Apple's blockbuster winter quarter boosted by cheap oil, dinged by strong dollar
Apple's final quarter of 2014 is expected to set dramatic new records in iPhone sales and overall profits, but external issues out of the company's control will also play a part, ranging from cheaper oil to declining foreign currencies.
More recently however, OPEC oil nations have overwhelmed global demand for oil with continued production in an effort to push crude prices dramatically downward--an apparent attempt to make U.S. production costs prohibitive and reduce new investment in fracking, allowing the oil cartel to win back market share.
The end result has been an abrupt drop in fuel prices. That directly benefits Apple, because it significantly reduces the cost of shipping components and finished goods.
Apart from shipping costs, Apple's own cost savings from cheap oil are tempered somewhat by the company's aggressive efforts to move away from oil to renewable energy sources, including the solar, hydroelectric and biomass fuel cell energy facilities it has built to power its vast data centers in the U.S.
Among iPhones, Apple is now offering its most expensive phone ever: iPhone 6 Plus, at a $100 premium for its super sized screen.
Additionally, iPods--once Apple's primary holiday favorite--have scaled back to make way for a broad array of iPads targeting base model price points starting from $249 to $499.
Despite bearing a premium price among a sea of Android tablets that commonly target the low end, Apple's newest iPad Air 2 is broadly perceived to the most desirable tablet, even being picked out by Android Police as the tablet to buy in its latest holiday gift guide.
Samsung, the company's primary smartphone rival, has blown both of its primary 2014 flagship launches with introductions of unexceptional products built using cheaper materials. Dinged by poor reviews and inventory it can't move, Samsung's September quarter chalked up an incredible 73.9 percent decline in phone profits as its premium sales volumes collapsed in the third quarter.
Once strongly differentiated by large screen sizes, Samsung's latest Galaxy S5 and Note 3 have been bludgeoned by the release of iPhone 6 models sporting not only larger displays but also functional Touch ID for fingerprint login, the broadly-promoted new Apple Pay, fast graphics and 64-bit processing, on top of Apple's use of premium materials.
Outside of Samsung, no other smartphone maker approaches Apple's smartphone sales in the West, even as iPhones have dominated the charts in Japan and taken the lion's share of premium phone sales in China. That's given Apple the majority of the global profits earned from selling phones, a position it also enjoys among tablets and PCs.
Google has abandoned its own "Silver" initiative to drive more premium Android devices, and is running into continued production issues with its Nexus line built in collaboration with troubled vendors including HTC, LG and Motorola.
BlackBerry and Microsoft's Windows Phone are barely even registering as also-rans this holiday season, funneling consumers directly to Apple Stores. Other retailers are continuing to leverage the popularity of Apple's products to drive traffic in their stores via incessantly promoted discounts.
The company is indeed expanding, with new offices in the UK and Japan, and dramatic plans for retail expansion, particularly in China where 20 new stores are planned.
However, a larger problem is that Apple will lose some profits from foreign sales when those revenues are converted back into dollars for financial reporting purposes. In fiscal 2014, international sales made up 62 percent of Apple's total revenues.
Apple has previously warned of "foreign currency headwinds," noting in its SEC filings that while it maintains hedges as insurance against extreme currency fluctuations, sustained strengthening of the dollar will eventually result in either the need to raise overseas pricing or force Apple to eat the difference.
Specifically, the company's Annual 10K warned that "weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of the Company's foreign currency-denominated sales and earnings, and generally leads the Company to raise international pricing, potentially reducing demand for the Company's products.
"Margins on sales of the Company's products in foreign countries and on sales of products that include components obtained from foreign suppliers, could be materially adversely affected by foreign currency exchange rate fluctuations. In some circumstances, for competitive or other reasons, the Company may decide not to raise local prices to fully offset the dollar's strengthening, or at all, which would adversely affect the U.S. dollar value of the Company's foreign currency denominated sales and earnings."
Apple also noted that it "uses derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any, or more than a portion, of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place."
Cheap oil makes shipping less expensive
Record U.S. production of domestic oil--largely from new shale oil fracking extraction techniques--has incrementally pushed energy prices downward over the last two years.More recently however, OPEC oil nations have overwhelmed global demand for oil with continued production in an effort to push crude prices dramatically downward--an apparent attempt to make U.S. production costs prohibitive and reduce new investment in fracking, allowing the oil cartel to win back market share.
