Notes of interest from Apple's Q4 2009 quarterly conference call - Page 2

Personally, the most impressive part of the earnings was the Mac side of the story, where growth is outpacing the rest of the market handily 17% to 2%.

Plus, when you understand how much of that growth is coming from Portables, you understand why the Tablet is inevitable, something that I blogged about in:

The Right Stuff: Analysis of Apples Q4 Earnings Call
http://bit.ly/RJAPA

Check it out, if interested.

Mark

So at 60/40 for the general Market, & 74/26 for Apple, it would take a 2x increase is Desktop sales to get Apple back to the current market...

This report on Yahoo, from mid-2009, says 54/46
http://tech.yahoo.com/blogs/null/146551
- corresponds to a 2.5x increase..

ok, there would be some cannibilisation, but how much?

Personally, I would get a single socket Core i7 from Apple if they did one
- but at the moment, I'll just get a Windows7 PC (argh!)

That's a little misleading. Even if your guess were correct and the market were at 60:40, remember that a very large percentage of PC sales are netbooks - a market that Apple doesn't care to participate in. That means the total ELIGIBLE market still wouldn't be higher than 50% laptops - so Apple is selling 1/3 as many desktops (relatively speaking) as the rest of the market.

It is possible that Apple believes that all those 'missing' desktop customers will buy their laptops and maybe they're right. I would personally like to see a mid-range headless desktop Mac, but I have no way of knowing how large that market is. Presumably, Apple has some idea of the size of various markets in making their planning decisions, so I suspect there just aren't that many people like myself.

I'm due for a new computer this fall or winter. Depending on what the new MBPs look like, it will probably be an MBP, so maybe I am typical.

Apple also doesnt compete in the cheap computer market segments, where the most units are sold, so unless we discount all of those machines too then I dont see how it is misleading. They are saturated in the $1000+ market segment and Im certain well see some slightly cheaper machines to continue their growth, but a cheap tower doesnt seem likely.

Obviously Apple have done their sums, and concluded it doesn't make sense to play in that market segment
- even if it 'feels' like they're missing an opertunity for a few of us...

Their laptops are good.

But the desktops represent horrendous value for money. Skewed. Simple.

Price cuts. Non premium components that give less value and performance for money would tap into substantial desktop sales. The desktop market is substantial despite what the mad-heads on here would have you believe.

We'll see what Apple does re: desktops re: cheaper pricing and more competitive models or any new model added. With 3 million in sales. It MIGHT happen. Not holding breath.

But any prizes to anyone who thinks desktop sales may rebound when Apple offers cheaper more competitively performing ones? Well duh. Quad core iMacs? Yes please.

Lemon Bon Bon.

According to the chart in the link below, the US PC desktop market reached its per unit peak in 2006, with projected declines for the world to follow suit. Well have to check out other vendors to see if they declined in desktop sales and by how much.

Same here. If I were to stray from that which I know and understand I might as well go to Vegas (I will add for ppl that don't get my humor).

Nice blog

Rationality does take over at some macro scale, but a lot of virtual randomness occurs in between. As the old saying goes, markets trade up on greed and down on fear. Both are emotional, not rational, reactions. Buying what you know and understand is always a good plan -- but still, trying to predict the market on any given day, week, month or even year, is a fool's errand.

That's why, except for the '90's, I haven't done that.

Yes, I think a lot of us learned the hard way during that time period.

FWIW... AAPL still has never closed above 200. The last after hours trade yesterday was at around 202, it opened this morning at 200.47, traded just shy of 200 most of the day, and closed today at 198.76. I'm not complaining mind you, but it is interesting how much resistance the markets have to pushing this stock beyond that 200 mark.

And the fuzzy logic just keeps on coming!


Look, the market for desktops, is the market for desktops. It's a finite number. The number of desktops doesn't magically get LARGER just because you want to start NOT counting netbooks. Sheesh!

Accidentally, you did manage to get one thing right, and that's calling the market an "eligible market".

You have the desktop market... which includes:
The desktop Windows corporate IT market.
The desktop PC gamers market.
The desktop AIO market
The desktop PC tower > $600 market
The desktop PC tower < $600 market
The 'don't give a damn what OS' desktop market.
The 'I can build it myself" desktop market
The "Macs are just toys" desktop market.
etc etc.

How's that ELIGIBLE market looking now?

