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Impact of Nokia settlement expected to be seen in Apple's earnings report

post #1 of 16
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Both Nokia and Apple have remained mum on the financial terms of their patent lawsuit settlement, but a glimpse at the deal Apple was able to broker is expected to be seen in next week's quarterly earnings report.

Maynard Um with UBS Investment Research believes Apple was likely accruing a liability in accordance with generally accepted accounting principles, or GAAP, in anticipation of a settlement with rival handset maker Nokia. It's possible that Apple was "over-accruing" on this liability, a move that could result in a more positive effect on the company's gross margins for the June quarter.

"If Apple had been accruing for Nokia royalties and brokered a more favorable rate, we believe it could see a 1x benefit to gross margins," he wrote in a note to investors on Wednesday. "Conversely, if Apple had not been accruing, the 1x 'catch-up' would likely have an adverse impact."

Um doesn't expect Apple's ongoing royalty payments to Nokia to have a material impact on the company's bottom line going forward.

Apple and Nokia announced in June that they had settled their patent dispute and withdrawn their respective legal complaints. In the deal, Apple agreed to make a one-time payment to Nokia, and also to pay ongoing royalties, though specifics remain confidential.

In his initial analysis, Um said he believes the timing of the announcement suggests the deal was a favorable outcome for Apple. Though he believes Apple's one-time payment to Nokia was probably several hundred million dollars, he also thinks the company may have been "over-accruing" for a possible licensing deal with even higher costs.

In addition to the Nokia settlement, Um sees a number of other potential positive signs for Apple's gross margins in the company's third quarter of fiscal 2011. For starters, sources have reportedly indicated that Apple currently has favorable component pricing while demand remains strong for Macs, the iPhone 4 and iPad 2.

In addition, this year's back-to-school promo offers students and faculty a $100 Mac App Store gift card. In years past, the company offered customers who bought a new Mac a free entry-level iPod touch, which had at least twice the value of this year's offering.

While the change will result in fewer "sales" of the iPod touch, the App Store gift card promotion will help Apple's gross margins going forward. Um also believes that the change is a sign of Apple's increasing emphasis on a consumer's digital life.

"By encouraging users to make purchases on their multiple software and content stores, Apple is fostering a consumer dependence on the company for digital media, content, software etc. that serves to further promote the use and purchase of its hardware in order to seamlessly manage, access and consume this content," he said.



Finally, Um also sees Apple reducing its traditionally conservative warranty accruals, as the company has seen a recent down trend in warranty claims. If those claims continue to drop, he expects that Apple will reduce its reserves accordingly.

Um has adjusted his forecast for the June quarter, and expects Apple to have sold 7.9 million iPad 2 units in the three-month span. He is also calling for the company to announce sales of 7.9 million iPad 2 units when it reports its quarterly earnings next Tuesday afternoon.
post #2 of 16
Apple will blow away all expectations. That is all that is to be expected.
post #3 of 16
Quote:
Originally Posted by nvidia2008 View Post

Apple will blow away all expectations. That is all that is to be expected.

From Apple ][ - to new Mac Pro I've used them all.
Long on AAPL so biased
"Google doesn't sell you anything, they just sell you!"
Reply
From Apple ][ - to new Mac Pro I've used them all.
Long on AAPL so biased
"Google doesn't sell you anything, they just sell you!"
Reply
post #4 of 16
The Back To School promotion is really interesting.

If you think about it, its like Apple giving away millions of dollars to developers.

Assuming that about 50% of the money is spent on 3rd party apps (I think it would be a LOT higher, esp. since this includes both Mac and iOS apps), that is about $35 for 3rd party devs per user.

Each back to school promotion probably gets millions of sales, so I think 3rd party devs making about $100 mn. out of back to school promotions is not unthinkable.
post #5 of 16
Quote:
Originally Posted by addicted44 View Post

The Back To School promotion is really interesting.

If you think about it, its like Apple giving away millions of dollars to developers.

Assuming that about 50% of the money is spent on 3rd party apps (I think it would be a LOT higher, esp. since this includes both Mac and iOS apps), that is about $35 for 3rd party devs per user.

Each back to school promotion probably gets millions of sales, so I think 3rd party devs making about $100 mn. out of back to school promotions is not unthinkable.

Biggest barrier to customers spending money on apps is fear. Jump start the acceptance, and you suddenly have someone "locked" into the platform, and contributing to the ecosystem more strongly.
post #6 of 16
Quote:
Originally Posted by aaarrrgggh View Post

Biggest barrier to customers spending money on apps is fear. Jump start the acceptance, and you suddenly have someone "locked" into the platform, and contributing to the ecosystem more strongly.

I agree...the promotion gently guides users into becoming comfortable buying apps. This will only strengthen the App Store eco-system for devs.
post #7 of 16
Quote:
Originally Posted by addicted44 View Post

The Back To School promotion is really interesting.

If you think about it, its like Apple giving away millions of dollars to developers.