The end result has been an abrupt drop in fuel prices. That directly benefits Apple, because it significantly reduces the cost of shipping components and finished goods.
Apart from shipping costs, Apple's own cost savings from cheap oil are tempered somewhat by the company's aggressive efforts to move away from oil to renewable energy sources, including the solar, hydroelectric and biomass fuel cell energy facilities it has built to power its vast data centers in the U.S.
Cheap oil gives consumers more money to spend
Low prices at the pump also give consumers extra cash to spend elsewhere. That's particularly fortuitous for Apple given that it has set up a holiday product lineup with a variety of premium options.Among iPhones, Apple is now offering its most expensive phone ever: iPhone 6 Plus, at a $100 premium for its super sized screen.
Additionally, iPods--once Apple's primary holiday favorite--have scaled back to make way for a broad array of iPads targeting base model price points starting from $249 to $499.
Despite bearing a premium price among a sea of Android tablets that commonly target the low end, Apple's newest iPad Air 2 is broadly perceived to the most desirable tablet, even being picked out by Android Police as the tablet to buy in its latest holiday gift guide.
Weak competition for winter
Apple is not only well positioned to boost its Average Selling Prices and unit sales during the cheap oil holidays, but also faces some of the weakest competition ever exerted by rival vendors in smartphones, tablets and PCs.Samsung, the company's primary smartphone rival, has blown both of its primary 2014 flagship launches with introductions of unexceptional products built using cheaper materials. Dinged by poor reviews and inventory it can't move, Samsung's September quarter chalked up an incredible 73.9 percent decline in phone profits as its premium sales volumes collapsed in the third quarter.
Once strongly differentiated by large screen sizes, Samsung's latest Galaxy S5 and Note 3 have been bludgeoned by the release of iPhone 6 models sporting not only larger displays but also functional Touch ID for fingerprint login, the broadly-promoted new Apple Pay, fast graphics and 64-bit processing, on top of Apple's use of premium materials.
Outside of Samsung, no other smartphone maker approaches Apple's smartphone sales in the West, even as iPhones have dominated the charts in Japan and taken the lion's share of premium phone sales in China. That's given Apple the majority of the global profits earned from selling phones, a position it also enjoys among tablets and PCs.
Google has abandoned its own "Silver" initiative to drive more premium Android devices, and is running into continued production issues with its Nexus line built in collaboration with troubled vendors including HTC, LG and Motorola.
BlackBerry and Microsoft's Windows Phone are barely even registering as also-rans this holiday season, funneling consumers directly to Apple Stores. Other retailers are continuing to leverage the popularity of Apple's products to drive traffic in their stores via incessantly promoted discounts.
Stronger dollars could affect Apple's perfect sales-storm
The significant strengthening of the U.S. dollar against a range of other currencies including the Euro and Japanese Yen could enable Apple to make corporate overseas investments at a discount.The company is indeed expanding, with new offices in the UK and Japan, and dramatic plans for retail expansion, particularly in China where 20 new stores are planned.
However, a larger problem is that Apple will lose some profits from foreign sales when those revenues are converted back into dollars for financial reporting purposes. In fiscal 2014, international sales made up 62 percent of Apple's total revenues.
Apple has previously warned of "foreign currency headwinds," noting in its SEC filings that while it maintains hedges as insurance against extreme currency fluctuations, sustained strengthening of the dollar will eventually result in either the need to raise overseas pricing or force Apple to eat the difference.
Specifically, the company's Annual 10K warned that "weakening of foreign currencies relative to the U.S. dollar adversely affects the U.S. dollar value of the Company's foreign currency-denominated sales and earnings, and generally leads the Company to raise international pricing, potentially reducing demand for the Company's products.
"Margins on sales of the Company's products in foreign countries and on sales of products that include components obtained from foreign suppliers, could be materially adversely affected by foreign currency exchange rate fluctuations. In some circumstances, for competitive or other reasons, the Company may decide not to raise local prices to fully offset the dollar's strengthening, or at all, which would adversely affect the U.S. dollar value of the Company's foreign currency denominated sales and earnings."
Apple also noted that it "uses derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any, or more than a portion, of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place."
