Apple's FY2010: A Retrospective

Apple's FY2010: A Retrospective

In preparing my December quarter and FY2011 estimates for Apple, I'm looking to the company's FY2010 results for benchmarks and clues concerning revenue growth trends. FY2010 was a year of extraordinary growth for Apple, delivering revenue growth of about 52% and eps growth of roughly 67%. 

Fiscal Year Unit Sales

The emergence of the Apple iPad in the revenue mix for the June and September quarters was crucial to Apple's ability to deliver the growth numbers mentioned above. For the fiscal year iPhone unit sales grew about 90%, Mac unit sales grew about 30% and the Apple iPad (device sales and related accessories) represented 7.6% of the company's reported revenue for the fiscal year and contributed about 11.6% of the 52% growth in revenue. This was an extraordinary outcome for a product that was in the market for only six months and for much of that time in constrained supply. Although the Apple iPod line experienced a decline of about 8.5% in unit sales in the fiscal year, revenue grew almost 2.3% due to the sales performance of the iPod touch during the 12-month period. 

FY2010 Revenue Mix

The chart below illustrates Apple's product line revenue mix for the fiscal year. Due to strong growth in iPhone unit sales and an average selling price hovering around $600 per unit, the iPhone and related accessories delivered almost 40% of Apple's revenue in the fiscal year.

AAPL FY2011 Estimates and Forecasts

AAPL FY2011 Estimates and Forecasts

In late July I posted a preliminary Apple FY2011 revenue forecast of $100 billion. Following the September quarter results I'm beginning my first set of estimate revisions. In reviewing my unit sales numbers following the September quarter I've become more emphatic about my current AAPL price target of $450 per share. I will be revising my revenue and earnings forecasts for FY 2011 over the next two weeks with a bias toward increasing the revenue forecast. Below are the factors by product line that are influencing the outcome of my work:

Mac Unit Sales

In FY 2011 I expect Mac unit sales growth to moderate from the 31% growth rate in FY2010. I expect Mac sales to growth a rate at least 2x the pace of growth of the industry. In fact, I expect Mac PC unit sales growth to represent more than 50% of the growth seen in the domestic market.

In my view tablet products such as the Apple iPad will force a continued deceleration of PC industry growth in the domestic market and increasing revenue share of all PC sold for Apple. Rising enterprise adoption, aggressive product pricing and Apple's efforts at refreshing the Mac product lines more frequently are counter-weights to unit sales growth falling below 25% for the fiscal year. I expect Apple to at least maintain its current 20.7% share of consumer PC sales in the domestic market.

iPod Unit Sales

In the 4th fiscal quarter of FY2010 both unit sales and revenue for the iPod line fell below prior-year levels. I expect this trend to continue into FY2011. For now I anticipate a 10% to 12% fall in unit sales for the fiscal year with the iPod touch partially offsetting a commensurate fall in revenue from the line. 

iPhone Unit Sales

To the surprise of all analysts, iPhone unit sales growth in the September quarter roughly matched the pace of growth for the first nine months of the fiscal year. I expect this strong pace of 90% growth in unit sales to continue through FY2011. Apple ended the September quarter with only 3.2 million iPhones in the global channel, representing about 2.5 weeks of expected unit sales in the quarter. As supply reaches demand, the FQ1 numbers will benefit from an increase in channel supply as Apple exits the quarter with more iPhones in the channel than when the quarter began. 

The September Quarter Outcome: Apple Prepares For Battle

September Quarter Results

Earlier today Apple reported results for the fourth fiscal quarter ended September 25, 2010 and the fiscal year ended the same day. The fiscal quarter's results were well above published analyst expectations. For the quarter Apple reported a 67% gain in revenue to $20.343 billion and a 67.5% rise in earnings per share to $4.64. For the fiscal year Apple reported a revenue gain of 52% to $65.225 billion and an earnings per share rise of about 66.9% to $15.15. These results are inline with my May forecasts for the fiscal year. 

The iPhone 4 Goes To War

The fiscal fourth quarter's results were lead by strong sales of the Apple iPhone. The 14.102 million units sold represents a 91% increase in unit sales, tracking inline with the fiscal year gain of 92.9% or 39.989 million units sold. This compares with estimated global smartphone unit sales growth of 64% for the industry. Tim Cook, Apple's COO, called demand for the iPhone 4 "staggering."