I understand why it didn't go further back then.

A few of us here were arguing, early in 2008, that we were in a recession, but some people said we were nuts, and that until it was officially announced, it wasn't a recession, and that everything was fine, blah blah.

Of course, the recession, as we found out later, began late in 2007, so we were right after all.

If you look at this sales chart for Apple, you can see how sales tracked the recession perfectly, and why the stock rose to where it did, and why it started dropping when it did.
You can also see the previous drops.

You can also see why it's rising the way it is now. Makes perfect sense. No mystery.

http://link.businessinsider.com/view/8cu.769/b7ce5e33

In addition, the reason why the stock pulled back a tiny bit today is this:

http://www.forbes.com/2009/10/20/bri...partner=alerts

You never know, officially, that a recession is underway until after the fact -- simply because it's most commonly defined by two consecutive quarters of negative GDP growth. Likewise it's difficult to argue that one has ended until well after it has already ended. Of course on the flip side, lots of people seemed overly prepared to declare this recession a "depression" -- even some who should understand the distinction between the two.

I wouldn't use a chart of Mac sales to plot Apple's revenue growth, since it's not the Mac which has been primarily driving revenues over the past couple of years. Have we seen a recent quarter when Apple did not report EPS growth in healthy double digits, even in the midst of the recession? I don't recall one. The truth is, in stock market panics everything gets thrown overboard eventually, the good with the bad. This isn't rational behavior, it's herd mentality. This human trait is why so many people find themselves buying high and selling low.

You don't need to see the official numbers. It was pretty obvious to me and a few others here that we were in a recession back in February 2008. Of course, we can wait for it be be called, officially, a recession. But by then, it's too late, everything's down. Since late in 2008, we were told that the recession started in late 2007, by the time we reported it in february, we had had two quarters of it already pretty much.

Besides, why do you need someone to give you official figures when you can tell for yourself?


That chart compares Apples growth in sales compared to the PC industry, something investors seem to care about, as do we here.

For that, it serves a purpose, and it does track Apple's stock price pretty well.

I'm not stuck on "official" measurements (of which there are several), but how exactly do you tell, by yourself?


Sure, we care about it -- but it doesn't really predict revenues for the company, so I'd say it's more coincidental than useful as a forecast model. Of course given the inherent perversities of the markets, coincidence can be more useful than reality if enough people believe in it.

I track trends in shipping companies, suppliers sales, and other areas that tend to lead the economy. These show changes several months before the economy sees it openly.


Revenues don't always tell the tale. Look at MS's stock since 2000. It's expectations that fuel a stocks price. And that has also to do with the comparison between its performance, and the performance of the general industry it's in.

If the industry went down by 15%, and Apple stayed flat, then the stock would also have shot up, because its performance would have been so much better.

A lot of things are relative.

Sure, it's expectations that fuel stock prices -- expectations of earnings growth. Apple's performance in this regard did outstrip the industry, but the stock price fell 60% anyway. I'd like to see a chart that plots P/E over time, and compare companies in various industries that way. Might be interesting to see how they performed in terms of relative expectations.

It looks like the 200 barrier might finally be broken today!

Slight elaboration: Actually the bubble phase of markets is driven by quick buck greed (and not greed in the Ayn Rand sense of rational self-interest) and by all the late pilers in to the latest tulip-bulb-prices-(or dot.coms or derivatives of derivatives)-will-grow-to-the-sky mania, but the saying is that even sound bull markets "climb a wall of worry," i.e., the successful investors know (in the long run, yes, and not during any day, month or year) how and when to fight their fear to feed their greed. Further, markets tend to overcorrect in a fall and the savvy traders (again over time) have already started bargain hunting even as the chicken littles are still fleeing in droves, establishing themselves for the next leg up.

Which, thank heavens, until now and hopefully for long to come, has always arrived eventually.

Case study: Warren Buffett.

I don't buy individual stocks or bonds, but after 30 years of investing, if I had to choose one for the long term, i.e., make a bet 10 or more years out, even granting the succession issues looming at some point, and the fluidity of evolving technology markets, I would probably choose AAPL despite its inherent volatility. They're quite the outfit, own and/or master an iconic stable of foundational technologies, expertise, creativity, good consumer will, unprecedented buzz and actual business sense, and will reflect the brilliant team that resurrected them for a good long while.