Comments
It's difficult to see past the nonsense that is cited by Wall Streeters as the cause of markets or stocks rising and falling. Frankly, I doubt they really know themselves. It's cyclicality within cyclicality.
Is that confirmed? If Apple has fixed contracts in place for transport they are longer than this current drop in fuel prices it could be their transportation clients that are reaping the profits, not Apple.
Wouldn't that be mostly fixed QoQ, which means that companies that pay for fossil fuels are more likely to see a bigger benefit from this cheap oil?
So Apple is now going bankrupt???
/s
(how long will it take before someone jumps on this comment???)
I don't see anything nonsensical about this. It's a very good article, especially on the possible implications of the dollar appreciation on Apple's margins and reported earnings. With nearly two-thirds of its sales abroad, Apple's cash flows are hugely exposed to currency swings compared to even a few years ago.
I have no doubt that Apple hedges aggressively, and that will hopefully mute the impact. Moreover, the fact that China had been the huge area of growth should mute the impact as well, since the U.S. Dollar has not appreciated too much against the Chinese Yuan (compared to the Euro or the Yen). I think the Japan numbers -- reported in dollars -- are going to suck this quarter.
The net effect of all this could well be that, despite what may be a blockbuster quarter -- perhaps even the best ever in terms of actual volumes sold or in constant currency terms -- the stock will move sideways for a while.
I don't see anything nonsensical about this. It's a very good article, especially on the possible implications of the dollar appreciation on Apple's margins and reported earnings. With nearly two-thirds of its sales abroad, Apple's cash flows are hugely exposed to currency swings compared to even a few years ago.
I have no doubt that Apple hedges aggressively, and that will hopefully mute the impact. Moreover, the fact that China had been the huge area of growth should mute the impact as well, since the U.S. Dollar has not appreciated too much against the Chinese Yuan (compared to the Euro or the Yen). I think the Japan numbers -- reported in dollars -- are going to suck this quarter.
The net effect of all this could well be that, despite what may be a blockbuster quarter -- perhaps even the best ever in terms of actual volumes sold or in constant currency terms -- the stock will move sideways for a while.
It doesn't really matter if Apple's stock moves sideways for a while. That is out of Apple's hands. At this point I don't believe Apple can do anything to boost the share price. Looking at Apple's share price this past couple of weeks, the stock movement looks no better than any other two-bit tech stock on the market. Apple's share price seems no stronger or less volatile than any other stock. All that really matters is that Apple must be reaping huge amounts of revenue and profits while other companies aren't. Relatively speaking, Apple should be head and shoulders above nearly every other company during this holiday season but honestly it's hard to tell by looking at Apple's declining share price movement. I'm hoping while Wall Street steps on Apple's share price, Apple is buying back lots more shares to create a solid bottom to move from once the new year starts. It blows my mind to think Apple has lost close to $60 billion in market cap in just a couple of weeks and yet Apple can't sell products fast enough. $60 billion. It's crazy. That's more than Netflix and Tesla combined with $10 billion or so left over. Yet you've got people sternly claiming how Apple's iPad business is on the rocks and will be negatively impacting this quarter's estimates.
But who cares what the boo-birds say about this quarter. Apple's stores are packed (with more than just protesters) and the iPhone is selling in huge numbers. As shareholders we have to think longer term as Apple Pay grows and hopefully high sales of AppleWatch begin. I don't know where AppleTV is headed but without having control of content, selling AppleTV hardware isn't going to help much in terms of boosting Apple's revenue. I have no concerns about Apple's future for the next couple of years. Apple has enough cash to continue growing as well as any other company on the planet. As long as Apple continues increasing dividends, I'm golden.
Not sure if drop crude oil prices are affecting consumer costs. Gas is still in the $3.50 / gallon range in northern california.
The point I noticed was that Samsung had failed with their new products because they failed to excite and were poorly made.
I find that particularly interesting because Apple's success is built on product quality. Samsung had a growing market share and were successfully competing for the mid-range market (where there is some profit to be had). Rather than choose to improve the quality of their products and become more competitive in the higher range market, Samsung decided to go cheap and paid for it.
It goes to show that most companies fail to understand that quality wins business. They are too obsessed with the bottom line and market share that they do not realize that customer satisfaction is what builds business.
This is a pivotal moment. The chance for Samsung has gone and Apple succeed again.
