       15,750    15,700    +   50    + 0.3%
COGS           9,497     9,564    -   67    - 0.7%
GM             6,253     6,136    +  117    + 1.9%
OpEx           1,850     1,902    -   52    - 2.7%
OpInc          4,403     4,234    +  169    + 4.0%
OI&E              62        58    +    4    + 7.6%
Pre-tax        4,465     4,292    +  173    + 4.0%
Tax            1,161     1,039    +  122    +11.7%
NetInc         3,304     3,253    +   51    + 1.6%
Shrs.            925       927    -    2    - 0.3%
EPS($)          3.57      3.51    + 0.06    + 1.8%

Ratios        ------    ------    ------    ------
GM%            39.7%     39.1%    + 0.6%    + 1.6%
OpInc%         28.0%     27.0%    + 1.0%    + 3.7%
Tax%           26.0%     24.2%    + 1.8%    + 7.4%
NetInc%        21.0%     20.7%    + 0.3%    + 1.3%

Guidance      ------    ------    ------    ------
Rev($M)       16,450*   18,000    -1,550    - 8.6%
EPS($)          3.27*     3.44    - 0.17    - 4.9%

* These were my PO-LowBall™ guidance estimates for 4Q.
My real estimates were $18.3b in revenue and $4.46 in
EPS, obviously to get revised soon.

Great stuff, Apple. Best thing: that sweet guidance. This stock, at these levels, is the opportunity of a lifetime. It's now up to investors (big and small) to step up to the plate... Apple has already loaded the bases for you (and the pitcher is, like, drunk).

Bloggers vs. Pros Earnings Smack-down

2010-07-20T08:30:00.011-04:00

Later this afternoon is Apple's earnings day. This is when all of us analysts earn our salary (haha sarcasm). To me, it's very important to keep track of my accuracy compared to other analysts not because I need to earn a salary, but because I simply need to get my modeling relatively right for my investment objectives to work.

So as I'm sure you know, PED does this earnings smack-down thing, pitting professional analysts against bloggers. Think of WWE, but better (without the predetermined outcomes). Lol ok, it's not nearly as exciting or entertaining, but it's as close as it will ever get in the investment analyst world. It's been a couple of years now, and it's been really fun. Thanks PED.

The Street awaits Apple's Q3 earnings

Go there and see the awesome table PED's meticulously crafted. I thought I'd try to get the revenue and EPS columns in some kind of visual form. So I went and calculated standard scores on everyone for revenue and EPS and ranked them all on the combined score. Then try to chart it, highlighting and contrasting the pro/blogger dimension. I came up with this (click to enlarge):

I decided to highlight the 3 most bullish and bearish professional analysts, and one of each extreme for the bloggers, as well as the mean for each group. I also highlighted Munster (because his EPS is so out of whack and I wanted to show that) since his combined score represents the median analyst (that is, if his revenue and EPS estimates actually cohered with the mid point of those two extremes). Oh, and myself, uh, because this is my blog.

If you ask me, this looks ugly. Ha. I don't know if I could've enlightened the data in a different way, but to me it's not a nice visualization of it. I couldn't think of anything else and the report is almost here, so there you have it.

Here's the raw data for the chart:


Analyst (ranked from most                     ----- z-scores ----
bearish to most bullish)                        Rev    EPS   Comb
--------------------------------------------  -----  -----  -----
1  Ben Reitzes, Barclay's Capital             -1.31  -1.13  -1.22
2  Mathew Hoffman, Cowen & Co.                -1.13  -1.09  -1.11
3  Tavis McCourt, Morgan Keegan               -0.80  -1.28  -1.04
4  Keith Bachman, BMO Capital                 -1.31  -0.76  -1.04
5  Shaw Wu, Kauffman Bros.                    -1.31  -0.73  -1.02
6  Toni Sacconaghi, Bernstein Research        -0.93  -0.91  -0.92
7  Doug Reid, Stifel Nicholaus                -0.91  -0.80  -0.86
8  Kathryn Huberty, Morgan Stanley            -0.58  -1.06  -0.82
9  Ralph Schackart, William Blair             -0.64  -0.76  -0.70
10  Brian Marshall, Gleacher & Co.            -1.13  -0.21  -0.67
11  Mark Moskowitz, J.P. Morgan               -0.57  -0.69  -0.63
12  William Fearnley, Janney Capital          -0.47  -0.54  -0.51
12.3  Professionals                           -0.42  -0.47  -0.45
13  Ashok Kumar, Rodman & Renshaw             -0.04  -0.65  -0.35
14  Richard Gardner, Citigroup                -0.04  -0.36  -0.20
15  Rajesh Ghai, Think Equity                  0.29  -0.65  -0.18
16  Chris Whitmore, Deutsche Bank              0.07  -0.36  -0.15
17  Gene Munster, Piper Jaffray                0.87  -1.13  -0.13
18  Nehal Chokshi, Technology Insights         0.18  -0.43  -0.13
19  Mike Abramsky, RBC Capital                 0.14  -0.36  -0.11
20  Vijay Rakesh, Sterne Agee                 -0.80   0.63  -0.08
21  Turley Muller, Financial Alchemist         0.05   0.19   0.12
22  Scott Craig, Merrill Lynch                 0.00   0.45   0.22
23  Jeff Fidacaro, Susquehanna                -0.24   1.26   0.51
24  Dennis Hildebrand, Apple's Gold           -0.08   1.18   0.55
25  Yair Reiner, Oppenheimer                   1.12   0.08   0.60
26  Andy Zaky, Bullish Cross                   0.36   1.15   0.75
27  Alexis Cabot, Apple Finance Board          0.90   1.23   1.07
27.2  Bloggers                                 1.07   1.21   1.14
28  Daniel Tello, Deagol's AAPL Model          1.14   1.00   1.07
29  Horace Dediu, Asymco                       0.73   1.55   1.14
30  Jeff Fosberg, Apple Finance Board          1.67   1.63   1.65
31  Robert Paul Leitao, Apple Finance Board    2.38   1.51   1.95
32  Nicolae Mihalache, Trader's Neighborhood   2.37   2.07   2.22

Good luck to everyone!

Fiscal 3Q 2010 Final Estimates

2010-06-30T15:22:00.025-04:00

Apple now trading at 12.1 times my FY2011 EPS (9.8x after excluding cash)


3mo ending Jun-2010    Rev($M)   EPS($)
-------------------    -------   ------
Apple guidance          13,200     2.34
Analysts consensus      14,604     3.05
Deagol estimates        15,750     3.57


3mo ending Sep-2010    Rev($M)   EPS($)
-------------------    -------   ------
Apple guide (est.)      16,450     3.27
Analysts consensus      16,453     3.69
Deagol estimates        18,271     4.46


12mo ending Sep-2011   Rev($M)   EPS($)
--------------------   -------   ------
Analysts consensus      71,225    16.16
Deagol estimates        83,993    20.48


Valuation (12mo beginning on)    EPS($)    25x    20x
-----------------------------    ------    ---    ---
Trailing           (Jul-2009)     13.34    334    267
Fair value         (Jul-2010)     19.05    476    381
1yr target         (Jul-2011)     24.23    606    485


Revenue breakdown:
Mac        4,125 ( 3,338 @ $1,236)
iPad       2,150 ( 3,258 @ $  660)
iPhone     5,456 ( 9,042 @ $  603)
iPod       1,655 (10,124 @ $  163)
iTunes     1,258
Software     641
Periph       465


Income statement:
Revenue   15,750
COGS       9,497
GM         6,253
OpEx       1,850
OpInc      4,403
OI&E          62
Pre-tax    4,465
Tax        1,161
NetInc     3,304
Shrs.        925
EPS         3.57


Ratios:
GM%        39.7%
OpInc%     28.0%
Tax%       26.0%
NetInc%    21.0%

Check out these fellow bloggers' estimates:

Andy Zaky: Fiscal Q3 2010 Earnings Forecast (AAPL)

Horace Dediu: Asymco estimates for Apple’s third fiscal quarter

Robert Leitao: AAPL June Quarter Estimates In Detail

Jeff Fosberg: AFB's user Mercel

Alexis Cabot: AFB's user awcabot

Turley Muller (by way of PED): How Turley Muller calls Apple

And PED's smack-down is on:

The Street awaits Apple's Q3 earnings

How many iPhones did Apple sell?

How many iPads did Apple sell in Q3?

How many iPods did Apple sell in Q3?

Let's talk about the Mac for a change

Apple randomizes web order numbers

2010-06-17T14:30:00.009-04:00

Sometime around the middle of May I started receiving submissions of web order numbers that were out of sequence. After a major batch of contributions from June 15, I've concluded Apple has now successfully randomized these in such a way that I no longer can derive (nor estimate in any meaningful way) a count of web orders from any two or more numbers and date-time values, as I've done for 5+ years.

Here's a scatter plot of the contributions for June 15:

Here's a frequency histogram including a few more web order numbers from before and after those shown above:

And here's the raw data, in case anyone somehow mines some pattern out of it:

Timestamp(PDT)  Web number  Contributor
--------------  ----------  ------------------
05/09/10 06:11  W299136XXX  macnmaine
05/10/10 03:52  W2477497XX  michelc
05/10/10 05:48  W2293963XX  CdnPhoto
05/14/10 15:19  W2916900XX  Ghh008
05/16/10 17:40  W215139XXX  macnmaine
06/02/10 11:55  W2769957XX  centex
06/06/10 15:49  W292153XXX  macnmaine
06/14/10 18:58  W2856025XX  centex
06/15/10 09:30  W263697XXX  cotten999
06/15/10 12:51  W2462125XX  hltr
06/15/10 13:35  W2771715XX  The Scorpion Files
06/15/10 14:53  W2436969XX  braney
06/15/10 15:55  W2736754XX  DSO
06/15/10 16:22  W2670179XX  parkslope2006
06/15/10 16:32  W2755113XX  DSO
06/15/10 17:07  W216414XXX  nontekkie
06/15/10 17:12  W2488284XX  $ Bill Yall
06/15/10 18:00  W2831010XX  jamesd
06/15/10 19:19  W2111939XX  centex
06/15/10 19:22  W2659075XX  cranjo
06/15/10 19:29  W2705339XX  tradervic
06/15/10 19:30  W2562092XX  cranjo
06/15/10 19:31  W2357239XX  sensiblethoughts
06/15/10 20:00  W219790XXX  organicandnoworms
06/15/10 23:29  W2940290XX  fhatta
06/16/10 09:46  W2300058XX  Probe

This is unfortunate, but of course it won't prevent me from continuing to analyze Apple's business. I have to thank Apple for letting me get away with it for 5+ years, but most of all I'd like to thank all the fellow AAPL investors for their voluntary contributions to this effort. And Steve "Caligula" Evans for coming up with the idea in the first place and compiling those very early numbers.

But now it's time to fly solo, and hope I don't disappoint. Third quarter final estimates in a couple of weeks. They look great but I'm still tinkering with things, and we'll surely get some more info on iPhone 4 sales over the next couple of weeks. Stay tuned!

iPad web usage passes iPod

2010-06-03T23:22:00.053-04:00

So my prediction from six and a half weeks ago came through, with a couple of days to spare. iPad has surpassed iPod in web traffic. It took only two months and two million units, compared to almost 3 years and about 40 million iPod touches out there. That means iPads use the web roughly 20 times as much as iPod touches.

Also, not only has iPad more than doubled Android 2.1's share, it's now past all Android OS's combined. No idea how many units make up the Android installed base. See the whole two-month-long comparison below.

Data provided by Net Market Share

July 1st Update, they're a month late on it, but Net Market Share is mentioning it now: iPad Blows Past Android and iPod Touch in Browser Usage

Apple beats up everyone

2010-04-20T17:19:00.017-04:00

Pro analysts 51% worse than amateurs

Apple today reported $13.50b revenue, $3.33 EPS, 8.75M iPhones, 10.89M iPods, 2.94M Macs, and 41.67% gross margin, beating everyone down to a pulp.

I took PED's estimates compilation of amateur and professional AAPL analysts, computed each estimate's percent error against Apple's actual numbers, averaged the six categories' errors for each analyst, and ranked them all from best to worst. I also averaged the errors for the six amateurs and the 19 pros, and calculated how much worse these did in relation to us amateurs. Here's the table.

 %Err  Analyst, Affiliation
-----  ---------------------------------------
 5.9%  Turley Muller, Financial Alchemist
 7.2%  Daniel Tello, Deagol's AAPL Model
 7.2%  Robert Paul Leitao, Apple Finance Board
 7.3%  Andy Zaky, Bullish Cross
 8.2%  Ashok Kumar, Rodman & Renshaw
 8.7%  Bill Shope, Credit Suisse
 8.8%  Patrick Smellie, Apple Finance Board
 9.6%  Alexis Cabot, Apple Finance Board
 9.9%  Yair Reiner, Oppenheimer
10.1%  Mike Abramsky, RBC Capital
10.3%  Ben Reitzes, Barclay's Capital
10.3%  Jeff Fidacaro, Susquehanna Financial
10.6%  Toni Sacconaghi, Bernstein Research
10.8%  Peter Misek, Canaccord Adams
11.8%  Mark Moskowitz, J.P. Morgan
11.9%  Chris Whitmore, Deutsche Bank
11.9%  Tavis McCourt, Morgan Keegan
12.1%  Gene Munster, Piper Jaffray
12.3%  Doug Reid, Thomas Weisel
12.3%  Shaw Wu, Kauffman Bros.
13.3%  Keith Bachman, BMO Capital
13.4%  Scott Craig, Merrill Lynch
13.7%  Brian Marshall, Broadpoint AmTech
14.1%  Kathryn Huberty, Morgan Stanley
14.3%  Richard Gardner, Citigroup
-----  ---------------------------------------
11.6%  Professionals
 7.7%  Amateurs
-----  ---------------------------------------
51.4%  Pros error increase % on amateurs

Clearly Steve Jobs, the sneaky rascal, punked us all with his announcement of 50M total iPhones.

