Behind Apple's impressive quarter
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| Apple sold 6.9 million iPhones in its fiscal fourth quarter – beating RIM's BlackBerry in unit sales. Photo: Apple |
When Steve Jobs got on the phone to answer Wall Street's questions Tuesday afternoon during Apple's earnings call, it was a signal that Apple knows investors are scared. The last time I recall the Apple CEO doing that was eight years ago, when Apple missed its numbers in one of the first signs that the dot-com bust would hammer Silicon Valley.
Back then, Apple's (AAPL) stock lost more than half its value.
Clearly, one of Jobs's goals Tuesday was to head off such panic, and convince everyone that this time things are different. Back then Apple was a puny computer maker with a stagnant market, expensive products, and no obvious prospects for growth. The iPod and iPhone weren't born yet. The company didn't have a lot of cash. Fast forward to 2008 and Apple's Mac sales are growing faster than its rivals, its iPods rule the MP3 player market and the iPhone is on a tear.
"We are not economists; your next door neighbor can likely predict what's going to happen as accurately as we can," Jobs said in a nod to the gloomy global financial picture. But then he went on to argue that Apple should continue clobbering its competitors no matter what.
It's not a hard case to make, especially considering the numbers Apple just posted. Profits were $1.14 billion on sales of $7.9 billion. But because of accounting rules that affect the iPhone and Apple TV, that actually understates the strength of Apple's quarter. Counted another way, Apple actually sold $11.68 billion worth of product in the quarter, worth $2.44 billion in profit. Apple's cash hoard ballooned to nearly $25 billion, leaving it with more cash than any other debt-free technology company. (That's more than Microsoft (MSFT), Intel (INTC), or Google (GOOG); Cisco (CSCO) has more than $26 billion in cash, but it also has about $7 billion in debt.)
So Apple has enough money to do pretty much whatever it wants – build factories, hire engineers, even send a rocket to the moon. And this should indeed give investors a sense of security, especially those who are thinking about buying into Apple at this price.
In fact, you'd have to turn the clock back to the fall of 2006, before the success of the iPhone and the disappointment of Windows Vista, to find the sort of value the stock price now holds. Here's the thing: Because Apple has about $25 billion in the bank, the $81 billion market value Wall Street has given the company is actually somewhat misleading; subtract the cash, and the street says Apple is worth only $56 billion, or about $63 per share. For a company that's growing at Apple's pace – it sold 6.9 million iPhones in the quarter, up from 1.1 million a year before – that seems pretty cheap in any economy.
Of course, these days the economy has a way of making fools of us all. With tight credit markets and companies cutting back, it's possible that consumers and businesses just won't have the money to continue their Apple-buying spree. "This is definitely a concerning environment from a credit perspective," Chief Financial Officer Peter Oppenheimer said, mentioning that he is closely watching Apple's accounts receivable. "It's a tough environment. Hopefully we won't have issues in the future."
And Apple has certainly taken a gamble by leaving its laptop prices pretty high, rather than cut them drastically to lure penny-pinching consumers. (Apple recently dropped the price of its entry-level laptop to $999, but its redesigned laptops offer more features at the same old prices.) It's hard to blame Apple for holding the line on price – after all, if consumers will pay more, why not let them? But it could backfire. If the economic picture continues to worsen and Apple's sophisticated target buyers start bargain shopping, they could delay purchasing that Mac or iPhone – or choose something cheaper.
This idea is not lost on Apple. While Apple is holding prices for now, Jobs hinted that cuts are coming next year for the iPhone. With more competition coming from the likes of Google's (GOOG) Android phone platform, "We have to not leave a price umbrella under us, and we're working very hard at fulfilling those goals." In other words, Apple engineers are hard at work cutting costs out of the next iPhone.
And in the end, that might be the most encouraging news of all.