In the conference call with analysts following the earnings release, Apple CEO Steve Jobs was impassioned in his comparison of the iOS and Android platforms calling the iPhone's platform, based on Apple's iOS, "integrated" and the Android platform "fragmented." This was the CEO's nomenclature in response to Google's claims the Android  platform is "open" and the iPhone platform is "closed." Illustrating the fragmentation of the Android platform Mr. Jobs made reference to the many versions of Android with which app developers must contend and the proprietary interfaces some Android device makers will deploy to boost sales and create after-purchase revenue opportunities. This, he suggests, make the Android platform "fragmented." 

Apple's iOS Versus the Competition

Mr. Jobs also noted in his comments that in Apple's September quarter the company sold more smartphones (14.102 million units) than Research In Motion sold more smartphones in its most recent fiscal period ended in August (12.1 million units). In comparing the success of iOS-based products to the reported success of Android-based products, he stated Apple activated in September on average 275,000 iOS-based devices per day compared to an average of about 200,000 Android-based devices as reported by Google. In comparing activations one must note iOS-based device activations include the Apple iPhone, Apple iPad and Apple iPod touch. 

Apple: Do You See What I See?

Apple: Do You See What I See?

On Monday afternoon Apple releases the company's September quarter results and results for the 2010 fiscal year that ended with the quarter. Yesterday Philip Elmer-DeWitt posted the comprehensive analyst estimates on Apple 2.0. I'm honored to be among the independent analysts selected for the quarterly analyst comparison.

Apple's quarterly results are essentially a static snapshot of a dynamic company that's growing at an astoundingly fast pace for an enterprise of its size. For the first nine months of fiscal year 2010 Apple's revenue has risen 46.2% and earnings per share have grown 66.8% over the prior-year period. Most likely Apple's September quarter revenue and eps growth performance will exceed the results of the first three quarters of the fiscal year.

Apple's Revenue Source Expansion

Even before the September quarter results are released we should already be looking beyond those numbers. I've mentioned before more than 50% of Apple's revenue in the September quarter and more than 50% of revenue in fiscal year 2011 will be derived from products that did not exist in the marketplace as recently as three and one-half years ago. Fully 25% of Apple's FY 2011 revenue will be derived from a product that's been in the market for less than eight months as of this writing. According to IDC September quarter estimates, Apple has regained the #3 spot among domestic PC vendors and has now secured a 10.6% share of the US market. In fiscal year 2010 Apple's iPod line of products will actually report out an increase in revenue despite a drop in unit sales due to the popularity of the iPod touch. It's easy to see why people would become enamored with the company's quarterly results. But there's more to the story than these 91-day snapshots of performance.

When I look at Apple, I don't see a company that develops popular products. I see a management team that is focused on revolutionizing the way we use technology to better our lives and better the world around us. Excellent quarterly results are one component of management's mission.

Top Line Management and Bottom Line Growth

Apple's results aren't produced by a bottom line-only approach to management. Obviously decisions must be made based on the economic viability of products. But Apple's bottom line growth comes primarily from top line growth. Without growth in revenue, Apple's bottom line growth can not be sustained nor improved. Cost management has amplified Apple's earnings from revenue growth, but cost management has not been the primary driver of Apple's superb earnings performance. There's a difference between cost management and efforts at outright cost containment. Management understands costs must rise to support growth in revenue.

Apple and R&D

Over the past several quarters Apple has invested about 3% of revenue in research and development. As revenue has risen so has the company's investment in R&D. These expenses lead to future products. Management has chosen smartly to increase its investment in future product development  as revenue from current products provides the resources. In other words, Apple is investing in new products at a rate proportional to the success of its current products. R&D as a percentage of revenue has not been scaled back for the sake of bottom line growth.

AAPL Estimates: Have The Wall Street Pros Gone Crazy?

One of the more interesting features of Philip Elmer-DeWitt's Apple 2.0 column is the recurring quarterly comparisons of the revenue and earnings estimates of a select group of independent analysts and bloggers and the numbers put up by the Wall Street pros. 

The comparison of estimates for Apple's fiscal fourth quarter that ended in September illustrates how differently the independent bloggers and analysts view Apple and the company's prospects for strong revenue and earnings growth in the iPhone and Apple iPad eras. In reviewing the numbers one question leaps to mind: Have the Wall Street pros all gone crazy or have they been wilderness camping together since the Apple iPad's release? 