I came $905M (-6.7%) below actual reported revenue mostly due to huge iPhone and iPod upside, but also all other revenue sources except Mac which almost compensated for these. ASPs came in higher than expected for iPod but Mac and iPhone were lower. I keep underestimating peripherals by a relatively significant amount (-12.8%) although it's not significant in absolute terms.

Fortunately I guessed right at gross margin percentage, so this near $1b error comes down to almost $0.4b beat in operating income. Now, if one were to apply a normal tax rate to that, my net income would have come only $280M below, resulting in an EPS beat of 30 cents. But a 24% effective tax rate (630bps below normal) turned it into a 56 cent beat. That's 46% of the upside caused by an unpredictably low tax rate. How is one supposed to model for this, if Apple itself can't even guide within 20% of the effective tax rate? In any case, as a shareholder I won't complain.

Complain? Are you nuts? $333, baby. Come on. Right now. Hell yea! lol


.                Est       Act       Err      Err%
.             ------    ------    ------    ------

Units (K):
Mac            2,949     2,943    +    6    + 0.2%
iPhone         7,500     8,752    -1,252    -14.3%
iPod          10,400    10,885    -  485    - 4.5%

ASP ($):
Mac            1,320     1,278    +   42    + 3.3%
iPhone           635       622    +   13    + 2.1%
iPod             162       171    -    9    - 5.5%

Revenue breakdown ($M):
Mac            3,893     3,760    +  133    + 3.5%
iPhone         4,764     5,445    -  681    -12.5%
iPod           1,681     1,861    -  180    - 9.7%
Music          1,238     1,327    -   89    - 6.7%
Perph            412       472    -   60    -12.8%
SW               608       634    -   26    - 4.2%

Income statement ($M):
Revenue       12,594    13,499    -  905    - 6.7%
COGS           7,367     7,874    -  507    - 6.4%
GM             5,227     5,625    -  398    - 7.1%
OpEx           1,631     1,646    -   15    - 0.9%
OpInc          3,595     3,979    -  384    - 9.6%
OI&E              35        50    -   15    -29.8%
Pre-tax        3,631     4,029    -  398    - 9.9%
Tax            1,089       955    +  134    +14.1%
NetInc         2,541     3,074    -  533    -17.3%
Shrs.            918       923    -    5    - 0.5%
EPS             2.77      3.33    - 0.56    -16.9%

Ratios:
GM%            41.5%     41.7%    - 0.2%    - 0.4%
OpInc%         28.5%     29.5%    - 0.9%    - 3.1%
Tax%           30.0%     23.7%    + 6.3%    +26.6%
NetInc%        20.2%     22.8%    - 2.6%    -11.4%

One last thing, Apple guided for $13.0b to $13.4b in revenue, midpoint $13.2b, and $2.28 to $2.39 in EPS, midpoint $2.335. This was my guidance prediction made a week ago:

3mo ending Jun-2010   Rev($M)   EPS($)
-------------------   -------   ------
Apple guidance (e)     13.200     2.40
Analysts consensus     12,913     2.63
Deagol estimates       14,675     3.21

iPad web usage already beats Droid, iPod in sight

2010-04-19T01:18:00.039-04:00

I predict iPad passes iPod before June 3. Link here or click on the image above. Please note that at some odd hours the last data point may still require an adjustment (this is a live chart, automatically updated daily), I believe based on their relative geographic presence in the parts of the web they see, or something.

Currently, Android's 2.1 installed base is probably made up of mostly Motorola Droid phones, at least for now. Some others are HTC Nexus One, their recent Desire and Legend, and their upcoming Incredible and Evo 4G. And a whole bunch of phones by others soon. See the compared web usage for all the Android versions here.

Data provided by Net Market Share

Deagol vs. Market

2010-04-17T16:21:00.009-04:00

Click to enlarge. Not sure if it needs any more explanation. It's kind of complicated, yet simple. Ask in comments if you have any question.

Update: A reader requested earlier forecasts. Here's a sloppy zoom-in showing those (click to enlarge).

Fiscal 2Q 2010 Final Estimates

2010-04-13T11:42:00.008-04:00

3mo ending Mar-2010   Rev($M)   EPS($)
-------------------   -------   ------
Apple guidance         11,200     2.12
Analysts consensus     11,960     2.44
Deagol estimates       12,594     2.77


3mo ending Jun-2010   Rev($M)   EPS($)
-------------------   -------   ------
Apple guidance (e)     13.200     2.40
Analysts consensus     12,913     2.63
Deagol estimates       14,675     3.21


12mo ending Sep-2010   Rev($M)   EPS($)
--------------------   -------   ------
Analysts consensus      55,091    12.01
Deagol estimates        59,721    13.66


Valuation (12mo beginning on)    EPS(e)   PPS(25x)
-----------------------------    ------   --------
Trailing           (Apr-2009)     11.22        281
Fair value         (Apr-2010)     15.72        393
1yr target         (Apr-2011)     19.82        495

PED:
How many iPhones did Apple sell?
How many Macs did Apple sell?
How many iPods did Apple sell?
How big was Apple's second quarter?

Revenue breakdown:
Mac        3,893 ( 2.95M @ $1,320)
iPhone     4,764 ( 7.50M @ $  635)
iPod       1,681 (10.40M @ $  162)
Music      1,238
Software     608
Periph       412
--------  ------
Total     12,594


Income statement:
Revenue   12,594
COGS       7,367
GM         5,227
OpEx       1,631
OpInc      3,595
OI&E          35
Pre-tax    3,631
Tax        1,089
NetInc     2,541
Shrs.        918
EPS         2.77


Ratios:
GM%        41.5%
OpInc%     28.5%
Tax%       30.0%
NetInc%    20.2%

Another revenue segments visualization

2010-04-09T12:21:00.016-04:00

Before I post my Q2 predictions next week, I thought I'd entertain those who are a bit anxious with yet another visualization of Apple's various revenue sources (click to enlarge):

First thing you should notice is the log scale. Second, you don't get a legend for the colored lines. Ha! [Update: game over, see the 10 year projection above] It occurred to me as a fun and educational research activity to leave it like that and let you work out which color is which product segment. It shouldn't be hard if you remember your Apple products history. And as an incentive, I'll send you the continuation of the graph with my estimates for the next 10 years (yea I know 10 years is crazy but whatever) if you email me the correct color/product matching. Don't spoil it for others in the comments, please!

Enjoy!

-d

Update:

Well, 15 readers have played along and correctly cracked the color key (with just a little help for a few), and are enjoying the prize. The toughest part seems to be how to name those colors! Blame it on the mischievous guys and gals from the MacBU at Microsoft for picking those default colors for charts in Excel for Mac.

These were the names readers used for just two of them:

teal, turquoise, blue-green, light blue, bright blue, mid-tone blue (teal)

gray, blueish gray, light blue, light purple, purple, lightest blue (lavender?)

Yikes! I wonder what they called them at the MacBU. Probably something impossible like 'Blue Chill' and 'Blue Haze'.

Good job everyone. And if anyone's stuck... get a clue already. :P

Earnings estimates tomorrow afternoon (Tuesday).

Ten weeks later, AAPL numbers elude financial web sites

2010-04-04T18:53:00.039-04:00

Closing in on ten weeks since Apple's last report where they "cleared up" any confusion about accounting rules, most financial sites still show incorrect data on their profiles for Apple.

So what the f**k is AAPL's P/E??

Turns out I was being unfair to Yahoo! in singling them out. This is a generalized industry problem and not exclusive to a few bad sites. Out of the 16 major sites I looked at (2 good ones submitted by readers), only 7 have managed to update their historical financials with the retrospective amendments freely available from Apple's Investor Relations site. Even though 11 do report somewhere the correct trailing P/E ratio, in some cases they still quote a wrong P/E (perhaps derived from their outdated financials) on a different section of the site, or even on the same page. Finally, a couple of sites have simply stopped providing analysts estimates for Apple (Forbes and Yahoo!).

Here's a table with all the sites and data I checked.


Site         ttmEPS    P/E   Fncls   Ests
-----------  ------   ----   -----   ----
Forbes       $ 8.17   28.9   Wrong   N/A
CNN Money       N/A   28.9   Wrong   Ok (incorrect expectations history)
SmartMoney   $ 8.17   28.9   Wrong   Ok
Nasdaq       $ 8.17   28.9   Wrong   Ok
Zacks        $ 8.17   28.9   Wrong   Ok
Yahoo!       $10.27   23.0   N/A     N/A Ok! (fixed as of 4/15, 11 weeks later!)
CNBC         $10.25   23.0   Wrong   Ok
FOXBusiness  $10.25   22.7   Wrong   Ok
MarketWatch  $10.25   23.0   Wrong   Ok
Google       $10.25   23.0   Ok      N/A
Reuters      $37.33?  23.0   Ok      Ok (missing March quarter!?)
MSN Money    $10.25   23.0   Ok      Ok
Scottrade    $10.25   23.0   Ok      Ok
Fidelity     $10.24   23.0   Ok      Ok
Ameritrade   $10.25   23.0   Ok      Ok (excellent tool!)
ft.com       $10.25   23.6   Ok      Ok

Please add links in the comments for any other financial research site's flawed Apple numbers, or to let me know if any of these have fixed theirs.

Two weeks of iPad pre-orders: 240,000

2010-03-26T08:32:00.009-04:00

Here's a two-week update: 240 thousand iPad units pre-ordered online for delivery (doesn't include reservations).

A quick recap: 190k first week, 120k first day.

Quick rates:

120k units on first day

70k/6 ≅ 12k units/day over first week excluding first day

50k/7 ≅ 7k units/day over second week.

One week to go.

PED: iPad week two: 240,000 pre-orders

Revenue and growth prospects by product segment

2010-03-21T13:55:00.005-04:00

This discussion inspired me to make a few charts. The data used for these are based on a trailing 1-year moving window of revenue by segment, which is why they come out so smooth without the December cycle spikes. Enjoy!

(click to enlarge)

Take the stuff beyond 2011-2012 with a grain of salt.

History vs. current events

2010-03-18T03:10:00.016-04:00

More charts!

This one shows the whole history of web order data I have, at the finest granularity available (between a week or two since 2005 and perhaps months before 2005). Data from 2001 to 2004 compiled by Steve Evans (aka Caligula). The value charted is the 30 day moving average of the daily rate, on a forward looking basis (i.e. the average for say April 1 to April 30 would be plotted on April 1 along the horizontal axis) in thousands of orders per day.

Here we see the blue line representing the same web order data, but aggregated on a quarterly basis, and also the data for quarterly revenue as reported by Apple (red line) and the ratio of Revenue/Orders (green line). Smoothing was applied because it looks really cool.

As for current events, it seems I've created some sort of controversy by reporting data that showed a steep fallout in sales velocity after the first day of iPad pre-orders, which was of course expected. Maybe some people are better off not knowing precisely at what level and how fast things reach a stable point and would prefer being told a big round number in a month or two, with no interest in the internal dynamics of an event driven launch. A suggestion, don't read these updates if you don't like such fine-grained data analysis, ok? Just wait until my pre-earnings report in mid-April.

PED: iPad pre-orders: 10,000 per day

It seems this image was a favorite among fellow bloggers. Here it's updated up to the latest order we have, for ~~yesterday around noon~~ Friday morning.

Now the thing with this image is that it shows the total number of web orders, not just those that include iPads, and there's no way of discriminating these through the factual data. But it's a nice image, and I'm not surprised that people are latching on to it. Now, as shown above I have a rich history of web order data going back years, and have several "sample datasets" for the month of March and for various types of product intros. What I've been doing in this case is assuming the week-long measurement of the rate just before the iPad was available for pre-order has been relatively constant except for a slight increase due to the higher traffic and interest, and subtracted this value from the observed rate.

WSJ: How Many iPads Have Been Ordered?

Doing this definitely introduces some uncertainty, but there's no reason why the non-iPad orders should be getting more or less volume now, except a sensible proportion due to the increased traffic (someone came to the store interested in iPad, saw all the other goodies, and decided NOT to pre-order the iPad but to order something else). Notice that if someone decides to ADD other non-iPad stuff to their iPad pre-order it still counts as an iPad pre-order.

Well, there you have it. That's my update for the week: 180 thousand units pre-ordered online as of noon yesterday. [Update, 190k as of Friday morning, exactly a week after becoming available for pre-orders.] It obviously doesn't include store pickup reservations, nor will it include store sales after April 3 (if I'm still getting order submissions and bothering to track these). That's it. Based on this, and using my intuition and experience, and voodoo or however you want to call it, I'm sticking to my prediction of 1 million sold by mid-April.