By different you must mean that they just work. Past products not withstanding no one would call Apple's current OS unstable in relation to anything Microsoft has ever put out. I too have been a long time professional user of both platforms and have come to prefer Apple's products because they allow me to do my work, not fuss with getting the computer to work. Apple has grown recently because people's eyes and minds have been opened (originally by the iPod) and now they realize there is a difference. As Jobs stated on the conference call Apple does not try to address every segment of the market, they will not put out a cheap-o computer, they leave that segment to other manufacturers who have a tough time making any money there.
I'm using my Macbook, purchased a year ago; after using pc's for 25 years. Why? My two Dells cracked up; started eating email, took 15+ minutes to boot and shut down. I was desperate with an onslaught of emails coming in daily from my lawyers on six suites. Gone, gone, gone.
Apple lives the conceptual computer envisioned by Jobs and Wosniak interpreting XeroxParc. It is simple. It works. It does what you want. I makes what you need. No instructions needed. Just go, do. Forget 'computer', 'technology'. The Mac is a tool. Like a screw driver, or better yet, a sewing machine, typewriter. Did anyone ever have to keep reading manuals, need 'HELP' to use those instruments? No. And, as an aside, using MS Help is like querying the Library of Congress and being referred to 75 million volumes.
I will never use a PC again. I can't afford the time wasted, the money to keep having it debugged, or the desperation of missing deadlines because the gd MS OS is a piece of elaborated s^%t.
Oh, by the way: the original first DOS was fine. And let's remember Billy Boy Gates didn't write it–didn't even have rights to it–he stole it, then conned it off on IBM. The rest is history. Yes history. Shadows of everything, every thing from each iteration of dos remains in your blessed windows, xp, v.7, whatever.
Take that bite out of an Apple. You'll never look back.
Apple isn't as great as people make them out to be, they are BETTER.
I am a HUGE fan of Apple. My entire life I've used PC's. My entire life I've been disappointed by how slow they operate and how buggy they are. When it was time for me to get a new computer…not because the computer was too old, but because my (Dell) never worked correctly, I headed to Best Buy to buy yet another laptop PC. This was about 9 months ago and I hadn't seen the new Macs (and in my opinion most non-computer nerds had not either).
Not only did I not buy a laptop, I bought a DESKTOP Mac on the spot that day. All it took was one look. I knew there reputation was great, I had heard all the buzz, but seeing it in person blew me away. The design was super slick and the 24" flatpanel with the computer BUILT IN to the screen was incredible. Since getting my Mac I've never had a better computer. I use it for nearly everything, including watching movies. It's LOADED standard with software you can't get on a PC.
I use my Apple far more than any PC I've ever owned. It wasn't at all hard to learn how to use as long as you know how to point and click. I have since added Bose speakers and now it's also (using i-Tunes and Front Row) my overall media center. PC users probably don't even know what Front Row is, I feel sorry for them, really. I spend hours in front of it, often opting to watch shows on it rather than my 55" TV.
I also have an i-pod which I'm very happy with and hope to some day have an i-phone, once I get rid of my wretched Crackberry.
I will happily pay up for an Apple product that actually WORKS over the general crap out their in PC land. You can't buy this kind of brand loyalty, i'm a convert for life as long as they keep making products that work.
As for those who say they can't stay on top by remaining innovative, you HAVE to be kidding me. They are LONG known for having the most easy to use computers (which by the way, all the schools are now using so what do you think the business world will be using in 20 years???), they practically invented the MP3 industry and now are dominating the mobile phone industry.
Bottomline, I love my Mac and I will never buy another PC ever again. PC's are the next typewriter.
OSX is technically Unix. It's not AT&T's Unix. It may not be the Unix you use. But it is a fully compliant Unix.
http://www.apple.com/macosx/technology/unix.html
If it is a semantic argument you make, well then you're making a semantic, not technical argument. If you insist it doesn't meet the industry's specification of Unix, then you're mistaken.
On another note, Apple's products are very well priced for what they are and the value they provide. The growth of Apple is not from zealots, but from everyday people that value what Apple offers over the competition. Peple who don't want or need the additional value Apple provides at a higher price don't need to buy an Apple computer. That's cool.