They could lose their way, could lose their nimbleness in their sheer growing size, get mired like MS in an increasingly growing base of legacy devices and code, etc. But I wouldn't bet agin 'em when taken head to head with any other company I can think of.

Compared to Apple, for example, both MS and Google are basically one cash cow companies. MS is Win, Office and Server - all vulnerable on multiple fronts and Google is AdSense. Google lapped the existing means of delivering advertising. Which means, although they're driving hard and have major research chops, someone else could lap them. When all your revenue comes from one product (they're giving away everything else to spread that product) your profitability, share value and capacity to grow yourself is at-risk if you lose even a few percentage points of share, and people are going to keep probing for soft spots in your strategy.

While who would have thought Apple Computer (remember them?) would go from a struggling box maker with zero experience in the music biz, to being the world's largest music seller in just a few years? Or that they could capture such mind share and design dominance in the phone market in even less? That people would be lining up for days outside of physical Apple retail stores? That they would own an astounding percentage of the over $1000 personal computing market and be closing in on double digit US market share? Would build native Exchange into their OS before MS did? Would account for an inordinate share of photo and video uploads? Would go from zero to billions of sales in their mobile App store in the blink of an eye? Would be a major contributor to key open source technologies with good relations in that community? Would not only switch to Intel CPU's, but render the word "Wintel" null and void? Would own their own custom fab? Would go from Greenpeace pariah to ranking reasonably well on green lists?

Sure there are niggling miscues, questionable design, tactical and occasionally strategic decisions now and again, and challenges from many other creative savvy companies, but Apple, Inc. is a diverse, vibrant, well-run, well-positioned modern corporate machine firing on all cylinders.

Even if they continue to withhold the deserved gift of a headless mid-tower mac for the long-clamoring faithful of moderate means in favor of chasing rapidly growing markets.

Sure, markets tend to overshoot on both the upside (bubbles) and downside (panics). You can plot those actions as part of the fear/greed continuum.

At this point I can't completely endorse the idea of ignoring these emotional market reactions, and investing over ten year horizons. Speaking for myself (and many others too), in the Spring of this year I found my investments to be worth less than they were in the mid-1990s. Not only had I lost all my paper gains during an over ten year timespan, I'd also lost all of the contributions I'd made to my IRA and SEP-IRA for that period, which were substantial. I won't even try to describe how that feels -- I'm sure a lot of people already know. To make matter worse, this was the second market panic I'd experienced in ten years.

No, I didn't panic. I didn't sell anything, probably because I was too shell-shocked. In fact I bought, a little. The markets have since recovered some of their losses, though hardly all. But the point is, should I trust the markets to treat me well over the next ten years? Fool me once, fool me twice -- fool me three times?

As for Apple, I think they are a very good prospect for the next couple of years, but I know their success depends on pulling rabbits out of their hat on a regular basis. How much longer can they realistically be expected to do that? So beyond the next two, three years I don't know. I certainly would not try to predict where they, or the stock price, will be in five or ten years.

There is another thing in Apple's favor, which is almost old fashioned: They are sitting on a mountain of cash. I chuckle every time some disciple of the current religion demands that Apple "put it to work," because they have forgotten what cash buys you that nothing else can: stability. Certainty. That's why pensions were cash (until they were "put to work" and all but vanished). Apple could faceplant, badly, and take a full year to recover, and when they did they'd be sitting on an even bigger mountain of cash. It assures that the operation isn't brittle, that they have a concrete and redundantly massive insurance against risk. That, in turn, means that they can be utterly fearless in taking risks. They can throw $4M at renovating a 60 year old subway station in order to maintain their brand image at a single store. They simply do not answer to the risks and vagaries of the market, or of R&D, or of bold design.

Look at how long Microsoft was able to coast on their cash supply. They are a far less efficient and well-directed company than Apple is, and they were able to weather a huge, failed (but necessary) release and follow it up successfully eight years after XP (which itself caused a great deal of pain upon its release).

In an era when everyone else was acquiring and leveraging and investing aggressively, Apple was tending Fred Anderson's meticulously built "cash machine" and eliminating all but a small amount of tactical debt. As a result, they have years' worth of insurance against failure. As a result, they can take risks that no other company would even consider taking. As a result, they are wildly successful and growing.

A lot of companies could do well to learn that lesson. But they'd have to learn design first, and apparently that's even harder than retreating from high finance.