PED: iPad week 1: 190,000 pre-orders

As you can see, that conclusion amounts to not much more than my opinion. But the data in the first three graphs is factual, not opinion or estimates. Thus, my recommendation is that you come to your own conclusion as to how this might measure against expectations, both short and long term (although I would advise against putting too much weight into short-term market predictions) and decide for yourself, regardless of whether I'm right or wrong in my opinion-based prediction.

Thanks for all contributions.

-d

Sexy model curves on iPad pre-orders

2010-03-15T05:40:00.012-04:00

No this is not some spam post offering a pseudo-porn iPad app. Just go read my previous post to see what this is about. Also, don't miss PED's quoting my random musings on this stuff (and outing me! LOL):

PED: Apple iPad orders drop sharply

On to the "sexy" curves, click to enlarge (hey, some extra hits due to my title shenanigans can't hurt, and maybe someone somehow learns something new thanks to my mischief).

This one's pretty self explanatory. A nice, round rump evolves after 12 hours into a relatively straight line slightly sloping up. I'll just add that this slope will increase in the next few hours and days, that is, the line will curve in the opposite direction right about now (72 hours) and get steeper, and then it'll become straight once again for some time. Once we get past 100-150 hours, I expect a new, more subtle rump to form in which the slope will very slowly get shallower as the days and weeks pass.

This one's also easy to read. It's an attempt to measure the value of this slope over time (an approximation since I can't actually do infinitesimally small intervals), also called the first derivative, or rate of change. It simply represents the order volume rate per hour. Notice the sharp drop off early on and then it manages to maintain that small value for a longer period of time. The flat part here corresponds with the straight slope upwards of the previous curve.

Please don't pay attention to that harsh bump at 10 hours as it's due to a noisy sample most likely off by a few minutes from its true time value as recorded in Apple's servers.

Again, this curve will start to creep back up just a bit over the next few hours, and maintain a higher plateau for a longer period of time, and then after a few days keeping its ground it'll start showing a very slight decline only noticeable over much longer periods.

I'd also like to mention here that I left out a few points that would go in the tiny sliver of space between the vertical axis and that first point up there at 70 thousand. These points would plot much higher, higher than 100, and one of them was over 500 (that is, half a million orders per hour, but of course there never was half a million orders placed, just that the time span during which this happened was a minute or two, so 500,000/60 minutes lasting for a minute or so would generate something like 8-10 thousand orders).

The problem with including these points on the chart (despite them being really fun to look at) is that in order to show them so high up there, the zooming out of the vertical scale would have made the later part of the curve where it's more stable as if it was laying flat against the horizontal axis, thus potentially misleading one into thinking that the order rate just died. It did not die, it's oscillating a couple of times at around one thousand orders per hour without falling further, which is quite respectable for a weekend.

But that part is still really hard to see, like, those oscillations are important as they show the day/night volume patterns, and it'd be nice to get a closer look at those values. That's the motivation for the next chart.

I think this is the coolest one. Please ignore those two outliers at a value of 1, which correspond with that noisy sample I was talking about before. As to what the values on the axes mean, well it's just the logarithm of the same values plotted previously. Something similar would happen if you used log scales on both axes, except the normal values for hours and thousands of orders would show at different spacings.

To help you find your place there, remember that log(1)=0, log(10)=1, log(100)=2, etc. So, on either axis where the zero is, it's the 1 hour point in time or 1k orders/hour level. Where the 1.0 is shown, it's the 10 hour point, or the 10 thousand level, the 2.0 is where we'll get to the 100th hour or when the rate was 100k orders per hour (only during the first 19 minutes of sales, which is 0.32h and log(0.32) is right around -0.5 which is the left side of the graph so those very early orders are not shown). As to what this curve is saying, what it means, I'll leave it up to you to interpret. Why do the dots fall much more in line? What would it mean if future dots suddenly stop falling or start turning up? All I'm going to say is, don't think those last few dots where it shows a temporary recovery for a cluster of them near the right side of the curve are noisy data points. These points are several hours and thousands of web order numbers apart, so a couple of minutes off creates no noise here. And there are several dots plotted at the temporary recovery (during daytime on Saturday and Sunday).

Finally, this last graph (also shown in PED's article) is similar to the second one, except here I've only used a few points spaced out about 12 hours apart. A clarification is needed about the yellow label there which says "iPad sales" which should have said "iPad unit sales" so it's not showing $ sales. But the most important addition here is I show my estimated volume rates for orders that don't include an iPad pre-order.

Wow this turned out to be quite a long post. Sorry if you were expecting some hot chicks in bathing suits, but if you read all the way through here, I appreciate your effort and I'm glad I could keep your attention this far.

Stay tuned over the next week or two.

How many iPads pre-ordered?

2010-03-12T13:51:00.012-05:00

We've been trying to estimate how many iPad pre-orders have been placed simply by counting web orders from user contributed web order numbers. I have more than 5 years experience working with these, correlating them to overall sales, and gauging product introductions.

PED: Apple sells 50,000 iPads in two hours

It's not an exact science though. This web order sequence of course includes all Apple products sold through the US Online Store. But for today, this is relatively insignificant when compared to the iPad orders. The average daily order volume from January 16 to March 5 was about 16 thousand orders per day. From March 5 until the first order submitted after the store opened today it was about 14.5 thousand per day.

But today, that's a drop in the iPad bucket. The other products would account for 600 orders per hour, assuming the base rate continues the same. Yet for the first 6 hours since the store opened, we've seen the sequence increase by more than 88 thousand orders in total. That's the baseline daily volume, per hour! For the last 2 or 3 hours the rate has moderated to about 7 thousand per hour, from more than a thousand per minute in the first 15-20 minutes.

Additionally, an important proportion of iPad orders are for two units, which for now I'm counting as just one until I get a bigger sample.

PED: Day 1 estimate: 120,000 iPads sold

I'll keep an eye on this rate and the estimated total over the next few weeks.

Thanks for everyone's submissions,
-d

So what the f**k is AAPL's P/E??

2010-02-04T13:12:00.023-05:00

Not just the P/E. It's mainly the ttm EPS, but also the real historical growth rate, all the financials, even analysts estimates are missing. I mean, come on, it's been 10 days since the report. What a mess.

Wasn't the internet supposed to be the realm of immediately updated information available to all for free?

What's the point of having Yahoo! Finance, Capital IQ, or even Thomson-Reuters services for that matter, keeping track of companies and estimates for the public, when they happily publish erroneous data for days or weeks and no one can do anything about it?

Does anyone even care? Where's the f**king SEC?

Updates:Yahoo! data still a mess. See http://finance.yahoo.com/q/ae?s=AAPL
Let them hear it using this form (make reference to ticket number 3385526).

~~It's been ~~three four six seven!~~ weeks since the report and yahoo's still a mess. Anyone, how do we fix this:~~
~~Well, it took them seven weeks, but they finally did it!~~
~~And they f'd it up again! Amazing. Eight weeks now.~~
~~And now it's good again, hopefully for more than two days. Two months to fix this...~~
~~And it's bad again. More than 9 weeks. Got tired of updating so here's a day counter for this.~~

Fixed! Good job, Yahoo! Finance, despite the 11 weeks your users were in the dark. Unfortunately, some who might have wanted to jump in at $190 are now looking at $247. Not to worry Yahooers, it's still going to double in a year or two.

Fiscal 1Q '10 actual results vs. estimates

2010-01-27T07:18:00.012-05:00

Apple beat my revenue estimate by $666M (hmm), an understatement of 4.2% on my part. Source of this is relatively evenly shared between all three main product lines, with Apple's solid crush of Mac units estimate partly compensated by my overshooting the ASP a bit. On a relative basis, most significant is the -6.5% error (-$221M) in iPod revenue which came from compounding a -2.2% error in estimating units (-470K) with a -4.4% error in estimating ASP (-$7). Finally, a 13.9% underestimation of Peripherals revenue is not as critical in absolute $M, but is still quite a nice surprise as this is the second consecutive quarter Apple crushes my peripherals estimate, so I'm now giving a boost to my model's longer-term attach rates for peripherals. Surely some sort of magic going on there.

Over to the income statement, an overshoot in GM% practically erased all of those mistakes in the revenue breakdown. Apple came in 150bp below my admittedly optimistic 42.4% GM estimate (I was tired of hearing PO's excuses for lowballing on this, and decided to completely ignore his air freight and component warnings). Thankfully it saved me from another embarrassing miss, and allowed me to waltz through most of the rest of the income statement line items within a percentage point or so of the actual figures. The only small issues I have is with OpEx which came a little too high (even a tad higher than Apple's guidance which is unusual), and OI&E for which I had ignored Apple's $30M guidance as silly given its cash position. It's inconsequential for now, but I do want to be able to model this based on interest rate trends and Apple's cash and equivalents, for the time when interest rates get back to normal and OI&E becomes a significant contributor to EPS. No luck so far. Finally, the net margin, 130bp below my hugely optimistic 22.8%. I should learn not to get carried away like that, as Apple did awesomely at 21.5% net margin. This was the first thing I noticed since I got crushed on revenue but Apple missed my EPS (and it worried me a bit at the time). I'll have to tone down the scorching profitability level very slightly.

Congrats to those who correctly guessed that Apple would make the accounting change in Q1. Yes, I got it wrong (and no, my reasoning wasn't at all based on any presumption that Joan Hoover would just tell me, a nobody, about such an important news item). I truly believe this was not the best way to go about it. For one thing, this report's figures have no clear relationship with what Apple had guided for back in October. Thus, not only the official record of Apple beating their own guidance is broken (of course they beat, but it's not "officially" sanctioned as in verifiably coming from Apple's own language in its reports), there's also no clear way to go about any top-down guidance analysis for it. You know, the thing many of us do in which we take Apple's lowball guidance, add back an average historically-derived "PO's lowball factor" to it, and aim our sights so our revenue and EPS estimates fall close to that. Not this time, Apple simply trashed their previous guidance for last quarter.

A similar disconnect is happening with investors, analysts, and financial reporters' interpretation of the numbers, in particular when trying to compare them to analysts consensus estimates. Obviously analysts mostly gave the old GAAP figures, some of them gave non-GAAP or new-GAAP, but the most quoted figure by the media was the old GAAP consensus. Turns out Apple by doing it like this has also trashed that gauge, it's no longer a comparable way to measure Apple's supposedly huge beat. So how do we know they really beat? and by how much? Well of course we know Apple, if it had reported based on old GAAP, would've easily beat even that "whisper" thing at $2.30, but people in general don't know and don't care to figure this out themselves (even I had a little conundrum in figuring that out). Apple clearly simply doesn't care for those old metrics anymore. That may be understandable given how those understated the company's performance, but why not provide a mechanism for a smooth transition? I say, respect the previous guidance that Apple itself gave to us, and also respect the analysts' consensus, even if it's way off, because no matter how wrong them analysts are, the consensus is the most quoted figure investors hear and read about, and investors rely on that mechanism for gauging any report against market expectations.

So people are naturally skeptical about all this, and some are assuming there are accounting tricks in play. Surely Apple's performance is quite jaw-dropping, looks highly suspicious to most in the face of the economic crisis, and to top it all most of the public know about the accounting scandals and simply distrust anything remotely reminiscing of an accounting sleigh-of-hand. To those that don't know about Apple's financial reporting preferences and style, I suppose this report can only make sense to them as a trick, after Enron, Worldcom, and all the recent banks shenanigans. Let's not forget Apple itself had it's own accounting scandal. No it wasn't overstating financial metrics to meet or beat expectations, but options. Still, that reinforces doubt. Well, the thing with this one is that it's just the opposite of that stereotype. Apple management tends to act, with regard to the stock, as understated as possible. The CFO and other executives tend to paint things in the least favorable way from a shareholder point of view. Who knows why, maybe they figure it's better to lay low and downplay your stock, perhaps to avoid attracting all sorts of curious eyes (competitors, the SEC, tax audits, envious freaks, and whatnot). Put it all together and you can see how the stock may have reacted as oddly as it did AH and the day after, wavering around $200 when this stock should be worth at least $288 today. It's clear to me the stock is reflecting this self-inflicted fear, uncertainty and doubt (self-FUD, although this time I think unintended).

Anyway, a smooth transition would have been achieved by only issuing new guidance based on the new accounting scheme. Obviously the same question would have come up regarding how to gauge the strength of such guidance against consensus expectations for Q2, and that's why my assumption or recommendation was to report and issue guidance this time as old GAAP, then sometime in the middle of the quarter announce the accounting change, making clear they would restate the last 3 years and forget all about that GAAP/non-GAAP stuff, and leave plenty of time for most analysts to realize they can throw away their old GAAP models and start talking their new GAAP models, and for the media to pick up on this and update the consensus data for the quarter, the fiscal year, and beyond. A bonus of doing it for Q2 is that the GAAP vs. non-GAAP discrepancy would be minimal for this quarter and for the next. So, even if some analysts don't bother or can't figure out how to make the switch, it still doesn't make the consensus worthless, because the effect is minimized. Thus, investors would have been much better able to appreciate Apple's beat. Only then, you would have a sensible way to measure whatever Apple reports against the market expectation. This, what they did, wasn't a trick of course, some of us know. But there's no clear and indisputable way (through official company filings) to tell exactly by how much it isn't one.