When Apple didn't provide additional value, they struggled. If Apple doesn't offer meaningful value, then people don't buy it. Look at Apple TV. It is not a hot commodity because people don't value what it is bringing to the table. It works for some so sales are adequate to keep it going while Apple figures out how to add more value and try to make it more meaningful to people.
While I don't hate Apple (I love my iPhone) people need to realize that Apple isn't as great as people make them out to be.
For the comment earlier OSX is NOT *nix based. It is FreeBSD based which is Unix like but not *nix based. Get your facts straight before saying something foolish.
Macs can and will be hacked. Security through obscurity will end quickly. Despite what people think just because *nix (or a *nix like OS) is secure it's not because there aren't security holes. It's because *nix servers by default have no ports open. *nix servers aren't generally used for browsing the Internet or have a gajillion plugins/extensions running. *nix servers generally don't have weak passwords.
Disclaimer: Keep in mind that what I write following this deals with the "average user," not a power user or those with an IT/CS degree or Cisco/Microsoft/CompTia or other certifications.
Macs however DO have ports open. They DO browse the Internet. They DO have a gajillion of plugins/extensions installed. They DO have weak passwords. All of those lead to hackers hitting Macs once it's a viable target which will happen sooner then later.
As for the OSX vs Vista argument. Get over it. To date I have yet to see anybody from the iCult prove that Vista sucks or Vista is broken. If you can prove to me that Vista is "broken" please do. And I mean a true problem. Not something stupid like "I don't like UAC." Those who bash Vista either have never used it and/or have bought into the FUD from things like the Mac commercials.
Despite what people say a Mac is certainly NOT worth the price you pay. My year old Dell laptop is a 2.2GHz C2D, 4GB RAM and cost me under $1000. Wow…200MHz slower and more RAM for less the half the price of the lowest end Macbook Pro. I won't even bring up the price difference between my self-built desktop compared to an iMac or Mac Pro either.
@Oh Blah Dee Blah Dah – To call Apple products "premium" is, well, ridiculous…Different, yes, but hardly premium. I began my career as a software engineer over 20 years ago on Apple products (Apple II+, Apple IIe), and have used multiple versions of Macs many times over the years. However, the hardware, OS, etc. have been no better or worse than others I've used (*nix, Windows, etc.). In fact, I worked in a project for the "mother ship" in Cupertino for a while, and found that the Apple OS to be one of the most unstable I'd ever worked with.
My speculation: Apple is just another in a long line of fads, and is enjoying it's day in the sun like MS, IBM, Sun, and others before it. I doubt the success will carry on much after Mr. Jobs retires or shuffles off this mortal coil – will be interesting to see how that plays out.
The important thing to realize about Apple is that they do not compete on price. Never have, never will. When you compete on price the only thing you can do to be more competitive is lower your prices. Apple offers premium products with appropriate prices that discerning consumers are obviously more than willing to pay. Apple makes the cream of the products and takes the cream of the profitability, leaving the bargain basement of both to the likes of Dell.
Friends:
Thanks for the chatter about Apple. The company does have an advantage, similar to IBM & SUn, in being the developer of 'integrated' hardware/software for its products, perhaps limiting its' product penetration, adpoption and advocacy of the masses (ala Google), yet maintianing a superior systems engineering and systems configuration model that remains quite technically efficient and appealing to a more discriminating and loyal consuming public.
For a more macro comment concerning Apple and technology sector in general. let investors and crtics be mindful of this- 'there is no alternative to evolving technology', thus long-term both consumer and investor are rewarded by participating in this field. The existing mortgage-based recession will abate in a few years, as the US/world, shakes off its seduction by phony mortgage and real estate investments (never to be 'real' soon), technology developments willprovide the economic engine that pulls the world off of its' slump. The revolutionary science and engineering of nano technology promise to change everything from the industrial-electrical age to the nano age, just as electricity changed all of our lives.
I'm not that worried about Apple making it through the down turn. However, I'd worry about Google, Microsoft, or even some unknown in the long term. As time goes on, everyone seems to be gunning for Apple's niche. Many people with an iPod/iPhone or even a Mac aren't exactly die hard fans of Apple. So I could see them easily peeled off.