One day there may be a new company that comes along to beat Apple at what it is good at. Not yet my friends.
$2.40 here. First time back down since climbing back up to there in aught nine or so after the collapse.
Cali, though; that’s always going to be high. What was it, $4.50 six months ago?
Soon though, a 75 cents per gallon tax will be slapped onto California gas sales. It's just unending here.
Why are you allowing it? That’s the real question.
I don't see anything nonsensical about this. It's a very good article
The article is largely full of shit. When FedEx fill their planes with gas, they don't pay the price at the pump. They are in long term contracts for their fuel to insulate them from price fluctuations (just like every other industry that relies on a commodity that has market pricing). Furthermore, Apple is already getting great rates on shipping through the volume they ship. Savings will be a drop in the bucket for a company Apple's size.
Dollar wise, Apple is potentially in for more than a "ding". Their products are going to become more expensive overseas (which is already a soft market). They do have a strong lineup, but just because people are saving $15 per fill up is not going to negate the currency issue.
Is that really the case? Or US just trying to destroy the Ruble via the Oil price?
Shipping cost per unit in the whole BOM is the lowest of all. Not only does it not make a slight difference in the Apple's margin ( compared to the drop of exchange rate ). Apple dont paid for Oil price, and like someone said it is those transportation company who are benefiting. ( Which is unlikely either because these company sigh long term contract on oil prices )
Share price is never about the current quarter. Which is now reflected on the current share price already. It is about the future quarter. What are Apple's guidance and Apple Watch lunch date, and Apple will likely announce the partnership of Apple Pay in China.
The truth is Apple cant keep selling record number of iPhone every year, 2013 Apple sold 150M iPhone, 2014 Apple sold 170M. 2015 with iPhone 6 this number will likely reach close to 200M. That is half a Billion iPhone in three years. Apple watch and Apple Pay will add to Apple's bottom line if and when iPhone sales start to level off (Although i still think that is few more years to go ).
There's two things that historically get economies out of deep recessions. A bout of tax cutting/deregulation or massive drops in energy prices.
The cheaper energy will help Apple, not necessarily because of cheaper transport costs, but just because the US economy will finally put 2008 behind it and get back to normality.
The opec wanting to kill fraking yarn is pure speculative noise.
The economic benefits to apple ... Possibly. But this has NOTHING to do with their use of renewables (which don't replace oil in their business).
Economics is nearly pure BS because you can retrospectively tell any story you want while prospectively being able to predict almost none of the big moves.
This article is just like a Business Insider clickbait junk "article".
There was no contract required when it was $599. I bought one. That was the cash price out the door.
That is a very valid point. That said, I'd hope Tim had a built in safety net that kicked in the release Apple from fixed pricing if prices fell. In other words of a win win scenario for Apple.
Our memories differ. My recollection was that you could not buy the iPhone with cash. A credit card was required, as was a data plan. $30/month got you unlimited AT&T data. I still have that $30 AT&T unlimited data plan, but now it is on my iPhone 5s.
I switched from Sprint to get the iPhone and the 2 year AT&T contract was required.
Wrong again "cool" gut: Here in the States, Southwest Airlines has been the only airlines to hedge fuel prices.
That hedge loss is now costing them with dramatically falling prices in the fuel market.
Your argument for less sales overseas due to currency issues is tempered by the fact the iPhone 6's
are top tier quality technology not low to mid priced plastic phones that value priced buyers are sensitive to.
Apple markets quality and quality sells.
Please, if you're going to pretend to be a business analysts understand at least get to grips with what your speculating on, and above all, don't insert junk about opec lowering the price just to get at the USA. That is one theory but certainly not a confirmed fact ! There's not a single source provided for all these shipping cost variables etc
Usually, low oil prices are good for the US economy. Now that it's a major gasoline exporter, the rules have changed a little bit. Apple will see some reductions due to exchange rates, but the US-side will likely jump up as consumers will spend that gas money on other things (possibly iPhones, etc.). Any projections as to what will happen are really guesses, by anyone. If economists really knew what was going to happen, they'd all be millionaires. In the end, it's just guessing based on theories with many missing or incomplete variables.
I, for one, welcome lower gas prices due to lower oil costs. Maybe we'll see $1.50 gasoline in time for summer...