My performance details below. Apologies for the estimate fudging. It's all derived from what I published a few days ago, and a couple of things from my spreadsheet as it stood back then. Read the notes to see how.

Cheers!

-d


.            Est(*)     Act    Err     Err%
.          --------   -----   ----   ------

Units (K):
Mac         3184       3362   -178   - 5.3%
iPhone      8650       8737   - 87   - 1.0%
iPod       20500      20970   -470   - 2.2%

ASP ($):
Mac         1354       1324   + 31   + 2.3%
iPhone       619(1)     638   - 20   - 3.1%
iPod         155        162   -  7   - 4.4%

Revenue breakdown ($M):
Mac         4312       4450   -138   - 3.1%
iPhone      5351(*)    5578   -227   - 4.1%
iPod        3170       3391   -221   - 6.5%
Music       1177       1164   + 13   + 1.1%
Perph        404(2)     469   - 65   -13.9%
SW           604        631   - 27   - 4.3%

Income statement ($M):
Revenue    15017(*)   15683   -666   - 4.2%
COGS        8657(3)    9272   -615   - 6.6%
GM          6360(*)    6411   - 51   - 0.8%
OpEx        1625       1686   - 61   - 3.6%
OpInc       4734(*)    4725   +  9   + 0.2%
OI&E          55         33   + 22   +67.8%
Pre-tax     4790(*)    4758   + 32   + 0.7%
Tax         1365(*)    1380   - 15   - 1.1%
NetInc      3425(*)    3378   + 47   + 1.4%
Shrs.        915        920   -  5   - 0.5%
EPS         3.74(*)    3.67   +.07   + 1.9%

Ratios:
GM%        42.4%      40.9%  +1.5%   + 3.6%
OpInc%     31.5%      30.1%  +1.4%   + 4.6%
Tax%       28.5%      29.0%  -0.5%   - 1.7%
NetInc%    22.8%      21.5%  +1.3%   + 5.9%

Notes:
(*) Shows differences in these estimates compared to previously published estimates due to accounting change. See corresponding explanatory notes for special cases below (all other new figures marked with (*) are derived by applying already derived new estimates as inputs in its standard formula, e.g. newTax = newPretax * oldTaxRate).

(1) iPhone ASP - Looking forward, it makes sense to include "other" iPhone-related revenue (carrier payments and iPhone accessories) by rolling it into the ASP for simplicity of calculation and the subscription accounting requirement to separately calculate the handset hardware revenue recognition having been removed. Also, I've decided not to estimate the precise effect of deferring the $25 value of the rights to upgrade the iPhone software ($10 for Apple TV), and instead assume the recognized portion of this as attached to just the current period's units, also for simplicity and because the differences are relatively meaningless when compared to the aspired accuracy in estimates. This last simplification tends to penalize the ASP on those quarters with much stronger unit sales when compared to the trailing 2-year average, somewhat offsetting the first assumption which rolls in related revenue that isn't necessarily attached to each unit sold. For this F1Q2010, an originally estimated $247M worth of "other" iPhone related revenue (about $29 per estimated unit) that had been excluded from the original $590 ASP estimate has been added back, yielding $619 estimated ASP including all iPhone related revenue sources. Notice Apple stated an iPhone ASP of about $620, so backing that out of the $638 ASP as I'm modeling it, it reveals $18 per unit (about $160M) of this "other" stuff, which is well below the $29 per unit ($247M) I was estimating.

(2) Peripherals and Other Hardware revenue estimate now includes full recognition of ATV sales. This is derived by subtracting all other estimated revenue sources, including the new iPhone and Related Products and Services revenue estimate based on the new ASP estimate explained in (1) as an input, from the estimated non-GAAP total revenue published previously ($15,017M).

(3) New COGS estimate is derived by estimating a similar proportion as in previous company reports for the old non-GAAP adjustment to COGS over non-GAAP adjustment to revenue (close to 30%), as follows: take 30% of the difference between the original and the new estimates for iPhone and Related Products and Services revenue (.3*[5351-2815]=761), and 75% of the difference between the original and new estimate for peripherals revenue (.75*[404-392]=3) as representing the iPhone and ATV adjustments to COGS, respectively, and add these to the original COGS estimate of $7,893M, resulting in 7893 + 761 + 3 = $8,657M. There are many other ways to derive a non-subscription accounting estimate for COGS based on iPhone revenue and estimated gross margins, so feel free to try them out and let me know what you come up with. It shouldn't be too far off if you stick to sensible estimates for iPhone GM%.

Fiscal 1Q 2010 Final Estimates

2010-01-18T01:48:00.012-05:00

PED's now probably back from vacation and if he links here, well, thanks Philip. And a warm welcome to anyone coming from Apple 2.0. I appreciate being included with all the other big-shot analysts in the previews there over the last couple of weeks for our Mac, iPhone, and iPod unit estimates.

Final numbers below. But first I'd like to update that "Filling the GAAP" thing I did last time, except this time I've decided to do it on a trailing basis to avoid the confusion of having my estimates creep back into the past (although in my opinion the PEs are more stable on a forward-looking basis). The accounting "arbitrage" situation is a little more promising given the improved iPhone estimates. But still, when using forward valuation, the biggest opportunity remains in the past. However, the market still hasn't caught up with my forward valuation (it's getting close though) which means there's a nice $80 upside before AAPL starts trading close to my non-GAAP fair value. That should be the value NOW, forget about the 1-year target. Click to enlarge:


3mo ending Dec-2009    Revenue($B)       EPS($)
.                    -------------   ------------
F1Q10                 GAAP  n-GAAP   GAAP  n-GAAP
------------------   -----  ------   ----  ------
Apple guidance       11.45     N/A   1.74     N/A
Analysts consensus   12.01       ?   2.05       ?
Deagol estimates     12.47   15.02   2.35    3.74


3mo ending Mar-2010    Revenue($B)       EPS($)
.                    -------------   ------------
F2Q10                 GAAP  n-GAAP   GAAP  n-GAAP
------------------   -----  ------   ----  ------
Analysts consensus   10.33       ?   1.75       ?
Deagol estimates     10.69   11.34   1.94    2.29
Apple guidance (e)   10.15   10.90   1.51    1.85


12mo ending Sep-2010    Revenue($B)       EPS($)
.                     -------------   ------------
FY10                   GAAP  n-GAAP   GAAP  n-GAAP
------------------    -----  ------   ----  ------
Analysts consensus    45.05       ?   7.85       ?
Deagol estimates      46.67   51.50   8.63   11.18


Stock valuation:           EPS(e)        PPS(25x)
.                       ------------   ------------
Window  12mo starting   GAAP  n-GAAP   GAAP  n-GAAP
------  -------------   ----  ------   ----  ------
Trailing       Apr-09   7.46   11.29    187     282
Fair value     Apr-10   9.70   11.66    243     292
1-year target  Jan-11  11.53   13.42    288     335


Revenue breakdown:
Mac        4,312 ( 3.184M @ $1,354)
iPhone     2,815 ( 8.650M @ $  590)
iPod       3,170 (20.500M @ $  155)
Music      1,177
Software     604
Periph       392
--------  ------
Total     12,469


Income statement:
Revenue   12,469
COGS       7,893
GM         4,576
OpEx       1,625
OpInc      2,951
OI&E          55
Pre-tax    3,006
Tax          857
NetInc     2,149
Shrs.        915
EPS         2.35


Ratios:
GM%        36.7%
OpInc%     23.7%
Tax%       28.5%
NetInc%    17.2%

PS: Right now I'm kinda sick of forums so if anyone cares feel free to post this in either/both. Apologies if anyone misses it.

Apple Investor Relations: No word yet on accounting change

2010-01-12T16:26:00.007-05:00

Not yet...

I'm not too surprised by this. My impression is that Apple would want to make the change when there's the least impact on financials. This would be either Q2 or Q3. I predict they'll announce the change towards the end of Q2, so both their next report (Q2) and their next guidance (Q3) are minimally affected.

Huge Black Friday boost in web orders

2009-11-28T23:05:00.011-05:00

(click to enlarge)

Excellent contributions everyone. Keep them coming!

Here’s a preliminary analysis on a very hefty Black Friday boost this year (remember it’s only 1 day out of 91 for the whole quarter, so this growth needs to be maintained in order to significantly affect the quarter):


.                Order Rate (K/day)      Y/Y change
.               -------------------    --------------
.                2007   2008   2009      2008    2009
.  Americas     -----  -----  -----    ------  ------
Month up to TG   30.2   21.3   22.6    -29.5%  + 6.4%
Black Friday    274.3  240.6  317.0    -12.3%  +31.8%
BF Multiplier     9.1   11.3   14.0    +24.4%  +23.8%

.   Europe             -----  -----            ------
Month up to TG          11.7   12.6            + 7.8%
Black Friday            95.3  189.5            +98.8%
BF Multiplier            8.2   15.1            +84.4%

US+EU Combined         -----  -----            ------
Month up to TG          32.9   35.2            + 6.9%
Black Friday           335.9  506.5            +50.8%
BF Multiplier           10.2   14.4            +41.0%

 Asia/Pacific                 -----
Month up to TG                  5.9
Black Friday                   17.4
BF Multiplier                   2.9

US+EU+AP Combined             -----
Month up to TG                 41.1
Black Friday                  523.9
BF Multiplier                  12.7


Although chosen as consitently as possible given available data points,
some time periods and windows are slightly different. This may result
in somewhat distorted yearly and regional comparisons.

.                2007   2008   2009
.               -----  -----  -----
Month up to Thanksgiving window (days)
Americas           23     29     31
Europe                    29     33
Asia/Pacific                     63

Black Friday window (hours:minutes)
Americas         8:45  21:39   3:09
Europe                 21:39   8:04
Asia/Pacific                   9:40

I'll try to have an update on this around the end of next week.

May I take your order, please? Q1 redux

2009-11-27T16:16:00.025-05:00

This can be a great way to gauge Black Friday (and Cyber Monday) online sales. Remember I once again rely on crowdsourcing for this aspect of my model. Oh and don’t forget those European Online Store orders are very welcome too.

Just go here and note the date/time and W# of as many orders you wish to share (you can cross out the last 2 or 3 digits).

For those who’d like to run their own analysis, here's the raw data on the last few orders I've received:


Date    PST   Web #  Region    Contributor
-----  -----  -----  --------  ------------
08/25  04:42  90442  Europe    ITalian Pro
09/24   N/A   57279  Asia/Pac  benoir
10/24  15:35  91380  Europe    JML
11/11  11:38  65748  Americas  macross
11/16   N/A   65837  Americas  BillH
11/26  18:30  57652  Asia/Pac  benoir
11/26  23:10  91799  Europe    ITalian Pro
11/27  04:10  57659  Asia/Pac  benoir
11/27  07:14  91863  Europe    JML
11/27  10:54  66186  Americas  justforkix66
11/27  12:20  66207  Americas  BillH
11/27  14:09  66232  Americas  Pete_y_48
11/27  15:29  66249  Americas  daveynb
11/27  19:37  66297  Americas  justforkix66
12/02  01:00  66480  Americas  fhatta

(keep checking here, as I'm updating these as I get them)

The historical record provides great context for this unique metric. Here’s the whole history of web orders volume per quarter. And here’s last year’s analysis of the daily order rate around Black Friday.

Thanks!

Fiscal 4Q '09 actual results vs. estimates

2009-10-19T20:36:00.006-04:00

Two bottles of a Cabernet-Sauvignon from Mendoza, Argentina may not be enough celebration for this new all time high, not just because it's a new ATH, but rather for what we've been through over the last couple of years, and survived... and most impressively, for the short time it took to get us back on track. But I think I have some soul-searching pending, and so, that third bottle can wait for tomorrow's confirmation of an official close above $199.83. I just need to get this out of me now, and more wine might not help with that.

So here we go... well, that was quite embarrassing! Apple swept all across my estimates (and everyone else's). I feel the need to apologize to my readers for such a clueless prediction. I was off in almost every category that's meaningful, and missing the bottom line by 16% is more than 7 times worse than my average performance over the previous 8 quarters. I really hope this is a one-time thing.

I feel somewhat responsible if anyone decided to make serious bets or hedges out of my misguided conservatism. If you did, I owe you one, and I hope to make it good next time. I normally try to focus on the long term (and that's what my targets up in the high 200's are for), but I know this time I've expressed more concern about a short-term correction than at other times, due to the modest numbers I was seeing for last quarter.

In my defense, the second most significant reason for my huge EPS miss was such a forgiving effective tax rate reported. Apple guided for 30% and I estimated 29.1% tax, based on historical trends. The report showed an effective tax rate of 25.6%, which would explain away about 30% (or about 8.5¢) of the 29¢ miss.

The rest, the most significant reason for the miss, of course comes from underestimating revenue by more than half a billion, and then gross margins came 40 bps higher than I expected (Apple guided for 34%, I was at 36.2%, and the report came at 36.6%). Only a couple of cents were due to the slightly lower OpEx and slightly higher interest income than I was modeling for. So the real organic upside (for me and most everyone else) mostly came from the revenue side of the equation.

Of the roughly 20¢ remaining due to the revenue miss, more than 2/3 (or half of the whole 29¢ miss) are due to the Mac's incredible performance. The rest is about 3 cents due to a surprisingly rising iPod ASP's, a couple of cents from iTunes upside, and another 2¢ from peripherals (most likely stemming from high attachment rates to Mac sales). Usually, I get all these revenue sources to fall on both sides of the fence so that they cancel each other out and thus allows me to get pretty close to the overall numbers, but this time I only had SW on the plus side, which barely took care of my relatively accurate but slightly lower iPhone revenue.