Assuming that about 50% of the money is spent on 3rd party apps (I think it would be a LOT higher, esp. since this includes both Mac and iOS apps), that is about $35 for 3rd party devs per user.

Each back to school promotion probably gets millions of sales, so I think 3rd party devs making about $100 mn. out of back to school promotions is not unthinkable.

good call addicted; hadn't thought of that and completely agree...

ken
post #8 of 16
Quote:
Originally Posted by aaarrrgggh View Post

Biggest barrier to customers spending money on apps is fear. Jump start the acceptance, and you suddenly have someone "locked" into the platform, and contributing to the ecosystem more strongly.

I agree. I didn't buy any apps for my iPhone 3G because of that "fear" but once I made my first purchase I went crazy buying apps for my iPhone 4. It's really gonna help gain acceptance by people who might be on the fence or not even thinking about buying apps. Smart move I think.
post #9 of 16
Yeah but only people who read tech blogs have that fear. The ordinary people don't have a clue about so called lock in. They only find out when they buy a phone a different OS and want to move apps.

Remember though that music will be at the top of the list before apps.
post #10 of 16
Quote:
Originally Posted by nvidia2008 View Post

Apple will blow away all expectations. That is all that is to be expected.

The problem is when you don't meet expectations it hits harder. Apple have been on a roll for quite a while and only the iPod line shows any sign of having plateau'd. How far can they go?
post #11 of 16
Quote:
Originally Posted by kriskkalu View Post

Yeah but only people who read tech blogs have that fear. The ordinary people don't have a clue about so called lock in. They only find out when they buy a phone a different OS and want to move apps.

People generally get the idea of software lock-in, even if they don't call it by that name. The entire Windows hegemony was built on this premise. For decades the main argument against buying a Mac was that it would not run Windows software.
Please don't be insane.
Reply
Please don't be insane.
Reply
post #12 of 16
Quote:
Originally Posted by kriskkalu View Post

Yeah but only people who read tech blogs have that fear. The ordinary people don't have a clue about so called lock in. They only find out when they buy a phone a different OS and want to move apps.

After two years of owning a smartphone, I think many ordinary folks will eventually learn that you can't move apps from one platform to another (like iOS to Android) simply based on conversations with friends and family.

"Say, have you tried ______?"
"No, we don't have that app."

Anyhow, there's a return policy for new phones anyhow. Even if you learn about the lack of transferability of apps a couple weeks later, you can still take your new device back.

The biggest impact of iOS app lock-in has yet to be seen. It'll be the high school and college kids who are currently using iPod touches (the main demographic of the iPod touch is 13-24 year old). When they graduate, get jobs, and can pay for pricey smartphone monthly cellular service, many of them will migrate to the iPhone.

Apple sells about 2 iPod touches for every 3 iPhones. This is a large market that has no equivalent in other device platforms. As Steve has said, the iPod touch is "training wheels for the iPhone."
post #13 of 16
Quote:
Originally Posted by aaarrrgggh View Post

Biggest barrier to customers spending money on apps is fear. Jump start the acceptance, and you suddenly have someone "locked" into the platform, and contributing to the ecosystem more strongly.

I've always thought lock-in was far less a factor in keeping people on a given platform than most people assume. And considering that this promo is aimed at young people who are far more prone to impulsive change (as well as being technically adept enough to salvage or replace most of what they've bought) I'd say it's even less a factor.

If anything, Apple is getting more eyeballs looking through the store which is a good thing (especially for developers) any way you slice it.
post #14 of 16
Quote:
Originally Posted by aaarrrgggh View Post

Biggest barrier to customers spending money on apps is fear. Jump start the acceptance, and you suddenly have someone "locked" into the platform, and contributing to the ecosystem more strongly.

This is where Apple simply blows away the competition. They make something as simple as buying apps ubiquitous to the user experience and before you know it they are hooked. Android, MS/Nokia, et al can produce better hardware (debatable for sure) but Apple has shown time and time again that good hardware, coupled with exceptional software and backend are simply hard to beat.
post #15 of 16
The thing is that there are a lot of very popular free apps, many of which are high quality. There are plenty of free versions of paid apps (e.g., Angry Birds) so there's no risk in trying. You don't even need a credit card if you create the App Store account from your iOS device.

If you follow app discount sites like AppShopper, it's easy to find discounted apps, particularly high quality games at a fraction of their full retail price. While one might hesitate in buying a $4.99 game, it's much easier to say "what the hell" when you see it drop to ninety-nine cents.
post #16 of 16
Quote:
Originally Posted by Galeforce View Post

The problem is when you don't meet expectations it hits harder. Apple have been on a roll for quite a while and only the iPod line shows any sign of having plateau'd. How far can they go?

In the short term, as far as as many iPhones and iPads they can produce. In the long term, well, depends on Steve and the team.

The pent-up demand and brand power is so strong globally that Apple can go another three years just updating products without having to really come up with the next big thing. But they do have some next big things lined up going into the next five years, I reckon.
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