Also,
@Tom
*nix actually doesn't dominate enterprise space if you include users and not just servers. However Microsoft is making in roads even into servers (especially with Share Point, but no idea if that will have any staying power)… That being said I like both *nix and Windows Server, so I'm happy no matter what.
@Henry
I've used Macs, use to program on Macs actually, and I've hacked Macs. It's not difficult. The main issue is they use open source products but don't have a patch system that keeps up with the fixes. They're usually a couple months behind (even for major holes sometimes)… Although they've been getting better about that.
I would love to buy a mac. alas, i'm a little more cost/comparative than that. Argue all day over which is better… rub in my face than mine is totally inferior. In the end, i have a laptop that does everything i need, w/o any problems (none to date) that i use with many programs related to the construction industry – for half the cost. It just ain't worth it for me. It might be to some – let them pay into those 20% profits.
Anyone who believes Apple will fall is sadly mistaken. The apple computer, (I have 3: an original Imac, one from 2 years ago and a new macbook pro and all still operate as well as they did when they were new), has overcome the PC and the OS of Mac's stomps Vista like a SEC college football team would a Jr Varsity Jr High football team. In the short time, you may see a fall in prices and if they do, buy, buy buy! Have no doubt, Steve will cut prices. Soon, we will see the fall of the PC and Apple will rule the computer, MP3, and possibly mobile phone worlds!
EVERYBODY KNOWS THAT STEVE JOBS IS LOOSING HIS TOUCH B/C HE HAS NOT INOVATED IN A NEW TECHNOLOGY…. HE IS STUCKED WITH APPLE PRODUCTS SINCE THERE IS NO ADITIONAL FEATURES HE CAN ADD TO THE IPOD, THE IPHONE OR THE MACS… THEY ALREADY HAVE EVERYTHING!!!… SO AS A CX YOU ARE NOT GOING TO BUY SOMETHING THAT YOU ALREADY HAVE AND AS AN INVESTOR YOU ARE NOT CONVINCED OF THE CEO B/C HE HAS NO IDEAS LEFT… SO LETS FACE IT!! APPLE IS SUCCESFUL RIGHT NOW, AND EVERYBODY IS SAYING THAT WINDOWS SUCKS AND PC IS GARBAGE ETC ETC; HOWEVER THOSE PEOPLE, "THE MAC USERS," ARE GONNA COME BACK TO PC ONCE APPLE TEAR APPART YEAR BY YEAR… BOTTOM LINE APPLE´S Q4 WAS NOT A SUCCES AND EVERYBODY KNOWS IT!!… STEVE JOBS ITS ONLY TRYING TO KEEP INVESTORS ON THE COMPANY BUT SOON OR LATER THEY WILL LEAVE….
Senior Developer, program all day everyday – big business doesn't use Mac. I follow the money and until bug business changes, I am PC all the way.
I admire the passion of Mac users and have used them on occasion. Good machines, but Hospitals, Government Offices, etc… are not on board and probably never will be – But I will be ready when they do.
It would be great to see entry-level iBooks go for $300 cheaper to make them more competitive with cheap-o products offered by Dell and HP.
Regarding the Apple vs. Windows debate, it is fascinating that Windows has so many supporters. Having used both platforms at work and at home for the past 14 years, I can say that there's absolutely no comparison.
Windows is flawed at it's core, and it has always been so. It's design makes it so vulnerable, and the OS itself is so convoluted and huge, that simply using your computer becomes a balancing act of workarounds.
It's not so much that I'm a pro-Apple person, although I do like their products, but I really despise Microsoft.
I've had to suffer for a decade and a half using Microsoft's super-crappy, half-baked operating systems, which they insist on releasing before they're debugged, over and over and over again. (How long did it take after initial release before they applied the proper patches and debugs to make XP actually useable?)
Perhaps the worst thing Microsoft has done was systematically destroy competition, thereby preventing other operating systems, virtually all of which showed promise of being much better than Windows itself, from reaching maturity and becoming available to the general public in a meaningful way.
