AAPL - Apple Inc.

[Guest valueInv]

Nice, buyback window has opened up again.

[Guest valueInv]

 

I think the Americas revenue being down 1.2% is the biggest tell.  My read is that it's the saturation story.  The richest part of the world, where the most revenue is being earned, is now a shrinking market for Apple.  The next year should be really interesting in this operating segment as we see what Apple does to combat pretty-good-but-not-great Android phones.

 

 

Read the conference call notes.

[Guest valueInv]

I think this would be a very, very smart thing for Apple to pursue seriously:

http://online.wsj.com/news/article_email/SB10001424052702303448204579341290395762338-lMyQjAxMTA0MDIwMzEyNDMyWj

 

If there's one time they really need to execute on a service, it's on offering a comprehensive phone-based payments solution.  They have a huge incumbent advantage.  I expect that if Apple begins to make a serious run at this, Google will respond by buying Square, Stripe, Ebay or a combination.  Microsoft will potentially jump in this game, too.

 

Yes, this is a move I have been waiting a long time for.

 

However, I am no longer optimistic that this will be a big business with bit coin on the horizon.

 

BTW, Google has already made several attempts to break into the payments market and failed.

 

Maybe I was on the right track after all :

 

http://techcrunch.com/2014/01/27/ceo-tim-cook-says-touch-id-was-part-of-apples-thinking-around-mobile-payments/

 

[plato1976]

apple's growth in north america is over ?

 

 

I think the Americas revenue being down 1.2% is the biggest tell.  My read is that it's the saturation story.  The richest part of the world, where the most revenue is being earned, is now a shrinking market for Apple.  The next year should be really interesting in this operating segment as we see what Apple does to combat pretty-good-but-not-great Android phones.

 

 

Read the conference call notes.

[Viking]

There are many positives from Apple's earnings release today. There also was one very big red flag: iPhone unit sales missed by a huge amount (10%) due to weakness in the Americas; the miss was larger if you take inventory build into consideration. What was the reason provided? Tim Cook said it was due to US carriers enforcing their contracts and allowing users to upgrade only at 24 months and not at the previous 20 month timeframe. Cook said he expects this to also be a drag in the March quarter and for it to not be an issue afterwards.

 

Crazy that they were still able to hit total revenue and earnings targets for the quarter. Lots to digest.

[krazeenyc]

There are many positives from Apple's earnings release today. There also was one very big red flag: iPhone unit sales missed by a huge amount (10%) due to weakness in the Americas; the miss was larger if you take inventory build into consideration. What was the reason provided? Tim Cook said it was due to US carriers enforcing their contracts and allowing users to upgrade only at 24 months and not at the previous 20 month timeframe. Cook said he expects this to also be a drag in the March quarter and for it to not be an issue afterwards.

 

At the end of the day an investment in Apple depends on what you perceive Apple to be. If you believe them to be a company that will continue producing only smartphones, tablets and computers you have good reason to avoid the company.  Their growth under this scenario is much more limited and at risk.    If you look at them as a consumer products company that can expand into  many different verticals their growth prospects are much brighter. 

 

 

 

[Liberty]

Just finished listening to the call. Good quarter, I'm satisfied. Even better if the market doesn't like it and they can buy back more at low prices.

 

Most of the things that look bad at first glance had good explanations in the CC, IMO. Those who only look at a few headline numbers will miss what's really going on underneath.

[Kiltacular]

My 2cents:

I'm with Icahn.  I don't care if most of the cash is "trapped" overseas.  Either borrow the money and buy back stock or take the tax hit.

 

With regard to most of the major techs, we've been waiting for the overseas tax holiday for a long time.  It hasn't happened.  They're all overflowing in cash and there's no way they can "spend" it.  What's the opportunity cost of this wait while many of them are cheaply priced.

 

[LC]

There are many positives from Apple's earnings release today. There also was one very big red flag: iPhone unit sales missed by a huge amount (10%) due to weakness in the Americas; the miss was larger if you take inventory build into consideration. What was the reason provided? Tim Cook said it was due to US carriers enforcing their contracts and allowing users to upgrade only at 24 months and not at the previous 20 month timeframe. Cook said he expects this to also be a drag in the March quarter and for it to not be an issue afterwards.

