We can quite understand why Apple attracts such a huge investor fan base right now, but looking over its figures it’s hard to see how it can sustain its current momentum. And that raises an interesting question, what is a reasonable number of iPhone’s to sell each quarter?
For the immediate past quarter, the third in its financial year, Apple sold 5.2 million and if it had four quarters in a row like that it would sell over 20 million. Apple is often compared with Nokia, just to show how far behind it is in the handset stakes, and Nokia sells roughly 100 million devices each quarter, around 20 times the number.
Deutsche Bank analyst Brian Modoff this week pointed out that in operating profit terms Apple and RIM combined, which only ship around 3% of the entire global handset shipments, earn 35% of total global cellular operating profits and Nokia, despite having a 40% market share has just 55% of profits at the operating level. He goes on to predict that Apple and RIM next year will control 5% of the total cell phone market, but land 58% of the total operating profits. He’s dangerously wrong.
We’re not quite sure where he gets his numbers from and we assume that he is counting from before Nokia announced a 66% drop in profits for the last quarter, but there are significant anomalies here. Nokia has a history that shows that it rapidly corrects profit shortfalls, and it will once again, and it will be savage in its cost cutting. It can make phones incredibly cheaply due to its supply chain logistics and plant holdings in India and China.
Recently it has been beaten up by pundits, probably us included, for its failure to jump on the touch screen bandwagon aggressively enough or early enough. It now has a number of touch screen phones, but if you sit with them in your hand, notable the N97 and the 5800 Tube, and an iPhone in your other hand, the ease of control of the iPhone still draws you to it. It is a design phenomena.
Nokia must be castigated for not trying out enough radical new designs in the market, and it should perhaps spend less time trying to control an operating system and instead make its devices desirable. But it is a global player, and if Apple puts out more and more phones, Nokia will still ship 100 million devices. Yes its operating margin per phone may go down somewhat as it loses market share in smart phones, but when smart phones become commodities, Nokia will still make them cheaper than anyone else and it is very profitable in cheap phones.
In effect these are different skills. One makes truly desirable phones, one makes phones of all types, cheaper than anyone else and of course there’s room for both in the world.
We can see from Apple’s spread of revenues that it has a larger concentration of revenues in its native US than in Europe, despite Europe being responsible for more than double the number of new handsets each year, so Apple clearly has some potential to ship more iPhones in a quarter, just by getting better penetration in Europe. But Apple is likely to manage this by splitting the iPhone franchise into two or three price brackets. European operators are not doing half so well with the iPhone as an exclusive as AT&T is (Orange has had the courts take it away while others are accused of over pricing). It is just not quite so appealing in a market which has a wider variety of phones available and less people able to afford the iPhone and less of them in the habit of paying for their phones.
So for Apple to ship more iPhones a in Europe, it is likely that it will make less profit on each phone. Of course it may have some more growth in the US, but then possibly only if it gives up the AT&T exclusive, and then it won’t be anything like as profitable.
And just how many people can buy an iPhone before either a) Other devices are just as good or b) people are fed up with the design? What happens if the iPhone loses its appeal, then overnight, subsidies disappear, data revenues on the devices begin to fall and the iPhone margin could melt.
Companies like Nokia, Samsung, Sony Ericsson, HTC and LG may finally get the idea that they have to innovate and not just copy and one or more of them may eat into Apple’s popularity in the US, and halt its growth elsewhere, or collectively all Android phones may do the trick.
For our money Apple might manage to shift that 5 million a quarter up to 8 million before it has to dilute its profitability, but it can’t be a figure much higher than that, and even then Apple would have to come out with mild variations in design and capabilities every 6 to 9 months in order to achieve it. Which means that the shine might come off the Apple in three to four more quarters if it relies purely on the iPhone to deliver it. Others might argue that the top shipment range could get closer to 11 million devices quarterly, something the iPod did regularly. We would say that it would take a dramatic broadening of the range (is it did in iPods from the Shuffle, right up to the Touch) before that might be achieved, and margins will definitely have to fall for that to happen.
As we say Apple might be able to increase that shipment number, for instance if it introduced a low end device and a tablet like the large iPod Touch which has been predicted for some time, but we cannot see how it can ever again hope to achieve the margins on its phones that it has today.
But there has been an unbelievable transformation at Apple over the last few years, its desktop and laptop sales have been up hugely and this quarter they have more or less recovered from the effects of the recession, but just as surprising to Apple as the effects of the iPhone is the success of its retail operations. Retail is up slightly to $1.5 billion a quarter and throughout the recession it has held its revenuers there.
But once again, if people stop buying iPhones in quite such high numbers, they may go into these retail establishments less often. It would have a knock on effect. The key to look for is the Apple margins topping out, when that happens, expect a crisis.
For the Apple quarter it had revenue of $8.34 billion and a net income of $1.23 billion compared to revenue of $7.46 billion and net quarterly profit of $1.07 billion a year ago. Apple has a gross margin of 36.3% and this was up from 34.8% in the year-ago quarter, so we have not seen that margin dip quite yet.
That’s not to say that Apple is finished inventing things. It will continue into the Netbook market with whatever type of device it feels is appropriate and may look at more innovation around the TV and set top and DVR markets, alongside its less than successful Apple TV devices. The fact that Apple has now shipped 1.5 billion applications from its App Store in just a year, is something Steve Jobs was beaming about at the results and this may continue to have an effect.
The company does have almost $30 billion in cash and available to sell assets (some of them are classed as long term) and that’s the sort of cash pile that gives management confidence to do things like buy huge stakes in newer technologies, but it also leads to calls from investors to issue dividends and distribute at least some of that wealth. When a company answers those calls it usually means it can’t think of anything better to do with the money.
For next quarter Apple forecast that it would see similar profit on revenue of between $8.7 billion to $8.9 billion. Its market value jumped $6 billion on the day, to $141 billion.