Sunday, March 2, 2014

Apple As An Episodic Enterprise

As a member of the Braeburn Group of independent Apple analysts, there isn’t a day that goes by I’m not slicing and dicing the latest company news and media speculation about forthcoming products. For our members, Apple analysis is a full-contact, participatory sport. No one has the luxury of just sitting on the sidelines.

News reports from Apple component suppliers, Wall Street analyst commentary, patent disclosures, web usage stats and just about any other tidbit of information about Apple generates spirited discussions and debate on a daily basis. It’s what we do and please don’t ask why we do it. 

For our members, even a brief visit to an Apple retail store is more than a shopping trip. It becomes an adventure in acquiring anecdotal data. It’s observing which products are captivating the attention of shoppers and what devices might be purchased during our brief store visit. There’s no clue we won’t pursue in our data hungry quest for information about all things Apple. 

As analysts we seek to take both a short-term and long-term view of the company. Because data is both current and historical and projections are based on the extrapolation of data into future periods, there’s a data dependency in developing both short-term and long-term performance models.The more data the better and the more reliable the data the better the projections.This is why current data is the focus of so much discussion and debate.

Apple’s fiscal quarters are nothing more than static snapshots of a fast-moving enterprise object. Ninety-one day cycles come and go with a blur. Still, quarterly and yearly results are a standard for gauging a company’s performance.

Apple As An Episodic Enterprise
The graph below illustrates Apple’s revenue growth by year since FY2005. The Apple iPhone was released in June of 2007 and the iPad was released in April of 2010. From FY2005 to the end of FY2013, Apple’s revenue rose 1,127%. In dollar terms, revenue rose from $13,931 billion in FY2005 to $170,910 billion in just eight years. The 8-year period encapsulates the migration of the Mac to Intel processors and the release of two new products that currently comprise just over 75% of the company’s reported revenue.

The graph below illustrates Apple’s earnings per share growth by year since FY2005. From FY2005 to FY2013, Apple’s earnings per share rose 2,457%. That’s a rise in earnings per share from $1.55 to $39.63. Apple reached its current high watermark for earnings per share in FY2012 at $44.16. 

The falloff in earnings per share in FY2013 is for our members the source of ongoing discussion and debate as Apple works through a multi-quarter cycle of negative net income growth. Despite very high earnings, as analysts we want constant revenue and earnings growth and data-driven justification for the share price to move higher. 

In my view, Apple will be valued by the stock market based on the perceived pace of product innovation and the pace of earnings growth. While it might be argued there are better or more accurate ways to determine the company’s value, the share price will rise and fall on the company’s profit growth and perceived potential for profit growth. To the market, little else matters.

There are many members of the Braeburn Group that might disagree with my view of how the market values Apple. This is what makes active discussion and debate worthwhile. We learn with every twist and turn of the company’s fortunes and from the different points of view among our members.

Apple As A Global Enterprise
The graph below illustrates the percentage of revenue contributed by each of Apple’s regional revenue segments in FY2013 that ended in late September. 

The United States and China are currently the only two countries in the world that contribute 10% or more of Apple’s revenue. Japan may become the third country to enter that exclusive group. 

The graph below illustrates the rates of regional revenue growth in each of Apple’s regional revenue segments. 

Analyzing Apple is less of an effort to determine how many iPhones and iPads the company might sell in a 91-day period. It’s an effort to understand and forecast where in the world Apple is finding the best and most profitable markets for growth.

New products or product categories and continued geographic expansion all factor into Apple’s future growth mix. It’s not just counting iPhone and iPad unit sales or the number of new iPhone carriers added. It’s a matter of finding and distilling data related to all elements in Apple’s revenue and earnings matrix. 

It’s been four years since Apple released a major new product line. The original iPad debuted in April 2010. Apple is an episodic enterprise. It’s a company that since the start of the new millennium has reinvented itself as the maker of digital music players, smartphones and then tablets. While we don’t know with certainty what new product or product category Apple will announce in the coming months, history suggests a new product or product category is all but a certainty at this time.

At Apple’s annual meeting held on February 28th, Tim Cook encouraged short-term traders not to invest in the company. In his remarks the CEO again promised new products were coming soon and his vision is for the long-term. I’ll take him at his word. 

The Next Several Months Will Be Fun To Watch
Apple’s next episode of strong revenue and earnings growth will commence within the next several months. But forecasting Apple’s future growth isn’t easy. It’s about new products and a whole lot more. What sells well on Main Street, USA will need to sell well in Beijing, London, Sydney, Tokyo and other major population centers around the world. 

This is what makes Apple analysis so much fun and an all-encompassing interest. For those that engage in our full-contact, participatory sport called Apple analysis, there’s much to learn and track each and every day.

Apple will soon begin a new episode of growth. For those that do choose to remain on the sidelines, grab the popcorn and turn on the Apple TV. The next several months will be fun to watch. During this time, the members of the Braeburn Group will be hard at work putting the different pieces of data together to understand where Apple is headed and forecast future rates of growth while chasing down every available clue. Don't ask us why we do it. It's just our version of a full-contact, participatory sport.

Robert Paul Leitao

Disclosure: The author is long Apple shares

Saturday, February 15, 2014

Mirror, Mirror On The Wall, What’s The Fairest Glass Of All?

In the Cinderella fairytale, it was a glass slipper that revealed the identity of the young lady to the prince. In Snow White, it was a magic mirror that betrayed the identify and location of the tale’s heroine. 

In today’s digital device world, glass will play an increasingly important role in product innovation and market success. It’s industry lore Steve Jobs opted to replace the plastic screen on the iPhone just weeks before the original iPhone’s release with what’s now called Gorilla Glass from Corning. This apparently 11th-hour decision brought to market a Corning product that had been mothballed for years.

Corning’s Gorilla Glass has become both a successful and ubiquitous product in the global smartphone and tablet markets. But the drive for continued innovation and the desire for competitive advantages in the marketplace has Apple investing heavily is a new glass product for the company’s devices. 

On November 4, 2013, GT Advances Technologies (GTAT) announced a multi-year agreement with Apple to provide sapphire glass for Apple products. Apple is investing $578 million upfront to fund development of a sapphire glass facility in Arizona. GTAT will reimburse Apple for the pre-payment beginning in 2015. But like all good stories, the plot thickens and sub-plots abound. 

The Mythical iWatch
There isn’t an Apple product enthusiast on the planet that isn’t expecting an Apple iWatch. Looking at Apple’s recent hires including the former CEO of Burberry, the former CEO of Yves Saint Laurent and other recent hires with expertise in various medical fields, matched-up with recent Apple management meetings with representatives of the FDA, speculation extends to talk of a high-quality watch with all kinds of health monitoring capabilities. But who knows?
What is known is Katy Huberty at Morgan Stanley, one of the most respected Wall Street analysts covering Apple, has issued a note suggesting an iWatch could deliver up to $17.50 billion in revenue in the first year absent supply constraints. She’s not usually one to write fairytales. Apple currently uses sapphire glass to cover the camera on the iPhone 5s and the fingerprint reader on the device’s home button. Sapphire glass is also used by luxury watch markers to cover the face of their products. 
Looking Beyond The iWatch
Looking beyond the yet-to-be-announced iWatch, Apple has filed an interesting patent application consisting of different ways to fuse sapphire glass layers to strengthen manufactured sapphire glass panels. 
This patent application is definitely for fusing sapphire glass panels in sizes larger than what’s needed for a watch display. Although sapphire is among the hardest materials on the planet, fusing two panels cut on different planes will further strengthen sapphire glass for uses in particular applications. Following everything from patent applications to the size of the Arizona facility and the volume of specialty equipment shipped to the new facility for sapphire glass production suggests Apple is planning more than watch displays for sapphire glass.
The different pieces of evidence suggest very high sapphire glass production levels for whatever Apple plans to do with the product. The manufacturing capabilities of the new plant are for levels of sapphire glass production that are absolutely outsized compared to current industry demand.
All Good Stories Have A Fair Amount Of Risk
GTAT may trade as an almost pure Apple derivative and the company will have dramatically reduced gross margin per revenue dollar. The shares may bounce up and down based on the latest iWatch rumors and speculation about sapphire glass production levels at the Arizona facility. Apple excels at drilling down costs of components and squeezing every dollar it can from suppliers. Because Apple is financing the manufacturing facility’s development the company will be pushing down its costs per sapphire glass panel. High short interest, a low share price and heavy dependence on Apple for future revenue growth makes GTAT a volatility trifecta.
There’s No Magic Mirror
Whether or not GT Advanced Technologies is a modern-day “Cinderella story” is well beyond the scope of this blog. I neither recommend or suggest the company for investment. However, I am intrigued by Apple’s sapphire glass agreement with the company. I
f GTAT is to become the newest Apple supplier to find great success providing components for the maker of the world’s most popular digital devices, it will be revealed not by a magic mirror but by the passage of time.
This isn’t a fairytale. But it is a fascinating story to watch as the plot and sub-plots continue to unfold. Only time will tell if sapphire glass becomes Apple’s fairest glass of all. GTAT is looking for a very happy ending to this unfolding story. 