 

At the end of the day an investment in Apple depends on what you perceive Apple to be. If you believe them to be a company that will continue producing only smartphones, tablets and computers you have good reason to avoid the company.  Their growth under this scenario is much more limited and at risk.    If you look at them as a consumer products company that can expand into  many different verticals their growth prospects are much brighter.

 

My thoughts exactly. Their cash and cash from operations, along with the talent and culture of their organization, give them great exposure to future consumer product trends. Their fervent customer-base (IMHO, the most loyal in the industry) gives them a ready made foundation to sell to. Their history of successfully creating consumer products further validates (but is not the foundation of) this viewpoint. They are a lifestyles company. Just my .02

[Guest valueInv]

Just finished listening to the call. Good quarter, I'm satisfied. Even better if the market doesn't like it and they can buy back more at low prices.

 

Most of the things that look bad at first glance had good explanations in the CC, IMO. Those who only look at a few headline numbers will miss what's really going on underneath.

 

Not bad but not great either. Compare to numbers for Samsung, HTC and LG.

[thefatbaboon]

Question for the Apple followers, 

 

What are the plans for cash?

 

Management seems to have purposely selected a capital return policy that doesn't result in a reduction of cash.  If I look at the balance now (net of debt) compared to last year it has actually gone up a couple billion even after the +$40bn spent on repurchase/dividends.

 

Daily volume of the stock is substantial, they could triple the buyback rate and still be buying a single digit percentage of daily volume.  And I think the debt market would support another $20 - 40bn annually in debt issuance without meaningfully penalizing their interest costs.  So they wouldn't necessarily have to repatriate.

 

The unwillingness to manage the net cash hoard down has made me speculate that management has reasons for wanting it - and given the size of the hoard the only reason I can ascribe to them is to maintain substantial acquisition potential.  All the other reasons mgmt has put forward at various times, like "contract negotiations", are surely bullshit. $150bn to negotiate with Foxconn??

 

I'm not an Apple expert but I have been wondering for a while what they might buy with this money.  Something in payments? (Visa, MA, Axp)  It's fairly obvious to everyone these days that we shouldn't have to carry around lots of silly little pieces of plastic and  the new iphone's biometric security features are probably a step up from chip/pin.  Would this be feasible?  What benefit would purchasing one of these companies give Apple over say, simply partnering?  Would there end up being a "must carry" provision for the payments companies that Apple didn't buy?

 

Other possibility would be something aimed at helping them go after the other screen - the tv.  I'd imagine they see the problem in the tv market is not the quality of screens but that everything is balkanized between the various content owners and

"pipe" owners, with the whole thing further complicated by reams of legislation.  I don't know how M&A would sort this out.

 

Maybe I'm barking up the wrong tree but unless they are thinking of major M&A I really can't fathom why they need $150bn in cash.  It is an absurd amount of money.

 

 

 

 

[Palantir]

I think that they will reduce it over the long term - steady buybacks and dividends, Cook noted that he was a fan of constant buybacks. I think if you expect a mega buyback a la Icahn, you will be disappointed, but if you expect LT return of capital, it will happen.

[ZenaidaMacroura]

Would be worried that subsidy model comes under attack - Cook saying that the 24 month cycle is being stringently enforced seems to imply that the carriers are testing the waters.

[thefatbaboon]

I think that they will reduce it over the long term - steady buybacks and dividends, Cook noted that he was a fan of constant buybacks. I think if you expect a mega buyback a la Icahn, you will be disappointed, but if you expect LT return of capital, it will happen.

 

But given Apples cash flow Cook's 3 year capital return plan isn't going to reduce net cash.

 

It's such an absurd amount of cash to keep on hand which is what makes me think they must have some plan to spend it (or use it to capitalize a payments venture).  Why else would a company have $150bn with no plan of returning it to shareholders? 

[Palantir]

^ You may well have a point there. Bank of Apple? Apple Capital? iBank?

[frommi]

Like most of the tech CEOs they will burn it on overpriced glamour businesses. ( Look at GOOG :P )

I don`t really know why they don`t repatriate the cash and buy back much more stock, when you calculate it with a 12% discount rate the tax hit should not be a real problem.

But probably its only because we stockholders are so stupid and have no clue.

[racemize]

I'd be curious to see what Malone would do with this off-shore money/tax situation.  We just need to figure out the next time he talks and get someone to ask.  Maybe the next LMCA AGM?

[rpadebet]

Maybe they will buy DirectTV and Time Warner Cable and get into the TV business ;)

[GregS]

It's such an absurd amount of cash to keep on hand which is what makes me think they must have some plan to spend it (or use it to capitalize a payments venture).  Why else would a company have $150bn with no plan of returning it to shareholders? 

 

This has been the questions for years now.  I'm speculating like anyone else, but I think it is a case of inertia.  The cash hoard has been building up bigger and faster than anyone expected and I really think they had no plan for it.

 

Let's look at their options:

 

1.  Reinvest - They are spending whatever they want on R&D and CapEx.  Whatever they have in the pipeline, it is funded.  The point about capitalizing payments is interesting.  But how much cash would that really take?  If they are doing payment processing without actually extending credit, the low capital intensity is what would make this business very attractive.

 

2.  Dividend - They started a dividend, which is great.  They generate too much cash each quarter not to pay some out directly.  Should they increase it?  Maybe a bit, but raising it too much commits them if they want to change their mind.  I wish variable dividend policies were more acceptable to the market, but they're not.  And at these prices buybacks are better in my opinion.

 

3.  Acquisition - I don't think they have a target.  They can buy small companies for a few billion or less quite easily.  Bigger fish?  It seems that if they want to enter a market, they will do it their own way.  They launched iMusic instead of buying Pandora.  It's arguable whether that was a great decision, but that's their MO.  I also don't see Cook as getting itchy to do something, anything, with the cash a la Balmer and Microsoft.  He strikes me as much more patient.

 

4.  Buyback - To me, this is the only real solution for much of the cash.  Many said Jobs would never have done it and see that as a weakness.  BS.  The stock is arguably cheap and hoarding cash is just dumb and wastes capital.  I think starting the buyback is a big deal because they broke previous resistance to it.  Give them a year or two and they will step it up.  Frankly, Icahn needs to STFU because he is making it harder for Cook right now to maneuver.  I do wish they would do more immediately because I think the stock is cheap, and management deserves criticism for that.

 

I think there is a bit of fear in the tech sector and they feel they need to keep the ammo on hand in case they need to react to an unforeseen threat.  I think that's healthy, but not sure $150B+ is necessary.  I doubt Apple thinks that much is necessary.

[Viking]

Apple has done much in the past 18 months on the return of capital front:

1.) initiated dividend

2.) initiated buyback (to offset share awards so total shares outstanding would not increase)

3.) increased dividend 15%

4.) increased buyback

5.) accelerated buyback with $17 billion long term debt

 

Given the above, I am sure that Apple is thinking they are winning the race. Icahn, on the other hand, is of the opinion that Apple is so far behind they think they are in first.

 

We are getting a steep sell off today. With $160/share in cash (after netting out the debt) the calls for another debt issue and accelerated repurchase will get louder. Apple has communicated they will update capital return in April... I am not sure they will be able to wait that long.

 

The shares last year fell below $400 primarily over concerns about falling gross margins. One year later gross margins look to have stabilized at around 37-38%, which is great news. However, the new issue that surfaced in the quarterly report yesterday is very weak iPhone unit sales in the US. In my mind, this is a much bigger issue than the GM issue from a year ago. Over the past year I have tried to get a little more disciplined on when to sell a stock. Peter Lynch advises to sell when the news changes (gets worse). For me, weak iPhone sales in the US is an important piece of new news. I have decided to book some large profits and move to the sidelines with Apple. Great company; bright future; very cloudy near term outlook. I look forward to owning it again in the future.

[thefatbaboon]

My original thinking was the money would be used for tv.  To get enough content to give tv owners a viable "iTunes" menu.  Which obviously led me to Disney (Kids stuff, ESPN,…) there's enough in Disney to give the consumers a genuine taste of "iTunes" tv.  But the more I've thought about it the more it's started to seem complicated.  All the various players, sports franchises, content developers, coax, satellite.  This isn't like going into the post-napster music world where all your battles are with malnourished midgets. 

 

A Visa/Mastercard/Amex is my current favorite guess.  Stand alone it's a great business and I think a network would be valuable to Apple.  Visa is already there linking all the worlds merchants and customers.  Building out such a network would be difficult; obviously the phone buyer would be ok on his end but it would be on the merchant side that there would be a problem.  A successful payment network requires that it be accepted everywhere.  Buying Visa/MA/AXP would be quite special.  Your phone knows more about you than anything else, buying a new iphone you'd be asked about transferring card balances, children using iPhones will be predisposed toward the embedded card on reaching age, chip/pin replaceable with biometric scanner technology and no more stupid pins to remember or silly little pieces of paper to sign.  It's much easier for me to see this working out well than trying to see how they would navigate the TV minefield.

 

 

[GregS]

The shares last year fell below $400 primarily over concerns about falling gross margins. One year later gross margins look to have stabilized at around 37-38%, which is great news. However, the new issue that surfaced in the quarterly report yesterday is very weak iPhone unit sales in the US. In my mind, this is a much bigger issue than the GM issue from a year ago. Over the past year I have tried to get a little more disciplined on when to sell a stock. Peter Lynch advises to sell when the news changes (gets worse). For me, weak iPhone sales in the US is an important piece of new news. I have decided to book some large profits and move to the sidelines with Apple. Great company; bright future; very cloudy near term outlook. I look forward to owning it again in the future.

 

Agree with this.  The potential headwind for gross margins is the carriers upgrade/subsidy policies, which Cook mentioned was a bit of an issue.  But seeing how T-Mobile is starting a price war, I don't see the subsidies being eliminated anytime soon. 

 

Market saturation in the US is definitely the #1 concern.  The hope was for greater growth in China and other markets, but early indications are not great.  However, I was concerned last year when iPad sales flattened, but they were up nicely YoY this quarter. 

 

I do like the free option on new products that Apple offers, but history tells us that you will have plenty of time to get back in after an announcement if you like what you hear.

[Guest valueInv]

My original thinking was the money would be used for tv.  To get enough content to give tv owners a viable "iTunes" menu.  Which obviously led me to Disney (Kids stuff, ESPN,…) there's enough in Disney to give the consumers a genuine taste of "iTunes" tv.  But the more I've thought about it the more it's started to seem complicated.  All the various players, sports franchises, content developers, coax, satellite.  This isn't like going into the post-napster music world where all your battles are with malnourished midgets. 

 

A Visa/Mastercard/Amex is my current favorite guess.  Stand alone it's a great business and I think a network would be valuable to Apple.  Visa is already there linking all the worlds merchants and customers.  Building out such a network would be difficult; obviously the phone buyer would be ok on his end but it would be on the merchant side that there would be a problem.  A successful payment network requires that it be accepted everywhere.  Buying Visa/MA/AXP would be quite special.  Your phone knows more about you than anything else, buying a new iphone you'd be asked about transferring card balances, children using iPhones will be predisposed toward the embedded card on reaching age, chip/pin replaceable with biometric scanner technology and no more stupid pins to remember or silly little pieces of paper to sign.  It's much easier for me to see this working out well than trying to see how they would navigate the TV minefield.

 

 

 

A big acquisition is unlikely IMO for a couple of reasons:

    - Apple has a very unique culture which makes a digesting a big company virtually impossible. If they try this, they will fail

    - Apple understands very well the advantage of being small. Apple corporate is actually very small and they are effective because of it.

 

My guess is that they want the govt. to bring down repatriation taxes and are probably working hard behind the scenes to make that happen. Once that happens, they'll do a big capital return.

 

I'm with Icahn - they should do a bigger buyback and for crying out loud spend a little bit more on advertising. Apple TV ads were few and far between this holiday season.

 

[Guest wellmont]

buying disney or visa or mc would be a serious miss-allocation of capital for apple, and would fail finance 101. you would have to pay over 30x earnings to capture one of those prizes. The market would scoff at such a deal that would mean entering a business apple has little understanding of, at a time when apple stock is trading at 10x earnings. it would be a surefire way for visa or mc to be valued at 12x earnings, as it would be inside apple. the obvious answer to the too much cash question is a dutch tender auction for some shares at around $550. as far as putting pressure on apple ceo, I would posit that without shareholder pressure apple would not be buying back any stock at all (except to replace compensation issuance) or even paying more than a token dividend.

[GregS]

Excellent points, wellmont.