Chuckle all you like, but you're arguing against the bedrock principle of capitalism, which is (and it seems ridiculous even to have to mention it), the investment of capital for the purpose of making more money. Apple doesn't need $30 billion to spend $4 million. This must be "new math" at work. It sure doesn't compute for me.

Also, Microsoft hasn't "coasted" on their cash reserves, since they have never stopping making money. A company has to start losing money before they're going to need to rely on their cash reserves, which is surely a thing you never want to see. The goal of capitalism is, has been, and will continue to be, investing capital to increase earnings. If a company accumulates cash which it cannot use for that purpose, then they are, by definition, using it inefficiently. You might have noticed that Microsoft's stock price hasn't grown much at all over the last ten years or so, which is a reflection of their stagnant earnings growth rate. Their cash mountain does not help them here. In fact its existence only serves to point out that they have failed to use it in the way capitalism demands, and how capitalism defines success.

Please, do not wish this on Apple.

Maybe I am. What is money, after all, but a means? It really isn't anything, by itself. It's potential. (This is even more true if you broaden the term from "money" to "capital.") Apple is using money to do what it really wants to do, which is make really great stuff. Of course, the executives are making lots and lots of money doing it. Apple is not a commune by any stretch of the imagination. But, like many of the most innovative and dearly loved companies, they are focused on producing something great. Unlike many of those companies, they've figured out how to make a lot of money producing something great. Unlike many of those companies, they have been excellent stewards of the money they've made, which allows them to take risks, which allows them to focus on producing something great.

If anything, they are less a critique of capitalism than a sort of capitalist Zen koan: The successful capitalist need not focus on the accumulation of capital. Or, another way to look at it (which would include, say, Warren Buffett) is that in the long term, the most successful capitalists are patient and conservative.


They never stopped making money, but they are indisputably weakened from ten years ago.


Oh, I see. You're assuming that by "cash" I mean that there is a warehouse full of mattresses outside of Cupertino, each with a pile of physical dollar bills stuffed in it. "Cash"--Apple's shorthand, not mine--refers to highly liquid capital. It's invested, but conservatively. That's how they've grown it. They invest, get a real but modest return, and invest the return. Mix in some profits when you've had a good quarter. Lather, rinse, repeat over the course of a decade, and you have built a few tens of millions into a multi-billion dollar "cash machine"--Fred Anderson's term. With "no debt"--again, Apple-speak for no long-term debt, as they regularly take short-term loans when expedient--there is no drain on their reserves, and so the accumulation of liquid capital is close to maximally efficient. As the old capitalist adage goes, it takes money to make money.

But they are also putting the money to use. It stabilizes both their stock price (on an upward slope, because the money is making money), by cushioning their valuation, and it stabilizes their company by cushioning against risk. What else should it do? I find it nearly impossible to imagine how it could have been better used, given that the rise of Apple as a powerhouse directly correlates to the performance of their "cash machine" over the last decade.


It simply means that Microsoft sat on theirs, but Apple hasn't done that and won't. It's still growing. Also, Microsoft spent most of the last ten years sitting on their laurels, or twiddling their thumbs, or infighting, or tilting at windmills--something other than shipping great stuff. Apple hasn't done that either, and as long as they don't they should be safe from stagnation.

The best case is that Apple never needs to tap their cash pile to make up for failure. But as far as anyone evaluating the company is concerned, the cash pile is a very generous insurance policy against tactical failure, and as good a policy as one can have against strategic failure, which makes them a safe play for any partners or investors or lenders despite the fact that their product line and their approach to developing products is anything but--which allows them to make things that people really want to buy, which means that the cash pile gets even bigger. Etcetera.

I can answer your entire essay by saying that the model for Apple is not, nor should it ever be, Microsoft. Not in any way, shape or form. The problem Microsoft has is not sitting on their cash hoard, but not knowing how to reinvest it in ways which grow their business. This problem is becoming chronic in their case, which is why their stock stagnates. Unless Apple wants to become a bank, investing their cash "conservatively," or in any way that does not grow the business they are actually in, is nonproductive. It violates Rule 1 of capitalism, which is not to accumulate capital but to reinvest capital. What they are doing now is far more of the former than the latter. This is troubling, to those of us who understand how difficult it will be for them to keep up their present growth rate. Accumulating cash certainly is not how.