So, let me focus on the Mac. First, more than 3 million Macs, baby! 17% unit growth with the industry flat, and portables growing a scorching 35%. That's 300k more units than already lofty expectations (considering the economy) of 2.75M. But that's not what impressed me the most. What I couldn't believe and I'm still not sure how to explain is the sequential increase in Mac ASP's.

Didn't we just see Apple lowering prices, most steeply for laptops (the star of the quarter in terms of units) by hundreds of dollars? Isn't this the back-to-school quarter when many college students are getting their first self-purchased computer, and are extremely price conscious and tech savvy on all the cheap alternatives, netbooks, or aware of the "benefits" of a true gaming rig, a perennial "weakness" for the Mac? Wasn't this the quarter in which Microsoft supposedly got serious about conveying, through supposedly quite strong advert messages, the value advantage of going with a PC? Wasn't this supposed to be a quarter where the consumer would be spend-thrifty, and only buy absolutely necessary products?

So, how on earth did ASP's go up sequentially (although minimally)? I guess it's gotta be those $1700-$2500 15" and 17" MBP's that must be getting crazy popular among college students, perhaps precisely thanks to their reduced prices, but also obviously due to the unmatched features, quality, and experience. Could the secret to this success be as simple as just providing a satisfying, fun, high-quality, highly-valued experience for customers? Wait, that actually sounds like an obvious tautology. Well, not that obvious to some, perhaps.

Let this be my mea-culpa. I was wrong about the Mac! Not the iPhone, not the iPod, but the Mac, the segment that I'm always willing and eager to get bullish about. And I was afraid my 2.85M current and future unit estimates were at risk. Silly me.

Here's the detailed comparison:

.          Est    Act    Err%
.         ----   ----   -----

Income statement ($M):
Revenue   9322   9870  - 5.5%
COGS      5948   6256  - 4.9%
GM        3375   3614  - 6.6%
OpEx      1440   1421  + 1.3%
OpInc     1935   2193  -11.8%
OI&E        33     45  -26.0%
Pre-tax   1968   2238  -12.1%
Tax        573    573  - 0.1%
NetInc    1395   1665  -16.2%
Shrs.      913    914  - 0.2%
EPS ($)   1.53   1.82  -16.0%

Ratios:
GM%      36.2%  36.6%  - 1.1%
OpInc%   20.8%  22.2%  - 6.6%
Tax%     29.1%  25.6%  +13.7%
NetInc%  15.0%  16.9%  -11.3%

Revenue breakdown ($M):
Mac       3581   3952  - 9.4%
iPod      1502   1563  - 3.9%
iPhone    2265   2297  - 1.4%
iTunes     961   1018  - 5.6%
Periph     338    393  -13.9%
Software   676    647  + 4.5%

Units (M):
Mac       2854   3053  - 6.5%
iPod     10300  10177  + 1.2%
iPhone    7300   7367  - 0.9%

ASP ($):
Mac       1255   1294  - 3.1%
iPod       146    154  - 5.1%
iPhone     545    612  -10.9%

What did I get relatively close? A few inconsequential things: the OpEx number, the absolute tax provision (whatever), the shares outstanding (easy), the GM% (thankfully I read Turley's articles and dismissed PO's lame guidance), the iPhone revenue (not the ASP's, again those are out-of-this-world high, but it only gets reflected on the non-GAAP numbers), the iPod units, and the Mac ASP's (again, those are incredibly holding up but thankfully I didn't expect them to fall too much and thus avoided an even worse miss).

Oh, and I definitely got the subscription accounting change non-event right, first from my intuition of a bait-and-switch setup and later exclusively confirmed two weeks ago here through Joan Hoover's email.

Well, I should've known this big surprise was a sure thing when I heard Cramer do his 180° just as a huge amount of October options had expired worthless (both 190 calls and 185 puts):

"Investors who have waited and waited for a great time to buy Apple (AAPL Quote) will get their chance next week,"

Yea right, at a $10-$15 higher price! He was already working up the option volatility play for the benefit of his option-writing, market-maker puppet masters, IMO. Oh well, I guess that's what makes him a professional, and makes me an amateur.

One last thing, I seriously, truly nailed that guidance estimate, didn't I.

3mo ending Dec-2009   Revenue($B)       EPS($)
.                    -------------   ------------
F1Q10                 GAAP  n-GAAP   GAAP  n-GAAP
------------------   -----  ------   ----  ------
Analysts consensus   11.44       ?   1.91       ?
Deagol's estimates   12.07   13.71   2.20    3.02
Apple guidance (e)   11.45   13.00   1.75    2.60

Apple guided for GAAP in a range of $11.3b to $11.6b revs (midpoint is $11.45b!) and $1.70 to $1.78 EPS (midpoint is $1.74!). That's the one thing I'm really proud of this time.

Congrats to all longs, and see ya soon at $300!

Wow...

2009-10-19T16:34:00.004-04:00

Wow...

Fiscal 4Q 2009 Final Estimates

2009-10-15T15:24:00.005-04:00

Update: PED's Earnings Smack-down is up! LOL

Check back here Monday at 4:30 pm EDT for the results.

3mo ending Sep-2009:

F4Q09     Revenue($B)  EPS($)    GM%
-----     -----------  ------  -----
Apple guidance   8.80    1.21  34.0%
Analysts cons.   9.19    1.42     ?
My estimate      9.32    1.53  36.2%
My non-GAAP e.  11.28    2.52  41.2%

Product  Units(M)
-------  --------
Mac          2.85
iPhone       7.30
iPod        10.30


3mo ending Dec-2009   Revenue($B)       EPS($)
.                    -------------   ------------
F1Q10                 GAAP  n-GAAP   GAAP  n-GAAP
------------------   -----  ------   ----  ------
Analysts consensus   11.44       ?   1.91       ?
Deagol's estimates   12.07   13.71   2.20    3.02
Apple guidance (e)   11.45   13.00   1.75    2.60

12mo ending Sep-2010   Revenue($B)       EPS($)
.                     -------------   ------------
FY10                   GAAP  n-GAAP   GAAP  n-GAAP
------------------    -----  ------   ----  ------
Analysts consensus    42.44       ?   7.05       ?
Deagol's estimates    45.80   49.67   8.04    9.97

Stock valuation:           EPS(e)        PPS(25x)
.                       ------------   ------------
Window  12mo starting   GAAP  n-GAAP   GAAP  n-GAAP
------  -------------   ----  ------   ----  ------
Trailing       Jan-09   6.41    9.52    160     238
Fair value     Jan-10   8.54   10.19    214     255
1-year target  Oct-10   9.83   11.17    246     279

Revenue breakdown:
Mac       3581 ( 2.854M @ $1255)
iPhone    2265 ( 7.300M @ $ 545)
iPod      1502 (10.300M @ $ 146)
Music      961
Software   676
Periph     338
--------  ----
Total     9322

Income statement:
Revenue   9322
COGS      5948
GM        3375
OpEx      1440
OpInc     1935
OI&E        33
Pre-tax   1968
Tax        573
NetInc    1395
Shrs.      913
EPS       1.53

Ratios:
GM%      36.2%
OpInc%   20.8%
Tax%     29.1%
NetInc%  15.0%

Raising iPhone estimates

2009-10-11T16:22:00.007-04:00

A week ago I shared a few details about my iPhone unit estimates and the GAAP vs. non-GAAP valuation implications. Today that post was featured by Philip Elmer-DeWitt's Apple 2.0 blog. Welcome to all visitors from there, and thanks for the plug PED!

This weekend I was tweaking that very conservative iPhone unit forecast, seeing if I should take into account the recent report by Gartner (2012 estimate of 71M iPhones) despite it's questionable soundness. So in the end I just decided to raise my forecast by about 10%. FY2010 and 2011 iPhone unit estimates go to 30M and 36M respectively (from 28M and 33M previously), simply because it feels as is someone is really getting scared.

My valuation targets that I had previewed last week are updated as follows:


Stock valuation:           EPS(e)        PPS(25x)
.                       ------------   ------------
Window  12mo starting   GAAP  n-GAAP   GAAP  n-GAAP
------  -------------   ----  ------   ----  ------
Trailing       Jan-09   6.41    9.52    160     238
Fair value     Jan-10   8.54   10.19    214     255
1-year target  Oct-10   9.83   11.17    246     279

Stay tuned for last quarter's final estimates, revenue breakdown, full financials, and guidance prediction next week.

Accounting changes?

2009-10-05T17:05:00.010-04:00

By the way, this just in (not the greatest scoop but I thought I'd share anyway):

Fiscal Q4 2009 Preview

2009-10-02T16:12:00.006-04:00

Once again, last quarter was quite eventful. From modeling the Snow Leopard release to revisiting all the accounting rules. From tweaks on the new iPods with lower price points to considering the data on "iTunes credit cards" or a gazillion downloaded Apps. From potential iPhone channel fill in China to new carriers in the UK. From halved Net Applications Mac web share data weightings to the weak dollar effect. From industry reports of a big turnaround in the PC market to short-term valuation concerns given the non-stop rally. On top of all that, I finally dumped my clunker PC for good, and spent weeks tweaking the charts and formats in Excel for Mac (forcing me to use the "new" .xlsx format). As if all that shuffling weren't enough, Apple decided to skip some 16M numbers from the US web order sequence. That was fun.

Not jumping onto the accounting change until Apple says precisely what they're doing. If they were to completely eliminate subscription accounting it would raise my FY09, FY10, and FY11 EPS estimates by 51%, 20%, and 11%, respectively. This relatively quick "filling of the GAAP" is mostly due to my conservative iPhone projections of 28M and 33M units for the next two fiscal years. I'm sure I will feel more justified in raising these mid-term projections as we climb out of the recession. Given that my target is based on 2-years forward-looking EPS, the effect on it from the accounting change would be modest ($267 vs. $239), even on the Fair Value ($242 vs. $210) which is based on 1-year forward EPS, and would rather be felt on the trailing valuation ($231 vs. $160). Perhaps AAPL would then seem appetizing even for those who value stuff looking at the rear-view mirror.

I love the predictability of subscription accounting and I wish they could keep it (heck, I wish they could get iPods and Macs under subscription accounting!). I don't buy the supposed obscurity argument against it. Whoever's big enough to move the stock must know to use non-GAAP or cash flows valuation. In my opinion, AAPL is not undervalued because of this issue. Instead, it's being used as an excuse for analysts raising their "recessionary" estimates (both GAAP and non-GAAP) and targets without them looking like they've been completely wrong for the last couple of years, as they have. All this smoke-and-mirrors stuff (with Jim Cramer blowing up an accounting change mini-bubble) and the likelihood of a broad market correction does make me a little nervous in the short term.

Full numbers in a couple of weeks. Thanks to all who've contributed their web order numbers. Keep them coming!

-d

May I take your order, please?

2009-09-30T08:43:00.015-04:00

Anyone have a recent web order number to share? Anything from late September - early October would be great to have as a quarter-closing order. Thanks!

Update: Thanks to pats from TMO AFB, I got one for today 09/30/2009 W#64996xxx

This implies quite a nice boost for September.

Also, any orders between Jul5 and Jul9 would help determine when and by how much (estimated 16M jump) Apple messed with the sequence:

Date   Web #
-----  -----
06/15  46598
07/01  46933
07/05  46995
07/09  63063
07/22  63271
07/27  63351

Fiscal Q3 '09 actual results vs. estimates

2009-07-21T17:45:00.006-04:00

100 bp GM surprise is nice. Happy to be a few cents below. Now guidance... really really happy about it.

Oh and I hit one number right on the nose! hehe that was cool.

 
.          Est    Act    Err%
.         ----   ----   -----

Income statement:
Revenue   8350   8337  + 0.2%
COGS      5403   5314  + 1.7%
GM        2948   3023  - 2.5%
OpEx      1349   1351  - 0.2%
OpInc     1599   1672  - 4.4%
OI&E        57     60  - 5.8%
Pre-tax   1655   1732  - 4.4%
Tax        508    503  + 1.0%
NetInc    1147   1229  - 6.7%
Shrs.      905    909  - 0.4%
EPS       1.27   1.35  - 6.3%

Ratios:
GM%      35.3%  36.3%  - 2.6%
OpInc%   19.1%  20.1%  - 4.5%
Tax%     30.7%  29.0%  + 5.7%
NetInc%  13.7%  14.7%  - 6.8%

Revenue breakdown:
Mac       3104   3329  - 6.8%
iPod      1587   1492  + 6.4%
Music      987    958  + 3.1%
iPhone    1689   1689    0.0%
Periph     413    341  +21.0%
Software   571    528  + 8.1%

Units:
Mac       2444   2603  - 6.1%
iPod     10800  10215  + 5.7%
iPhone    5000   5208  - 4.0%

ASP:
Mac       1270   1279  - 0.7%
iPod       147    146  + 0.6%
iPhone     550    557  - 1.2%

Final Estimates for Fiscal Q3 2009

2009-07-14T17:53:00.006-04:00

Lots of things going on over the last 3 months. Most significant adjustments are:

- About 1.5M to 1.8M iPhone units shifted forward from Q4 to Q3, due to the launch one week earlier than I was assuming. This only affects non-GAAP estimates.
- MacBook refresh validates my optimistic unit expectations, but ASPs take a hit.
- Higher SW revenue (and about 100 bp higher GM) for next Q1 due to Snow Leopard launch in September.
- Not making any assumptions about a tablet product... yet.
- AAPL is finally trading at or above 25x trailing EPS. I'm still hoping for this same multiple but on a forward-looking basis by the end of this year as the level below which I would consider AAPL a strong buy (DYOD, YMMV, etc.)