Nuff said.
At
@Intosh: yawn
It seems you do not know anything about this, you're just repeating what you've heard/read somewhere years ago. What we all have heard/read somewhere years ago.
Have you ever used a Mac ? Do you know how many Macs are out there exactly ? Do you have experience in hacking ? Do you have any original thought to contribute to this issue ?
Exactly.
I think Apple has found its long term stride much like IBM has. Its not a short term flash in the pan technologie company that rises and falls on short term successes. With Jobs back as CEO and learning from his past mistakes and the misteps of the CEOs that came between his first and second terms, he has been able to set a long term strategy for Apple's viability and as such a strong foundation for long term investiment.
@Intosh
Shows what you know. *nix OSes dominate the enterprise space and there is a reason for it. They are rock solid. Windows is garbage. And if you knew anything, you would know that OSX is a *nix OS.
Just because you have a Microsoft IT Certification, does not mean that Windows rules the roost.
Do the people complaining about pricing realize that Apple has a great refurb store? New products at tremendous prices. I'm sure there are Macbooks at $800 in there. Go to the Apple Store website and look for refurbs in the lower left corner.
Apple is making enemies of some really powerful players in the market. It's only a matter of time before their insolence comes back to bite them. I'd start shorting now their about to get crushed.
Jobs participated in a quarterly conference call just a couple years ago, when the company reported excellent year-over-year results. And Apple had a great quarter this time, too, despite a worsening economy.
@Todd: OSX is NOT "worlds better" than Windows, FAR FROM IT. Windows dominates both entreprise and consumer space. It offers advanced capabilities satisfying the needs of the corporate environment AND it offers depth of choice for the consumer through support of millions of software and thousands of peripherals. OSX is a simpleton toy OS compared to Windows in terms of device/sofware support. Fanboys will claim security advantage of OSX over Windows but it's security through obscurity — who'd bother targeting Macs with its minuscule market share? Besides, net hackers would have a hard time finding a Mac on the Internet anyway.
Finally some good news on the Apple front. After the inital post market trading stock reaction I was starting to get worried, but it has moved pass $100 now and with the strong cash reserves (takeovers in store?) it could be a nice day in the market tommorow. As a long "suffering" AAPL shareholder it will good to see some upside. Though I am realistic enough to realize it will take some time to get back to levels I bought it at earlier this year.
Apple dropping price is short term solution for current market condition.. it will not be long term… if they can ride this thru the cash they have… they should be okay…
Jon,
Finally someone who does not feel a need to accentuate the negative!
You do well in saying: "Counted another way, Apple actually sold $11.68 billion worth of product in the quarter, worth $2.44 billion in profit."
You just failed to add the one more data point – "… yielding a real EPS of $2.69."
THAT is the big new item! In reality, their EPS was $2.69.
Steve Jobs is second to Jesus. Who can resist the allure of the Apple store? No one, people pile into that place and look around like they're at an art museum.
@Chris in Singapore
That is the idea, Chris. There is no need to upgrade. If you are not doing graphic design or video processing which needs the power of the newest machines, then hold on to that 2 or 3 year old MacBook Pro. Rest assured that the newer models are superior in speed and some new features, but the basics of computing have not really changed in 30 years.
So hold on to it until it begins to fall apart or you just feel that it is time you must upgrade. After having a quality product for 4 or 7 years, you can look back on the money you saved by not buying a cheaper computer.
Now go out and have dinner on the money you are saving.
I'm moved from the last of the G4 15" powerbooks to the new mac this week. You can read about my experiences on mynamemeansflintstone.wordpress.com.
Suffice it so say that I think this thing is awesome. With VMware running on it and and XP partition, I can touch any file and see any website. Leopard on the core2duos screams and I can't put the thing down.
At least they had some good news. Hang in there. Great days are ahead. http://www.LikeSoup.com
I must disagree with Ron Hofstedt's comment in response to this article. Peter Lynch and Warren Buffet have both explained that earnings are what matter. A stock's price EVENTUALLY tracks its earnings. The two don't march in lock-step, and this differential is what can create buying opportunities. I used "eventually" with emphasis, because as wise investors will state, there can be a considerable lag between a stock's intrinsic value and its market price.
