Ridiculous Apple Dramedy

Dramatis Personae

Apple (AP.)

AnalCyst (ANL.)

TechXpert (TEX.)

Markaotic Chorus (MRKT.)

-----

Act 1, Scene 1

Stage: The street, some random web property. Any one of so many indistinguishable articles.

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

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

Pro analysts' "lazy eye" - charted

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:

Which analysts are the biggest sandbaggers - charted

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.

Pro analysts: mediocrity has become a habit

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

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:

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.

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

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!

Apple beats up everyone

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

EPS estimates' relative deviation vs. actual results

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

Apple Reports Q1 2009 Results

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)