I apologize for not being able to do a preliminary update last month, mostly due to lack of user-volunteered data, but also because so much was going on that it seemed useless trying to pin down all the changing variables in the middle of June. I was a bit surprised at receiving just a couple of orders during May (thanks go to SagHarbor and Marc), and I was able to "steal" the quarter-closing order from fellow modeler Caligula (thanks Steve!), all of these for the US Online Store. I didn't get any data for the EU store, so I decided to estimate a similar trend as the US store (flat) instead of killing that whole effort. Hopefully there will be more volunteers in the future.

Good luck next week!
-d

3mo ending Jun-2009:

FY09Q3    Revenue($B)  EPS($)
------    -----------  ------
Apple guidance   7.80    0.98
Analysts cons.   8.16    1.16
My estimate      8.35    1.27
My non-GAAP e.   9.62    1.80

Product  Units(M)
-------  --------
Mac          2.44
iPhone       5.00
iPod        10.80

3mo ending Sep-2009:

FY09Q4    Revenue($B)  EPS($)
------    -----------  ------
Analysts cons.   9.02    1.29
My estimate      9.11    1.40
My non-GAAP e.  10.63    2.04
Apple gd (est)   8.60    1.05

12mo ending Sep-2010:

FY10      Revenue($B)  EPS($)
----      -----------  ------
Analysts cons.  41.53    6.40
My estimate     44.74    7.80
My non-GAAP e.  47.51    8.95

Stock valuation:

Window  12mo starting   EPS(e)  PPS(25x)
------  -------------   ------  --------
Trailing       Oct-08     5.79       145
Fair value     Oct-09     7.80       195
1-year target  Jul-10     9.43       236
Analysts mean target                 159

Revenue breakdown:

Mac       3104 ( 2.44M x $1270)
iPhone    1689 ( 5.00M x $ 550)
iPod      1587 (10.80M x $ 147)
Music      987
Software   571
Periph     413
--------  ----
Total     8350

Income statement:

Revenue   8350
COGS      5403
GM        2948
OpEx      1349
OpInc     1599
OI&E        57
Pre-tax   1655
Tax        508
NetInc    1147
Shrs.      905
EPS       1.27

Ratios:

GM%      35.3%
OpInc%   19.1%
Tax%     30.7%
NetInc%  13.7%

[download page]

Please help: Apple Online Store changes

2009-05-06T13:52:00.005-04:00

So, over the last week of April the Apple Online Stores (both US and Europe) have changed the way shopping carts and/or web orders get assigned a unique id. One thing I've determined is that a saved shopping cart will no longer use up a W# (they now have a SC#) which was the way I used to track them. Because the exclusion of saved carts from the sequence will have an effect on the order rate, I need to reestablish a new baseline for the trend, and would appreciate anyone sharing their recent order number/date/time info and, if you had any saved carts, the new SC# and date.

From this point on I will most likely rely on your voluntary contributions of web order numbers, unless a reliable relationship can be established between the SC# and the W# (very unlikely). I thank you all in advance for any and all contributions, and I hope this doesn't throw a huge monkey wrench in my model.

Thanks!

:d

EPS estimates' relative deviation vs. actual results

2009-04-23T18:02:00.004-04:00

Here's an easy comparison. Click to enlarge, sorry about the size and the uglyness.

Final Estimates for Fiscal Q2 2009

2009-04-15T09:30:00.003-04:00

3mo ending Mar-2009:

FY09Q2    Revenue($B)  EPS($)
------    -----------  ------
Apple guidance   7.80    0.95
Analysts cons.   7.93    1.08
My estimate      8.45    1.29
My non-GAAP e.   8.90    1.47

Product  Units(M)
-------  --------
Mac          2.35
iPhone       3.10
iPod         9.50

3mo ending Jun-2009:

FY09Q3    Revenue($B)  EPS($)
------    -----------  ------
Analysts cons.   8.28    1.11
My estimate      8.68    1.31
My non-GAAP e.   8.54    1.25
Apple gd (est)   8.10    1.03

12mo ending Sep-2009:

FY09      Revenue($B)  EPS($)
----      -----------  ------
Analysts cons.  35.25    5.20
My estimate     37.00    5.88
My non-gaap e.  41.50    7.85

Stock valuation:

Window  12mo starting   EPS(e)  PPS(25x)
------  -------------   ------  --------
Trailing       Jul-08     5.63       141
Fair value     Jul-09     7.24       181
1-year target  Apr-10     8.91       223
Analysts mean target                 130

[download page]

Preliminary Estimates for Fiscal Q2 2009

2009-03-16T09:27:00.009-04:00

3mo ending Mar-2009:

FY09Q2    Revenue($B)  EPS($)
------    -----------  ------
Apple guidance   7.80    0.95
Analysts cons.   7.91    1.07
My estimate      8.45    1.29
My non-GAAP e.   8.90    1.47

Product  Units(M)
-------  --------
Mac          2.35
iPhone       3.10
iPod         9.50

12mo ending Sep-2009:

FY09      Revenue($B)  EPS($)
----      -----------  ------
Analysts cons.  35.12    5.14
My estimate     37.32    5.97
My non-gaap e.  41.82    7.93

Stock valuation:

Window  12mo starting   EPS(e)  PPS(25x)
------  -------------   ------  --------
Trailing       Apr-08     5.51       138
Fair value     Apr-09     6.84       171
1-year target  Jan-10     8.53       213
Analysts mean target                 124

[download page]

Need an iMac refresh by March

2009-02-18T11:51:00.009-05:00

Long term recommendation:
STRONG BUY below $174
buy from $174 to $194
neutral from $194 to $216
sell above $216

For the year, Mac and iPhone unit estimates are reduced considerably, iPod units estimates remain unchanged, and gross margins are revised higher.

For this quarter, estimate of 2.4 million Mac units assumes desktops getting refreshed by early March.

3mo ending Mar-2009:


FY09Q2    Revenue($B)  EPS($)
        -----------  ------
Apple guidance   7.80    0.95
Analysts cons.   7.97    1.08
My estimate      8.54    1.33
My non-GAAP e.   8.99    1.52

Product  Units(M)
-------  --------
Mac           2.4
iPhone        3.1
iPod          9.5

12mo ending Sep-2009:


FY09      Revenue($B)  EPS($)
        -----------  ------
Analysts cons.  35.35    5.19
My estimate     37.62    6.08
My non-gaap e.  42.12    8.04

Valuation (25 x fwd EPS):


Timeframe   Period  Price  fwd-12mo EPS
          ------  -----  ------------
Fair Value  Mar-09    174          6.94
1yr Target  Dec-09    216          8.65
Analysts mean target  124

[download page]

Mining for non-GAAP, ASP's, and ATV's (Part 3)

2009-01-26T08:51:00.009-05:00

This is the third part of my attempt to peek under Apple's financial reports to see if we can find any of the hidden tidbits we would like: the baked-in goodies for the future, the average price of assorted things, and whatever happened to that hobby of Steve Jobs, the Apple TV. Skim over part 1 and part 2 if you haven't.

On to the next report for 08Q1: CDR=816, NCDR=624, TDR=1440 (compare to previous 07Q4: CDR=346, NCDR=290, TDR=636). Once again the increase in CDR must be half of current non-GAAP sales. So 2*(816-346) = 940 is the combined ATV and iPhone sales value. TDR goes from 636 to 1440 from adding this 940 amount and backing out the baked in of 87 from previous periods and the fraction recognized from current sales. That gives us the formula:

636 + 940 - 87 - x = 1440

And we get x=49.5, which is the amount to get recognized from those $940m in sales value for the current quarter. The fraction of GAAP (current) over non-GAAP, 49.5/940 = 5.3% = 1/19 again not too far from the 1/16 (6.25%) if sales had been spread flat along the quarter. Calculating the day of the "center of mass" (91/2-49.5/940*728) we see it lies about a week after the middle of the quarter, making it slightly more back-loaded than the previous. This back-loaded quarter is of course a Christmas quarter, so this is not some great revelation here. It just confirms and reaffirms that the exact way to reconcile the deferred schedules is through daily subscription accounting, and that the 1/16 rule is a relatively good approximation only for a linear quarter, otherwise the non-linearity must be taken into account.

Now we need to figure out the breakdown between ATV and iPhone. Before, we used the fact that the iPhone had had a cut in pricing at a specific date, and the 1M milestone was achieved only 5 days later, which gave us important clues about the likely ASP range and units sold around those dates. This allowed us to check our calculated results against the expected pricing backdrop. But for this quarter we know the iPhone was launched in different markets with pricing varying wildly for different carrier partners and plans. I remember there was a €999 plan (back when the euro/dollar was up above 1.45), and I think another plan in which the iPhone was free? (this is out of memory so I could be wrong). Despite all these pricing plans, I would expect the ASP to come out a little higher than $399 which was the only price in the US where the bulk of sales still came from.

So let's organize what we know:

$940m combined sales value
$49.5m combined recognition from these sales
2315k iPhone units sold
Somewhat over $399 iPhone ASP
$241m total iPhone related revenue
$87m baked-in for recognition from previous periods (81+6 break between iPhone+ATV)
$325 ATV ASP

And we want to determine the separate sales value and recognition for ATV and iPhone. From these we would be able to calculate ATV units (sales/$325) and iPhone ASP (sales/2.3k). Using some variables and equations:

x + y = 940
p + q = 49.5

We might try using the fraction (which measures linearity) as follows:

f(iPhone) = p/x
f(ATV) = q/y

And we might even safely assume that both products had the same linearity because there were no major product introductions or changes in the models (this assumption would not work for the first quarter of iPhone sales for those 2-days of sales because the linearity is obviously very different than ATV). And of course this same linearity would be the one we calculated before, about 5.3%. So we have:

x + y = 940
f*x + f*y = 49.5 (we know f=.053)

Hmm... cool, two unknowns and two equations, right? Well, nice try but it won't work. Look:

f*x + f*y = 49.5
f*(x + y) = 49.5, and substituting x+y=940:
f*(940) = 49.5
f=49.5/940

Which was just what we had done before to get that combined linearity factor. The system is indeterminate when we assume both products have the same linearity. We could guess any value for one variable, and all the others would have a valid solution. Any value for x or y less than 940 determines the other, as well as p and q less than 49.5. In fact this is what we've been doing for the last couple of quarters that we "solved". We simply guessed at the variable we thought we could pin down as best we could by using some outside information. For the last quarter it was trying a range of ATV sales (y) and checking the resulting iPhone ASP against external pricing and an intermediate unit milestone that Apple luckily shared. In the previous quarter, the iPhone launch, we simply assumed ATV linearity was flat (1/16 rule of thumb), and used the very strong non-linearity from the late-in-the-quarter iPhone sales (3/(2*728) =0.002). This allowed us to solve our system for all the variables.

But what could we do now? We know that most of the sales value must come from iPhone. And we know the overall linearity. We could also assume there should be an uptick in ATV sales given this is a Holiday quarter. Taking a shot at a slight sequential increase in ATV sales might give us a pretty good idea of things, but I'm tired of this guessing game of "financial sudoku" (I'm sure you are even more tired of it). So, what then?

Well, here's a promising approach: take the overall sales value and divide by iPhone units. Because iPhone is the main contributor to these sales, this should give a rough estimate for its ASP, but with some ATV component added. Let's introduce u and v variables for iPhone and ATV units, and build that equation:

940/2.315 = 406 = (x+y)/u = x/u + y/u = ASP(iPhone) + ASP(ATV)*v/u

Because the ATV units (v) is very small compared to iPhone units (u) that ratio v/u is a small percentage (2% would represent 46k ATVs), and thus we know the ASP for iPhone should be only a few dollars less than $406. In fact using that 2% generous guess and our $325 ASP for ATV we get .02*325= $6.50 of "ATV froth" in that $406, or a lower limit for iPhone ASP of $399.50. Well, knowing that this was the US pricing and that European pricing was generally higher, I'm pretty sure this is the extreme case. Oh I hear you saying, "but you were tired of guessing!" Sure, but notice how simple and intuitive this aproach made the guessing game: you just divide two known numbers and you get the top limit for iPhone ASP. We could leave it at that if we want, in case we don't care about the measly ATV sales, or if we happen to know some external info about the expected real iPhone ASP or the expected ATV units sold we can easily integrate any of it into our rough number.

