Apple Could Post Sales of 2,350,000 Macs when it Reports on Wednesday

in General Discussion edited January 2014
Apple Could Post Sales of 2,350,000 Macs when it Reports on Wednesday

Saturday, April 19, 2008

A few weeks ago, I wrote an article summarizing my earnings expectations for Apple?s soon to arrive fiscal second quarter earning?s results due out after the bell on Wednesday, April 23. Since that time, I have received a numbers questions regarding my assumption that Apple will sell 2.35 million Macs for the quarter. A number that is well above analyst consensus estimates of 2 million units. First, I should say that my estimates are based on an extrapolation of data derived from various historical trends as well as the currently available publicly published data on the issue, and that actual results could vary significantly from my estimates.

Last year, Apple sold 1,606,000 Macs in the first quarter (Q1) and sold 1,517,000 Macs in the second quarter (Q2). That is roughly a 5.54% sequential decline in Mac sales due to normal seasonality. If Apple sees the same seasonality this year, Apple will sell exactly 2.189 million Macs this quarter (Q2 2008). That's the base number I would like to start with. I do not use Q105-Q206 seasonality data because I think the data is highly unreliable. Using the base of 2.189 million Macs, one must consider and analyze any countervailing influences that might lead to better or worse seasonality when compared to last year. There are a number of factors with varying degrees of impact that might help answer this question:

MacBook Air's Impact on Sales

First, one should try to judge the overall fiancial impact of the MacBook Air on the quarter to determine whether Apple experienced better or worse seasonality as a result of strong MacBook Air sales. The MacBook Air did not start to ship until the end of January after it was released at MacWorld 2008, and thus, has probably had a limited impact on total actual Mac shipments for the month of January. Yet, at the same time, Apple did release the MacBook Air in the middle of January for sale and allowed purchasers to make pre-orders. As long as Apple ships those orders by the end of the quarter, it gets to fully recognize those orders in its calculation of total Mac revenue. Thus, January MacBook Air sales might not have been as hindered as one might first imagine.

MacBook Air's Potential Cannibalization of the MacBook & MacBook Pro

Yet, one must also judge the impact of those sales for the rest of the quarter, and the degree of cannibalization, if any, the MacBook Air had on Apple's other computer lines. Intuitively speaking, I think the degree of cannibalization has been quite minimal. First, it is more likely that the MacBook Air has cannibalized the MacBook more so than the MacBook Pro. This is due to the fact that the MacBook Pro is intended for pro users who demand performance, larger displays and high-end storage capacities over mobility. For example, Final Cut Pro and Adobe Suite users will find it highly impractical to use the MacBook Air for those ends. Also, users that demand performance for gaming or demand high storage capacities or are generally snobs when it comes to performance are going to choose the MacBook Pro over the MacBook Air. Thus, whatever cannibalization occurs will cut against the MacBook over the MacBook Pro. It will be those users who do not demand a lot of performance and cannot quite afford the MacBook Pro who will be purchasing the MacBook Air. But this is the type of cannibalization that Apple wants. If the customer, who would otherwise pay $1,099 for an Apple computer, is paying $1,799 for one, then Apple?s computer ASP will be driven up by those higher end purchases.

Moreover, there are a number of analysts such as Shaw Wu from American Technology Research, Inc., and Pacific Crest Securities analyst Andy Hargreaves who believe that the MacBook Air tends to be more additive, than cannibalistic, to overall Mac sales. As these analysts point out, there is a business market for individuals who are willing to sacrifice performance for high end mobility, and the MacBook Air answers this demand. If this were not the case, there would be no need and no market for ultra portable computers. Yet, given how MacBook Air has performed according to Apple's on-line webiste, the ultra portable market appears to thrive.

MacBook Air Tops Apple's Best Seller List

Each week, Apple updates its top sellers list for each of its operating segments. Usually, the update happens late on Monday night or early Tuesday morning depending on one's sleeping patters. I've followed this top seller's list very closely and have discovered some very interesting things. First, that the MacBook Air has held the number one spot for Apple's top selling computer since the first day the MacBook Air started shipping. It has held that position each week since the start of the quarter and continues to hold that position in April. This is important because the vast majority of Apple's computer sales doesn't come from its retail sector, but arrives from on-line sales. Its retail sector makes up less than 1/2 of Apple's computer sales.

Secondly, it?s important because it means that sales of the MacBook Air could result in significantly higher expected sales. Apple could easily eclipse sales of 2.4 million Macs this quarter, and nobody would even know about it. Why? Because it?s impossible for analysts to track on-line sales. Gartner, IDC and NPD data only track U.S. and World-Wide retail sales. Thus, the MacBook Air could be blowout this quarter, and there's no way to really quantify just how big of an impact it has had before Apple actually reports earnings. Moreover, since the MacBook has generally been Apple's top seller over the past 6 quarters, unless the MacBook Air significantly cannibalizes MacBook sales, the MacBook Air probably was highly addative to overall sales. In other words, if the MacBook is selling at close to the same pace it has in the past, then the MacBook Air would be highly addative since it holds the number one position. My estimates assumes a modest to significant impact of MacBook Air sales.