A quick look at the average estimates of the 31 analysts and the averages of the two sub-groups:

Average Revenue Estimates

All Analysts (31):                  $19.34 Billion

Independent Analysts (9): $20.32 Billion

Wall Street Pros (22):         $18.95 Billion

Average EPS Estimates

All Analysts (31):                          $4.28 

Independent Analysts (9):          $4.71

Wall Street Pros (22):                  $4.10

Apple's Guidance For The September Quarter

For the September quarter Apple CFO, Peter Oppenheimer, offered guidance of $18 billion in revenue and earnings of $3.44 per share. Historically Apple's guidance isn't guidance at all. It's a statement of guaranteed results. Guidance has markedly trailed actual results over the last several quarters. 

Apple's guidance for the September quarter suggests revenue growth of about 47.5% and eps growth of 24.2% over the fourth fiscal quarter of 2009. This contrasts with revenue growth of 46.2% for the first nine months of fiscal year 2010 and earnings per share growth of 66.8% over the same period.

However, in the June quarter, the first quarter with Apple iPad revenue and earnings in the mix, Apple realized revenue growth of 61.3% and earnings per share growth of 74.6%. It appears management's September quarter guidance does not reflect anticipated revenue and earnings per share growth from the Apple iPad in the July to September period.

AAPL 4th Fiscal Quarter Estimates

My AAPL 4th Fiscal Quarter estimates:
Since my original post on Monday I've made some small adjustments to my AAPL 4th fiscal quarter estimates. The adjustments include the reallocation of certain revenue expectations from the Other Music segment and slight adjustments to certain hardware ASPs. Below are the updated estimates. 

Revenue

Macintosh unit sales growth continued at a strong 30% pace, iPhone unit sales increased roughly 67% in the September quarter, Apple iPad unit sales rose more than 80% sequentially due to expanding global availability and support from enterprise and education adoption. Additionally, I anticipate strong growth in iTunes-related revenue due to the popularity of Apple's iOS-based devices. My revenue estimate for the 4th quarter of FY 2010 is: $21,486,228,989. The estimated revenue total is based on my trend analysis and accompanying formulas. 

In preparing estimates the focus is of course on the dollars. But one of the things I find most intriguing is the changing revenue mix that will deliver record revenue and earnings per share for Apple in the quarter. Revenue from the Apple iPad and the iPhone, two products that did not exist in the marketplace as recently as three and one-half years ago, represent 55% of my estimated revenue for the quarter.

AAPL 4th Fiscal Quarter Revenue Mix

Based On Growth, AAPL Remains Undervalued

At Friday's closing price of $282.52 AAPL is trading at less than 22 times trailing 12-month earnings and at a significant discount to current rates of revenue and earnings growth. Factoring into the mix the roughly $50 in cash supporting each share, Friday's closing price represents a real opportunity for value and growth investors to enter the market and share in AAPL's appreciation potential. 

The Reasons Why AAPL Remains Undervalued

About three weeks ago in a blog post titled FY 2011 Analyst Estimates: Why AAPL Is Set To Pop I highlighted the disparity between analyst FY 2011 estimates for Apple's revenue and earnings performance and the company's current rates of revenue and earnings growth. The disparity remains. Current analyst consensus suggests revenue growth of just over 25% in FY 2011. For the fiscal year ended in late September, Apple will report roughly 50% revenue growth with revenue growth well above that rate in the second half of the fiscal year due to the release of the Apple iPad. I rate the risk of Apple's revenue growth decelerating by 50% in FY 2011 as remote. Analysts will revise their revenue and earnings estimates for FY 2011 following in the couple of weeks before and the weeks following the release of September quarter results on October 18th.

iPhone and Apple iPad Unit Sales Estimates

In reviewing the revenue and earnings estimates for the September quarter now being published by Wall Street analysts and independent bloggers, we are seeing a wide range of estimates for both iPhone and iPad unit sales.  Uncertainty over the strength of unit sales for both product lines may be impacting the current share price. Clarity will come with the release of Apple's September quarter results. 

The June quarter's 3.27 million iPad unit sales performance provides little insight into the September quarter's results due to limited distribution following the April 3rd release and constrained supply conditions that continued through much of the September quarter. The June quarter's iPhone unit sales performance was impacted by an aggressive drawdown of 3GS channel inventory ahead of the iPhone 4's release. In the June quarter iPhone unit sales rose 61% year-over-year versus unit sales growth of 93.7% for the first nine months of FY 2010, inclusive of the June period.

Apple's Growth Rates Delineated

No matter the interest in Apple's September quarter results and focus on the unit sales performance of the company's two fastest-growing product lines, understanding Apple's share price appreciation potential requires a more objective view of the company's current rates of growth as a whole: