Tuesday, July 20, 2010

Oh Oh, It's Magic

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


JavaJack said...

Great information as always. Bloggers rule, Pros suck is obvious. I have seen concern in some articles that Apples margins are dropping, something like 41 to 38 percent from last quarter. Any comments on that or looking forward to the next quarter? Should be good, back to school, Christmas. Sales, sales, sales... Money, money, money!!!!

David Emery said...

In an email to PED, I expressed surprise at how much the affiliated/Wall Street analysts missed the Gross Margin percentages. Is it unreasonable to expect Wall Street models to be pretty accurate here, based on their (less accurate) sales projections?

Sacto Joe said...

Hi, Deagol, and congrats on another smackdown victory!

To me, two things were pretty seriously underestimated by everyone, but shouldn't have been: The number of Macs sold, and the profit from the storefronts. Now, I realize that storefront profit isn't one of the categories, but I think they bear a lot more scrutiny as a meaningful income source. In fact, I suspect that increase in Mac sales may be directly correlated with the increasing growth and popularity of the Apple storefronts.

I've often thought that Apple is missing a bet here by not spending some of that accumulating cash on putting up a LOT more storefronts. Here in Sacramento, we have one fairly small and pretty well overwhelmed store. Another store in the general vicinity would be welcome, especially something a bit more modern looking.

And let's face it: spending money on construction and personnel would really be helpful to the economy right now.

my 2 cents worth....

Sabor said...

@javajack, re: margins

I haven't looked at the numbers yet, but many companies have reoorted lower margins due to the weak dollar pushing up the costs of components purchased from overseas.

Diego said...


Thanks, congrats, and thanks. Appreciate the guide you're laying out for all of us. Curious whether you're planning to update your Deagol v. Market graphic anytime soon? I for one like tracking where we are on that.

And are you or anyone else taking bets on what 'new products' could fuel growth on a go-forward basis?

JavaJack said...

From what I understand they are going to target small business next. They are hiring people to work as business support experts right now. They could increase the number of Macs sold significantly this way.

Why aren't the shares increasing with all the good news?

Al Velasco said...

Gardner went from last to fifth because he reads your blog. I want to know this Daniel...

How do you think Research in Motion will perform at the next conference call? Obviously they are releasing the new operating system but they are so late to the party that inhobestly feel they are screwed. Will blackberry become the next Garmin, a company with a lot of potential buried in a landslide of competition. The only people who will
buy Blackberries are Nationalist Canadians... LOL


Al Velasco said...

The shares aren't increasing because people don't YET realize that Apple will make a ginormous push into Enterprize once they have enticed small business owners and all citizens to become familiar with the I-phone and I-OS.

Desktop computers are going touch. What do you think will happen to the computer illiterate when you tell them to touch their screen to "command" it. This will revolutionize computing for that generation. The good news is that people in their 70's-90's aren't interested in learning about computers. Everybody else is fair game. By the way, my 83 year old grandma loves Skype. I should call her more often. I love her to death.

Al Velasco

Al Velasco said...

Just curious if this applies to the data center in North Carolina....... "the real tipping point for [mobile web apps running in] the browser will be 4G because it will literally be your computer in your pocket […] quasi-instantaneous. That’ll be the point we see even more activity on the browser side.”

This is from Appleinsider.com

I wonder of the data center is for the purpose of data intrinsic mobile search. We as a society will owe Apple and Google so much.

Daniel Tello said...

Thanks everyone. Nice discussions here.

About margins, I expect about 38% this Q to be a one-time slip. I'm modeling 40% longer-term.

Sacto Joe, nice to know you keep an eye on me. It's always a pleasure reading your many insightful comments everywhere. I'm sure Sacramento will get their other store, or two. From the cc, Apple opened just 7 stores last quarter, but they expect to open a whopping 24 new stores this quarter.

Diego, that chart still looks pretty much the same, except the line tracking AAPL has remained flat while the line tracking my targets has kept going up. I'll do it again after AAPL makes a credible attempt to catch up with the fundamentals.

Al, thanks for your comments. Who knows what the future will bring. Some of the things you mention seem a little odd to me, but I can't really argue about them. And yes, please do call your grandma.