So, finishing up this quarter, I'll rather use about 31k ATV units: 31*325 = $10m sales value (y), 940-10 = 930m iPhone sales value (x). For the recognized fraction of these I'll assume the same overall linearity fraction (49.5/940=5.3%) for both products, so we get 10*.053 = 0.5m for ATV and 49.5-0.5 = 49 for iPhone to get recognized from these sales (p and q). Baked-in contribution to the following quarters increases by 10/8 = 1.25m for ATV and 930/8 = 116m for iPhone, and the total has now built up to $204m. Total recognized this quarter for iPhone is 81+49 = $130m, which subtracted from 241 total reported iPhone revenue leaves 111 from carriers and accessories. You could divide this amount into 2.3m units to get $48 other revenue per unit, although this is not the right way to measure carrier payments per user (you'd need to know the size of the installed base paying a contract) but it's still a somewhat insightful approach. The extra "ATV froth" built into that $406 ASP is 325*31/2315 = $4.35, so the real iPhone ASP is $401 and change. So much for all that currency-inflated premium pricing in Europe.

Here's our updated table:

(click on image for larger view)

I know you must have a huge headache by now from all this. I'd just like to summarize the approach, a sort of "recipe" when navigating through this chaos, and make some general description of this "simple" method (don't look at me like that) which I'll use going forward. It's like a 5-step program, all based on the DR schedule for the current and previous periods, except for the final step where ASP's would need to get validated against the externally known pricing backdrop:

1. Get the combined sales value for the quarter (call it S) from the DR schedule and previous quarters' data. The formula is:
S/2 = CDR + [total recognized in the fourth-previous quarter] - [previous quarter CDR], or
S = 2*(CDRchg + R[-4]) (CDRchg is the net change in CDR, see R below).

2. Get the the total amount recognized for the quarter (call this R) using the S calculated before and the change in TDR:
R = S + [previous quarter's TDR] - TDR, or R = S - TDRchg (TDRchg is the net change in TDR).

3. Get the amount to get recognized from only the current quarter's sales (call it r) by backing out from R any baked-in revenue recognition from previous periods' sales. This baked-in amount is simply the average of all the S's from the previous 8 quarters, less the r from the very first of those 8. So the formula is:
r = R - (average(S[-8 to -1]) - r[-8]), or r = R - sum(S[-8 to -1])/8 + r[-8]

4. Check the quarter's linearity r/S: near zero is a back-loaded quarter, 1/16 is a linear quarter, and near 1/8 is a front-loaded one. Also you could check the "center of mass" of the combined sales: days after mid-quarter = 91/2 - r/S*728. Positive is back-loaded and negative is front-loaded.

5. Calculate S/u to see if this maximum iPhone ASP makes sense. For the other extreme, consider some generous ATV unit sales and subtract this "froth" amount (v/u*(ATV ASP)) from S/u.

Finally (only if you're brave), try to incorporate any info or guesses you may have either about ATV units or the real ASP for iPhone, or anything else that might help. Guessing any one variable will lead you to all the others, even the "other iPhone related revenue," through the following equations:

x = (iPh ASP)*(iPh units)
y = (ATV ASP)*(ATV units)
p = (r/S)*x (unless a product launch suggests a different fraction, e.g. p = x*(days+1)/(2*728))
q = (r/S)*y (same observation, or alternatively consider linear ATV sales: q = y/16)
S = x + y
r = p + q

Where only x, y, p, and q are unknown, but all solvable once any single one of them gets assigned a value. Carriers+accessories can be derived (or even used as a guess to resolve the whole system) by backing out a couple of things from the reported total iPhone revenue: back out baked-in recognition from previous periods' iPhone sales, and back out p. So, calling this other iPhone sales 'o' (stands for "other"):

o = (total iPhone reported revenue) - sum(p[-7 to 0])

That's it. For the next part I'm jumping right up to the latest two reports with 3G sales. Here's a final summary of the five calculation steps:

1. S = 2 * ( CDRchg + R[-4] )
2. R = S - TDRchg
3. r = R - sum( S[-8 to -1] ) / 8 + r[-8]
4. linearity factor = r / S
5. max iPhone ASP = S / u

If you read all the way through here, I apologize for the length and please don't bill me for any pain killers you may have needed. Any drinks are on me though!

:D

Mining for non-GAAP, ASP's, and ATV's (Part 2)

2009-01-24T16:25:00.015-05:00

This post continues with my (probably extremely boring for most) exercise of puzzling out the stuff that Apple doesn't want explicitly disclosed in their financial reports. Yeah, I know what whoever might still be reading is thinking: "Just give me the current numbers! this old stuff is peanuts, whoopee you're up to $23m baked-in revenue. Tell me why I should care."

Well, you should care because, as I'm sure you've heard, this will keep building up to over $1.2b currently baked into the next quarter (09Q2), and it'll continue to build up. But the only way to get there, that is, to be able to know how much is already baked in (even before Apple tells us), is to figure out the previous figures, the non-GAAP numbers from 8 or 9 quarters before the quarter we want to predict. So bear with me for these initial baby steps. If you haven't done so yet, please check the first part here.

So we move on to the next report, 07Q4: CDR=346, NCDR=290, TDR=636 (previous was CDR=92, NCDR=88, TDR=180). Again, the increase in CDR must be half of current non-GAAP sales. So 2*(346-92)=508 is the combined ATV and iPhone sales value. TDR goes from 180 to 636 by adding this 508 amount and backing out recognized revenue of 23 from previous periods (calculated in part 1) and some fraction of the combined ATV and iPhone sales value. To find this fraction we just reconcile the change in TDR as I just described it:

180 + 508 - 23 - x = 636

This solves as x=29 and the fraction is 29/508 = 5.7% = 1/17.5 slightly lower than the 1/16 fraction from our rule of thumb, which means that the distribution of iPhone and ATV sales along the quarter was not linear but slightly back-loaded, just 4 days after the midpoint of the quarter (91/2 - 29/508*728 gives the number of days after the middle of the quarter where the sales "center of mass" lies, that is, the point in time where you could place all the sales and achieve the same revenue recognition).

The question now is how do we split the $508m combined non-GAAP revenue and the 29 recognized from those sales between ATV and iPhone. Well, let's run some extreme scenarios.

I can't see more than 50k ATV's sold, and you'll see why in a minute. Let's go with that generous number, and let's keep being generous and assume a $340 ASP (an important contribution from the $399 model), that gives 50*340 = $17m in non-GAAP sales, which leaves 508-17 = 491 as iPhone sales value. Divide this by 1.12m iPhone units and we get a $439 ASP. But we know that at least 389k iPhones were sold at $399 (from the Sep-10 1M milestone) and surely some more between Sep-5 (the date of the price cut) and Sep-10. Excluding the 389k we know for sure, 389*399= $155m, 491-155 = $336m on 1119-389 = 730k units and we're up to a 336/730 = $460 ASP for the original pricing mix (and some discounted from those 5 interim days). Hmm.. 460? this seems at odds with the 499/599 original price points, and quite far from the 540 calculated for the launch days. So, we need to hack ATV sales. Simple as that, no way around it.

Now let's check the other extreme: let's assume zero ATV's sold, just to get a maximum limit on the iPhone ASP. In this case all the $508m revenue comes from iPhone, 508/1.12 = $454 ASP (just $15 higher than before so not much upside there). Again, taking out the $155m from the 389k discounted units sold since Sep-10 leaves 508-155 = 353, divided by 730k we get a $483 ASP for the mixed pricing. Still seems a bit low, but now let's see what this implies as to how many discounted units we didn't count in the 5 days between the new price and the 1M milestone by assuming a $535 ASP between the launch and the price cut. We'll call x the number of units (at the lowered price of course) sold in those 5 days:

x*399 + (730-x)*535 = 353

Solving for x gives 278k discounted units sold in those 5 days (and 730-278 = 452k before that). More than 55k a day! (Compare to 452/66 = less than 7k/day before the discount) Wow. Perhaps that $535 estimated ASP is too high for the weeks following the launch, when the crazyness was winding down (although Apple did say on Sep-5 that the high-end remained the most popular model). Who knows, maybe AT&T gets a discount from Apple, which would explain the disconnect between these ASP's I'm getting and the 499/599 retail prices. Anyway, solving the formula using a $520 ASP for pre-discount sales results in 222k discounted iPhones sold in those 5 days (44k per day) and 730-222 = 508k before Sep-5. Compare this to the other sales volume rates we do know: 270k for 2 days at launch, 730k for the first 71 days of the quarter (over 10k/day), and 389k over the last 20 days (just short of 20k/day).

This run rate by Sep-5 would mean that as Apple said they were "on track to reach the 1M goal by the end of September" the actual cummulative units sold stood at 270+508 = 778k, with a unit volume rate down to under 7k per day and with 25 days left in September (25*7k=175k) the 1M goal would seem just out of reach. In addition, remember we had set ATV sales at zero! Surely some ATV units must have sold, right? Well, for every 1k ATV units added (at a more realistic $325 ASP) another 2.7k iPhones must get shifted from the original pricing timeframe to this 5 day period, and that would put the 1M goal by the end of September further and further away as seen from Sep-5. That means ATVs sales must not have been too big, because in my opinion Apple would have needed to implement the iPhone price cut earlier than Sep-5.

We saw two extreme scenarios and found that even though 50k ATVs takes only 17m in sales value, a very small fraction of the 508, the other iPhone pricing constraints and time frames that we know do limit the ATV sales to probably less than half that number. I'm going to go with a nice and even $500m + $8m breakdown of iPhone and ATV sales values. This puts iPhone ASP at 500/1.12 = $447 and about 25k ATVs @ $325 ASP. Contribution to the baked-in revenue of the following 8 quarters is 8/8 = 1m from ATV and 500/8 = 62.5 from iPhone, building up to $86m combined. Assuming both products had the same linearity of sales along the quarter, we can multiply each product's sales value by the 29/508 combined factor. So recognized revenue (from current sales) for ATV is 8*29/508 = $457k, and for iPhone is 500*29/508 = 28.5m. If we combine this with the 18m that gets recognized from iPhones sold during the 2-day launch (see the first part) gives a total of $47m total recognized from iPhone handsets. Subtract this from the 118 reported as iPhone related revenue and we're left with $71m for AT&T payments and accessories, which I'll leave combined from now on and call it Other iPhone related revenue.

Phew!! So here's our completed table (I fine-tuned some rounding glitches in the previous quarters):

(click on image for larger view)

Stay tuned for part 3, in which I'll try to come up with some method for all this chaos.

:D

(continue to part 3...)

Apple Reports Q1 2009 Results

2009-01-21T14:34:00.011-05:00

Well this is quite interesting. I suppose I've got some work to do, but it's cool to be able to leave all those highly paid professionals (even Munster) miles behind on the EPS side.

:D

(click on image for larger view)

Mining for non-GAAP, ASP's, and ATV's. Oh my! (Part 1)

2009-01-19T22:20:00.014-05:00

This puzzle is one of my favorite "games" I like to play when it comes to deciphering Apple's earnings reports. There are now enough pieces to allow one to pin down a satisfactory solution, but the pieces are all scattered all over the 6 or so relevant earnings reports while each item is vague enough on its own to make it quite a vexing scavenger hunt. Let's see if we can put the whole puzzle together.

First let's agree on some concepts and terms.

1. Sources:
The only source you'll need for the financial data is the Apple Investor Relations site at http://www.apple.com/investor/, under the heading "Earnings Releases". Sometimes I'll refer to data relating to a period prior to the earnings release in which it appeared, because that's the way Apple reported it. I might say "in Apple's Q3 report you'll find the deferred revenue for Q2 had been $20 million."

2. Terminology and conventions:
I will refer to each quarter as yyQ#, e.g. ATV shipped near the end of 07Q2 (3/21/07), the original iPhone launch was at the end of 07Q3 (6/29/07), iPhone 3G launch was early 08Q4 (7/11/08). BTW these dates can be verified through Apple's press releases at http://www.apple.com/pr/library/.

DR stands for deferred revenue, CDR is current DR (DR scheduled for recognition in the following 4 quarters), NCDR is non-current DR (DR scheduled for recognition in quarters beyond the following 4), TDR is total DR. All of these will refer to iPhone+ATV DR exclusively.

Most figures will be in millions, be that dollars or units, except a few in thousands which I'll note as ###k, and ASPs in $ which will be obvious. Any decimals will appear rounded but full precision will be carried in internal calculations.

3. How subscription accounting works, and some assumptions:
Each unit's non-GAAP selling price is gradually recorded to GAAP revenue on a daily basis, over 728 days (8 quarters of 91 days each) starting on the purchase/ship date (except those sold between 3/6/08 and 7/10/08 which start on 7/11/08).

To simplify and aggregate all these different schedules for each unit sold, we can assume all the units sold during any period as sold in a straight line, an equal amount each day for the duration of that period. This is equivalent to assuming all the units got sold at the midpoint of the period in question, and the number of days they end up contributing to GAAP revenue is about half the number of days the product was being sold.

This generally results in any quarter's units GAAP revenue contribution towards both the first and 9th quarter of their schedule is 1/16 of their associated sales (units*ASP), and 1/8 of that to each of the 7 quarters in between (the exact recognition formula for units that started shipping x number of days before the end of any reporting period is [1/2*units*ASP*(x+1)/728]). There are only a couple of special cases where this simplified rule does not apply: 07Q3 and 08Q3.

This also means that for the first 4 quarters of this (strictly until 08Q2, but meaningfully until 08Q4) half of the non-GAAP sales from each quarter should get added to the CDR line of that quarter as well as to the following 3 quarters. This is very helpful given that Apple reports the CDR as part of their quarterly reports.