Robert Paul Leitao
Disclosure: The author is long GTAT shares

Sunday, February 9, 2014

The One Solution To Apple’s “Problems”

Apple’s Invitation To Come Out And Play
I’ve been following Apple since the first time I heard the original Mac’s startup chime. The original Mac was alluring and inviting as if to say “come out and play.” My investment in Apple goes well beyond the interests of a shareholder. Over the past 30 years I’ve invested literally tens of thousands of dollars in Apple-branded products and every day and throughout the day I use the company’s devices to enhance the way I work and the way I choose to live. 

I no longer subscribe to a cable service and our household receives its entertainment content through Apple TV. We’re about to dump our landline because members of our household use iPhones for voice communication. Thanks to the iPad, I no longer need a laptop and apps are far less expensive for productivity and content acquisition and consumption than traditional applications. 

Over the next few years our household will save thousands of dollars from forgoing cable service, landlines and purchases of new laptop computers. Even the Super Bowl is now streamed over the Internet. What important service does cable TV provide at a cost of over $100 per month? I have a maxed out AT&T Family Plan for our iPhones and yet collectively we use less than the 700 minutes available under our plan. There’s no need for a landline.

For many in our society today, voice-only communication is the communication method of last resort. For intra-household communication, FaceTime is way more cool than voice-only communication and messaging is far more efficient than voice calls to relay shards of information or quick updates to family and friends. In our household we run more of a risk of a “throttle back” notice from AT&T for data usage on so-called “unlimited plans” than we risk using too many voice minutes. 

30 years from the introduction of the original Macintosh, Apple hasn’t steered away from the path of product innovation. But at this time and until the next big new product announcement, innovation from Apple is subtle but no less impactful for those who invest in the company’s eco-system of products and services. 

The “Problems” With Steve Jobs
In the years following the first exit of Steve Jobs, I watched a parade of people occupy the CEO’s chair. I was covering Apple in late 1996 when then CEO Gil Amelio stunned the Apple enthusiast community with the announcement the company wasn’t buying BeOS to provide the foundation for the next generation Mac OS but was purchasing NeXT and the NeXTStep operating system to complete the daunting task. With the acquisition of NeXT, Steve Jobs was returning to the company as a special advisor. 

From within the Mac community screams that the return of Steve Jobs to Apple would ruin the company were on high volume and the term "mercurial" was used to describe him so frequently, a casual observer might think Steve was the man’s middle name. Within months of his return to the CEO’s chair in July of 1997, the term mercurial to describe him was seldom heard anymore and little more than one-year later, the term “beleaguered” was no longer used as an informal prefix to the company’s name. 

The “Problems” With Sir Jony Ive
I recently finished reading Leander Kahney's book about Jony Ive. The book contains colorful insights into the career of Jony Ive at Apple. Contrary to common belief, Jony Ive began his career at Apple years before Steve Jobs returned to the company. No one can dispute his design genius nor the influence his design leadership has contributed to Apple’s amazing success over the past 16 years and the influence of his work on Apple’s products in the twenty two years he has been associated with the company. In addition to his influence on such products as the iMac, the iPod, the iPhone and the iPad, he was also involved in the development of the Apple MessagePad, the Macintosh Cube and the cost-challenged original iPhone 5. 

Jony Ive’s design genius and approach to product development often incorporates use of materials such as aluminum and glass in revolutionary ways and production techniques Apple must pioneer to bring new products to market. Product success isn’t guaranteed and breakthrough designs have inherent market risks. 

New products and new product designs take time. Although it seems like a long time from the release of the original iPad in 2010 to today, the design of the original iPhone released in 2007 was spawned from an existing tablet project. Initial development of the iPad preceded development of the iPhone though the iPad came to market three years later.

Apple’s attention to detail, decisions to create products requiring pioneering manufacturing techniques and products that disrupt sleepy old economy industries take time to develop, design and manufacture. Four years since the release of the iPad to today is really no time at all when disruptive new products are the expectation for Apple.