On the matter of Apple's product pricing, I believe that Apple standing firm on their pricing is a sign that they are confident in demand. Cutting prices is a sign that things aren't going well, and competing on price alone is often a sign that you have no unique advantage over your competition. Apple has the discretion to cut pricing when it suits them. To do so prematurely only cuts into their margin.
Remember: price is what you pay. Value is what you get.
For me, cash earnings are what I watch in a public company. Viewed that way, Apple continues to be quite a story.
I am a big Apple fan; my wife and I each own iphones, ipods, and mac laptop, but we are admittedly in a upper income bracket. I know a lot more people who would love to own Apple products, but they can not afford to spend the extra money. I think Apple definitely made a big mistake by not offering sub $900 laptops especially with a prolonged recession starting.
The economy will hit a hard recession next year. Merrill Lynch is lying off 10,000 employees. Do you think a new Apple product is on laid off worker's Christmas list? Apple is not immune to a consumer downturn. It has great products, but until the economy turns in 2009 or 2010, they face some strong headwinds that will slow all boats. There will be great opportunities to get into the stock next year.
OSX is worlds better than Windows. It is marginally better than a properly configured Linux for usability and beauty. So… those two comparisons warrant keeping prices inflated.
It's hardware though is is good and clever, but there are comparable machines out there. And I think a good Lenovo laptop is simply superior in quality (hardware-wise).
They need to drop their prices. If they did, they would own the market in < 5 years, IMHO.
RE: "And Apple has certainly taken a gamble by leaving its laptop prices pretty high, rather than cut them drastically to lure penny-pinching consumers."
=====================
Mercedes, BMW, Gucci, Prada, etc. are NOT going down market, and neither should Apple. Apple's products are of the highest quality components, have the best software, are supported with the best service department, run the best software, have ALL the necessary components and features, and use the Mac OS X operating system.
I wouldn't have it any way.
Few people are stupid enough to settle for a Windows machine over an Apple machine just to save a few dollars on something that they will have to live with hours each day, for numerous years.
"Oh honey, things are bad right now. You have to drive a Yugo and not that BMW you want, until things get better."
"No way dear. Just save and take a little longer to get that Mac computer that I really want."
I am an apple fan. But i must say, There is a real lack of motivation to upgrade now. There last 1/4 was great but from now on it could get nasty, I have used apple for around 12 years and i am very disappointed in the lack of new product, I would have upgraded my macbook pros but there is no reason too! I am starting to get sick of them putting out the same product in a different colour to try and get you to part with your money. Also this year i have purchased three new products and all three have been back to be repaired, I have not been to the service centre in the 12 years of using macs until now, I feel the wheels are slipping of. They need to do something or i will not be buying a new mac for a long time and i dont think i am the only one. if there stock keeps falling they could do a 1 for 10 split, make it look different even though its the same, just like macbook pro and ipod.
The underlying premise is fallacious: Earnings effect corporate valuations, which have little to do with stock prices. The pedantic view has stock prices increasing as earnings increase. The classic example of this fallacy is Microsoft, a virtual money machine whose stock price is essentially unchanged after 8 years. Apple investors are 'scared'? The hope of better earnings should do little to change comfort them.
re price umbrella — Apple has significantly cut iPhone prices this year, and they have been contually cutting iPod prices for 7 years (the ASP of iPods is down from over $300 in 2001 to $150 in 2008). They clearly know that what happened to the Macintosh in the 80s must not happen to their new platforms again. Apple will further strive to dominate the smartphone market and, as smartphones replace regular phones, the phone market as a whole. This is what Steve Jobs has underlined with his statement.
This may not make Apple or you "corporate types" happy, but I am still using an 8 year old G4 tower which I purchased for $200 (w/monitor) from a universtiy surplus sale. It runs OS X and is very functional. This is a testament to good engineering.