The same subscription schedule applies to the gross costs of the hardware sold. Carrier payments and iPhone accessories are recorded as received, as well as SG&A and R&D costs as incurred.

So let's start from the beginning. From the 07Q3 DR schedule, we see CDR and NCDR by 07Q2 (the middle column) stood at $10m each, so TDR amounted to $20m. The fact that CDR=NCDR means that GAAP revenue of ATV sales during its initial shipping quarter (last 9 days of 07Q2 between 3/21 and 3/29) was negligible, as it should (even assuming all units shipped the first day, units*ASP*9/728 would require 270k units in order to reach a mere $1m in GAAP revenue). So we know that the TDR reported of $20m must account for all the ATV sales in those 9 days, because there had not been any material recognition yet. Thus, units = sales/ASP = $20m/299 = 67k ATV units sold in 07Q2 (this is still huge for only 9 days but ATV had been available for pre-order for a couple of months).

These initial sales will contribute about $2.5m to GAAP revenue in each of the following 8 quarters (07Q3 to 09Q2), as well as get it deducted from DR. From the 67k units we can also estimate about $150k ($200k at most if we assume most were sold in the first few days) as GAAP revenue in 07Q2, and now we should tweak the 9th quarter after that initial one which would see $2.35m recognized instead of the $2.5m mentioned earlier (and NCDR would have been $9.85m but got rounded to $10m).

From the same 07Q3 DR schedule we now move to the left column, the 07Q3 numbers: CDR=92 and NCDR=88 for a TDR of $180m. Remember what I mentioned above about half of the non-GAAP sales being responsible for the increase in CDR, so from this we know combined non-GAAP sales of ATVs and iPhones were $164m. And the TDR should be reconciled by adding this amount and backing out what got recognized as GAAP from current and prior periods' sales: the $2.5m from the previous quarter, a fraction of the 07Q3 ATV sales (1/16 or about 6% per the rule of thumb described above), and a tiny fraction (about 0.2%) from the 270k iPhones sold the last couple of days of 07Q3.

So let's call x and y the non-GAAP sales of ATVs and iPhones sold in 07Q3 and we'll write the equation that reconciles the change in TDR during 07Q3:

20 + 164 - 2.5 - .06*x - .002*y = 180 (TDR)

And we know x+y=164, so y=164-x, substitute for y above and solve x, we get x=18 and y=146, that is non-GAAP sales of $18m for ATV and $146m for iPhone. So, iPhone ASP of 146/270k or about $541. Before figuring out the ATV units, notice that on May-30 Apple added the 160GB model at $399. Assuming an even split of demand for the whole month of June results in a 5:1 ratio favoring the 299 model. ASP=(5*299+399)/6 = $316 for 07Q3. ATV units would be 18/316 or about 57k. Baked-in GAAP revenue for each of the following 7 quarters is simply 18/8 or $2.25m from the ATVs (on top of the $2.5m from 07Q2 = $4.75m baked-in) and 146/8 or $18.25m from the iPhones. The total baked-in revenue goes to $23m. And lo and behold, add up the following 4 quarters of that, 23*4, and you get the $92m CDR as reported. ATV GAAP revenue from current sales is 18/16 about $1.1m on top of the $2.5m carried over, total $3.6m. iPhone GAAP revenue from current sales is .002*146 = $301k. This gives combined GAAP revenue of 4m which subtracted from the 164m GAAP gives the 160m increase in TDR. This $4m is also the difference between CDR and NCDR, because for the first year NCDR gets charged with all recognitions.

Finally, subtract the 301k recognized from handset sales from the $5m iPhone related revenue and you get what should be only accessories sales (no AT&T payments yet) of $4.7m, or $17 per handset.

Phew! Here's a table of the results so far:

(click on image for larger view)

Next up is 07Q4 which is a tough one and I'll leave it for the next post. Happy puzzling!

:D

(continue to part 2...)

Historical record

2009-01-16T20:02:00.001-05:00

Another investor had the following suggestion:

WJR42 said:

Deagol, I think you should insert about 2 years previous numbers by quarter and year end along with your estimates for those periods. This info would give your model more standing, especially for anyone who is not familiar with the reliability.

Ok, here's a chart comparing the last 16 quarterly estimates from my model, analysts consensus, and actual results as reported by Apple:

(click on image for larger view)

And here's one comparing the model's 12-month forward-looking estimate and the actual results from Apple:

(click on image for larger view)

I believe it's possible to verify these claims by digging for my posts in the Yahoo message board (up to July 2006), the Investor Village board (sporadically), and the Apple Finance board at The Mac Observer (up to this moment).

:D

An explanation

2009-01-16T19:30:00.004-05:00

Here's somebody who had some great questions, which I imagine many would also ask themselves about this thing I do.

Coldatoms said:

Caligula and Deagol,

I was wondering if you both have any kind of written description of your models that you could point us to or perhaps post. I think it's great stuff but I'd like to know what's included in the various estimates and the Christmas model etc. Are you both simply getting web order #'s from personal purchases at the Apple online store or do people send web receipts directly to you? Are the web order numbers from various countries all part of the same sequence? How do all of the sales at other retailers and the Apple Stores get included? It would seem that as we sell in more and more places that the web orders would become a smaller fraction of total sales. Do you see any effect like that?

Your modeling efforts are much appreciated and I'm curious about what goes into them.

Here's my reply:

Hey Coldatoms, thanks for the interest.

As you may have noticed, Caligula and I have different methodologies, although based on the same simple concept: web orders show a strong correlation with revenue and earnings. Since we have access to web orders in real time, as soon as the quarter ends, then we can make a fairly accurate prediction for revenue (my model) and EPS (Caligula's model).

There's descriptions and discussions of some of the details scattered in several message boards, from the old Yahoo boards (perhaps you can do a search for posts by Deagol_The_Stoor and/or clgl_fubar there although proceed at your own risk) to the TMO AFB (search for deagol) and here. I haven't written a serious writeup of the model or the methodology mainly because I'm not pitching this as professional financial research (because it's free, I'm not making a living out of it, and there's still a lot of guesswork) and the only one I consider a client would be myself and my family. Oh yeah, and I'm too lazy to do it. ;)

However, I do feel I have a responsibility for everyone who follows it, and I take it seriously. I just think no one should be blindly basing their investing decisions on others' opinions, as I've repeatedly stated regarding my work. In any case, I share it in the hope that others will find it useful, perhaps by taking the trouble of trying to understand it on their own, perhaps by just taking the raw data and running their own analysis, or just as yet another datapoint to consider or as yet another opinion from all the opinions out there and parse it through their own opinion-making filters.

I'll try to answer your questions as best I can. Feel free to ask if you have more questions.

First, currently we both mainly get our own orders ourselves, although Caligula insists on making real paid orders (I think it's an excuse of his for giving in to his Apple cravings) and I sort of cheat to get them for free. But at the beginning there was a great compilation effort by Caligula to get submissions of old 2001-2004 orders from people. This effort was invaluable and without it we wouldn't be where we are now with this.

Second, I'll skim over Caligula's model even though perhaps he should be the one explaining it in his own words. His is much simpler than mine, so I think it's fine if I describe the general method and he can fill in the details if needed. It's pretty straightforward: he derives a ratio of EPS/orders and applies the most recent quarter's ratio to the total web orders observed in the quarter which he wants to predict EPS for:

current EPS estimate = (previous EPS / previous orders) * (current orders)

This works relatively ok as long as there are no big sequential changes in gross margin, opex (as a percentage of revenue), the effective tax rate, as well as any shift in online vs retail sales. However, in the December quarter there's a seasonal pattern of a significant sequential shift to online orders due to gift giving. I think Caligula uses the previous year's ratio for the December prediction, but I could be wrong.

On to my model. I don't estimate EPS directly from the web orders. Initially I would estimate revenue through a similar ratio formula:

current revenue estimate = (estimated rev/order ratio) * (current orders)

That change there to an "estimated rev/order ratio" is important. In Caligula's model, it's based on the previous quarter data, but I derive this "estimate" from a regression analysis of the observed ratio over the previous 10 quarters (sometimes I've gone further back, but have found this window offers the strongest and most reliable predictive value). This regression model already takes into account the different seasonality for the Christmas quarter. That would give me an estimate for total revenue, from which I derive EPS by guesstimating gross margin, opex, taxes, etc. The historical revenue-orders correlation and the ratio can be seen in the chart below:

(click on image for larger view)

Notice in the chart the trend change three years ago for the rev/ord ratio, which reflects the retail expansion effect that you wondered about intuitively. Also, the seasonal patterns are quite evident, although some might say there's too much variability to make any reliable prediction. Maybe they're right, but the guesses have always been pretty close.

Still, these uncertainties made me realize that I needed an independent model for revenue: a traditional model of unit sales, ASPs, market share, installed base, underlying industry growth, etc. So after a year or so of "blindly" guessing the revenue from the orders (I think during 2006) I came up with that model, and included some oddities like the way I implement the halo effect, i.e. how to predict or influence the Mac unit estimate from previous iPod unit sales. This resulted in a quite complex model, but it's turned out very useful. Even if not always accurate at the specific product segments level, the overall revenue predictability has been quite good, I guess from the law of averages taking charge. Like, it would often be a little high in Macs but low in iPods, or vice-versa, or it would underestimate the units but higher ASPs would compensate for it, and thus total reported revenue would come pretty close to the estimate. EPS is another matter, whenever there was a significant miss it would usually be due to my guess for the gross margin.

So now I just come up with the revenue number using this products model, and then see where the rev/order ratio would fall when applying that estimated revenue. If the ratio seems to fall in contradiction of the historical seasonality pattern or the general trend from the last couple of years, it suggests a revision of my assumptions for the other model (for the product segments and units and all that) and then I adjust the variables as needed. Or, I'll consider the possibility that the seasonality or historical trend for the ratio might have changed and what implications such a change means.

This last quarter was turning out to be precisely such a case. After an awful October and an even worse beginning of November, the web orders were coming too low for a Christmas quarter. It would require an amazing recovery in orders after Thanksgiving and throughout December to justify my product segment predictions, or it would mean a break from the normal seasonality pattern of the rev/order ratio. Because of that I asked for everyone's help with their thoughts regarding the choice of a significantly weaker Christmas quarter (maintaining the seasonal pattern for the rev/order ratio) or significantly weaker online gift buying (breaking with the historical pattern of the ratio). People voted for a mitigated online shopping season, but without completely breaking from the historical seasonality.

Well, fortunately the amazing December recovery did happen, and the ratio now does fall within the historical seasonal pattern, thus justifying my revenue estimate. Without that, I would have had to revise revenue down to a little over $10 billion. Hope this example helps you to understand the subjective aspects and uncertainties in the interpretation of the otherwise factual web order data.

And then there's the projections into the future, which Caligula's model doesn't attempt. On the orders side, another regression model is used to project the growth of web orders into the future, with seasonal adjustments. Same with the product segments model, projecting growth into the future but here I have more input based on my intuitive take on Apple's and the industry's product developments. Combining these two I see what the rev/orders ratio might do for the next few years, and if something looks odd there then I may need to adjust the product predictions or accept (and rationalize or justify) such a trend change.

I've kept quarterly archives of the spreadsheet, which lets you see the evolution of complexity in the model. Feel free to explore them once you download from here, and let me know if there's any other questions.

Thanks again for your interest and sorry for the long post.

:D

And this:

I forgot to answer this one: there's a different sequence for the US store, the European store, and the Japan store (not sure which other Asian countries this one includes). Maybe there are other sequences (Africa?) but those are the one's I've verified. I only track the first two, with US representing about 70% and EU about 30% of the orders. I think the Asian sequence would represent less than 10%, and thus not help much in improving the model's predictive power.

:D

Hope that helps!

Welcome!

2009-01-15T19:15:00.002-05:00

So I finally got around to setting this up. The lack of file sharing had kept me away, but I decided this vehicle can still help get the word out about my work, and I can always link from here to where the files can be downloaded.

Apple reports on Wednesday, January 21, 2009. So, without further ado, here are my latest and final estimates for FY2009 Q2:

Long term recommendation:

STRONG BUY below $189
buy from $189 to $211
neutral from $211 to $235
sell above $235

3mo ending Dec-2008:


FY09Q1    Revenue($B)  EPS($)
          -----------  ------
Apple guidance   9.50    1.21
Analysts cons.   9.85    1.39
My estimate     10.88    1.80
My non-GAAP e.  13.43    2.83

Product  Units(M)
-------  --------
Mac           2.7
iPhone        6.0
iPod         19.5

3mo ending Mar-2009:


FY09Q2    Revenue($B)  EPS($)
          -----------  ------
Analysts cons.   8.33    1.13
My estimate      9.64    1.52
My non-GAAP e.  10.77    1.97
Apple gd (est)   8.85    1.15

12mo ending Sep-2009:


FY09      Revenue($B)  EPS($)
          -----------  ------
Analysts cons.  36.17    5.05
My estimate     41.13    6.50
My non-gaap e.  47.10    8.92

Valuation (25 x fwd EPS):


Timeframe   Period  Price  fwd-12mo EPS
            ------  -----  ------------
Fair Value  Mar-09    189          7.57
1yr Target  Dec-09    235          9.40
Analysts mean target  131

[download page]

Apologies for the horribly dry and messed up presentation. Maybe I'll have to try some new ideas, so any suggestions are welcome.

Cheers,
:D