MacBook Air in Apple's Retail Space

In further support of this conclusion is the tracking of MacBook Air demand in the retail sector. There were numerous occasions in the quarter were the MacBook Air was completely sold out in Apple's retail space which could either suggest a lack of supply or an overabundance of demand. But I think it is more the latter because Apple has had a tremendous track record in being able to manage its inventory levels. It was able to do so successfully with the iPhone and the iPod, and thus the evidence weighs in favor of suggesting that a selling out of MacBook Airs was the result of higher than expected demand. In concluding remarks regarding the impact of the MacBook Air, I think a couple of issues should be kept in mind. First, since the MacBook Air has held the number 1 spot on Apple's on-line store for the entire quarter, it is impossible to give a ceiling on the number of sales. Apple could have easily sold 2.4 or even 2.5 million macs if the demand was simply out of this world for the MacBook Air. There is really no way to tell. Secondly, the demand for the MacBook Air in the retail sector was likely very high for the quarter. Thirdly, the MacBook Air, intuitively speaking, has the tendency to cannibalize the MacBook rather than the MacBook Pro. Yet, at the same time, if MacBook sales were unusually low for the quarter, then the fact that the MacBook Air has held the number one spot could be meaningless. Again, there is no way tell.

MacBook & MacBook Pro Refreshes

Early in the quarter, Friedman Billings Ramsey chip analyst Craig Berger noted that Apple significantly reduced its build order for the MacBook and MacBook Pro computers. But this was likely the result of its immediate refreshes of the MacBook and MacBook Pro lines which Apple released on February 26. Last year, Apple released no new computers to help counter-act the affect of its seasonally slower sales. The MacBook and MacBook Pro refreshes released in February of this year likely had an impact on overall computer sales. Intuitively speaking, people are more likely to purchase a new computer when they know that the computer has just been upgraded to higher speeds etc., than they in the middle of the cycle. Thus, these upgrades will have, to some degree, an ameliorating effect on negative impact of normal seasonality. This point must be considered when comparing 2008's seasonal trend to 2007.

Gartner's Quarterly Report on U.S. Retail Mac Sales

According to a quarterly report released on U.S. and Worldwide retail computer sales conducted by market research firm Gartner, Apple is on track to see better seasonality in its retail computer sales this year than it did last year. Moreover, the study suggests that Apple should see flat overall sequential growth if Apple?s on-line sales perform at the same level as its retail sales sector. Gartner estimates that Apple sold nearly 1,010,000 Macintosh computers for its fiscal second quarter ended March 31, 2008. The reason the Gartner report suggests that Apple is seeing better seasonality in its retail sector this year than it did last year is due to the fact that Apple, according to Gartner, will experience a mere 2.4% sequential decline in retail sales between fiscal Q1 and Q2 of this year versus the steeper 5.7% decline it saw last year based on the same issued study. The data below compares the seasonally of Apple?s U.S. retail Mac sales by comparing the trends between Q1 and Q2 of 2007 to Q1 and Q2 of 2008.

Fiscal 2007 Gartner U.S. Retail Sales Estimates for Apple

Q1 2007 Retail Sales: 808,000 Macs

Q2 2007 Retail Sales: 762,000 Macs

Sequential Decline: 5.7%

Q1 2007 Total Sales: 1,606,000 Macs

Q2 2007 Total Sales: 1,517,000 Macs

Percentage Change: 5.54%

Fiscal 2008 Gartner U.S. Retail Sales Estimates for Apple

Q1 2008 Retail Sales: 1,035,000 Macs

Q2 2008 Retail Sales: 1,010,000 Macs

Sequential Decline: 2.4%

Q1 2008 Total Sales: 2,319,000

Q2 2008 Total Sales: 2,350,000 estimated

Sequential Rise: 1.33%

These estimates also suggest that Apple should see flat sequential overall Mac sales growth of 2.3 million units. The retail sector of Apple?s operations is the sector that is most susceptible to being affected by a slowdown in consumer spending. As less Americans visit the mall and make retail purchases, the more Apple?s retail space is affect by the lessening of retail traffic. Yet, Apple?s on-line store is not as affected as its retail segment due partly to the fact Apple derives the majority of its world-wide sales from its on-line store. Thus, the tendency is that sales derived from Apple?s online store should see even better seasonality than sales derived from its retail space. Even if one assumes that Apple?s on-line store performs in the same vein as its retail sector according to the Gartner study, Apple would sell roughly 2.280 million Macs. Yet, the countervailing influences of strong MacBook Air sales, noted above, will probably lead to better overall on-line sales of Apple?s computer?s sequentially. These influences, and unusually better seasonality in Apple?s retail sector, could very well lead Apple to post a new record for Macintosh sales of 2,350,000 units when it reports its quarterly results on Wednesday.

Disclosure: I own long term 2009 and 2010 call options in Apple. The information contained in this blog is not to be taken as either an investment or trading recommendation, and serious traders or investors should consult with their own professional financial advisers before acting on any thoughts expressed in this publication.
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