26 January, 2010

Digesting Apple's Pie... and Tablet

A certain Cupertino company, best known for selling a few computers, music players and telephones, had all of Wall St. in a frenzy yesterday as it announced quarterly earnings for the December quarter. A Christmas quarter that was wildly expected to be the most profitable in history for Cupertino based Apple Inc. (AAPL).

Expectations were inching up until analysts had settled on Income of around $2.10/share and Revenue of about $12Billion. Apple's reported numbers came in at Income of $3.67/share and Revenue of $15.7Billion, and that's where the confusion began. Just at a glance it seems something isn't right or analysts had spent too much time in the sun. Exchanges halted the stock in after-hours trading yesterday as Apple officially changed its accounting presentation to remove the controversial "subscription model" for iPhone and AppleTV sales.

With subscription accounting, due to the nature of free software upgrades, Apple has had to account for iPhone and AppleTV sales over a two year time frame, breaking up all related Revenue and Costs and lumped the rest in a deferred item on the balance sheet that caused analysts headaches and long hours at the calculators. When Wall St. still struggled to properly value this cash-generating machine Apple provided non-deferred numbers alongside the official GAAP figures. It also petitioned the standards boards to get rid of the subscription requirement.

In September 2009, the company got its wish and is now able to report Revenue and Earnings with minimal "subscription" effects (A nominal estimate representing the value of future software upgrades, which for Apple represents $25/iPhone and $10/AppleTV). The company decided that starting its new fiscal year was the prudent time to put this practice into place and the Wall Streeters were certainly caught off guard. When Apple stock resumed trading the price activity was very mixed until finally settling into a minimal after hours gain.

So that's the logistics of accounting, but what about the quarter? Apple certainly had its pie and is enjoying every bite. A record quarter in terms of profitability and Revenue starts off another successful year for the electronics maker.

Revenue: $15.68Billion vs $11.88Billion year over year.
Earnings: $3.38Billion or $3.67/share vs $2.26Billion or $2.50/share year over year

Mac Computer sales were a record at 3.36 Million units, besting the previous mark by 300,000, highlighted by the recent introduction of the new iMac desktop line.

iPod sales came in at 21 Million units, down slightly but well expected by the company as this market matures. The silver lining in the iPod numbers is the 55% growth rate in iPod Touch sales, bringing up the Average Selling Price of the business unit.

iPhone (which by definition is also an iPod) sales grew by 100% to 8.7 Million units, a quarterly shipment record, which should be noted was below the 9 Million unit consensus estimates. Some iPhone sales targets were even higher but increased competition in the space and a muted start in China is likely to blame for the shortfall. Another point to consider is the inventory channel, of which Apple is said to be one of the most efficient in the space. The company addressed this on the their conference call by re-iterating that its inventory channel is counted in a more conservative manner than competitors. The real kicker, the Average Selling Price of iPhone is $620!

It's usually the guidance game that is important to analysts and investors when Apple issues quarterly reports, however, during this announcement all eyes were and are awaiting what the company will showcase at its media event on Wednesday. Apple executives throughout much of the conference call almost gave the impression of toying with analysts, while likely secretly passing notes back and forth along the lines of "wait till they get a look at iPad"; or whatever the Tablet eventually is crowned.

The usual Apple hype machine is reaching fever pitch again and is strikingly reminiscent of the time just prior to the MacWorld keynote speech in 2007 when Steve Jobs unveiled the first iPhone to the world. News tidbits are flying out from several sources that Mr. Jobs claims the Tablet is the most important thing he's ever done, and in his customary quote on the quarterly press release he re-iterates that this week includes a new product release the company is very excited about. COO Tim Cook stoked the fires further on the conference call when asked about new product opportunities: "I don't want to take away your joy and surprise", referring to the planned Wednesday event. When Tim Cook, Apple's guru of manufacturing, retail and supply chain managment says "joy and surprise" there must be something special about this new device.

For one thing, Apple certainly have mastered the art of getting people interested and getting them in the room to have the conversation. Will the tablet be the be-all end-all of casual computing? A device to be left on the coffee table, used by anyone to control just about any media and anything electronic in their homes? Lots of questions remain and should be answered by the time Steve relents his magic wand by walking off that stage Wednesday. One thing is clear as day, and that's Apple's ability to cash in on their design prowess and excitement generation. The company took in a tidy sum last quarter, generating only about $5.8Billion in cash!

Disclosure: Author is long AAPL

21 January, 2010

Goldman Sachs: Profiteers abound!

13.4Billion! A staggering number when counting just about anything, but especially so when one is counting all of the dollars of profit made by investment banking titan Goldman Sachs (GS) in 2009. Revenue for the year topped out at $45Billion, another massive figure.

$4.79Billion in profits in the latest quarter sees Goldman once again having the eyes of the banking industry squared directly on itself. This time however, more than just the envious glares of rivals await Goldman, as the banking sector has been in the political cross-hairs for almost 2 years. Since spawning the credit crisis, which has been largely to blame for the prolonged recession Americans found themselves in, banks haven't had the easiest time with things like profits and bonuses as taxpayers ended up footing the bill for financial bailouts.

Having set a compensation record in 2007 with over $20Billion in bonuses, Goldman's bonus pool for '09 shot back up to $16.2Billion after falling substantially as the bank suffered credit losses and took government aid in 2008. Repaying TARP money and allowing the government to make a profit on its aid package to Goldman has alleviated some political pressure but the company surely still faces a substantial uphill battle. The next step for the company, why charity of course! Taking $500Million out of the bonus pool and putting it into the company's Goldman Sachs Gives foundation. Certainly a worthy deed by the company, however even this sizable donation will likely receive minimal press when compared to the overall pay practices of the nation's largest banks.

Comparatively in the year, Goldman will actually spend a much lower percentage of Revenue on compensation than its rivals, but one thing remains crystal clear; it's become business as usual on Wall Street, even though these firms are only one year removed from bringing global financial markets to the brink of collapse.

While shareholders are certainly happy with continued banking excellence at Goldman Sachs, investors are increasingly wary that 'business as usual' might not be an option in the near future. The financial sector is down today as a renewed push from the White House and President Barack Obama make it clear that going forward lawmakers will look to create legislation to restrict risk-taking, banking activities and the size and scope of certain financial institutions.

Most major firms are seeing red to the tune of 5% in today's trading session on the front page legislative news. The position that Goldman finds itself in, should give shareholders little reason to fear restrictive legislation as history has shown the firm to be a presence in all major financial law-making, nimble enough to avoid competitors pit falls, and sharp enough to continue profiteering like the stereotypical banker! And that, in the end, will be great for shareholders.

Disclosure: Author owns GS

13 January, 2010

Google China to be no more?

Google's (GOOG) foray into China had never gone swimmingly, the "Don't Be Evil" chants turned to scoffs as the company told the world its better to have a censored presence in China than no presence at all. The pitchforks subsided and its been business as usual for the company as it slowly built a base of business, taking on the dominant local Baidu (BIDU).

Having now built a business, that according to analysts represents about 20-25% of the market, Google is becoming entrenched into China's business culture and livelihood. The Chinese Google portal succumbed to Government pressure in the beginning but as new reports have surfaced of cyber-attacks on the search giant, the company is taking a stand for the individual. Gmail accounts of human rights activists, the exact opposite of persona embraced by the Chinese Government, were targeted in a set of complex hacks. Google has taken this breach as an opportunity to exert maximum political pressure in China. By issuing threats that it will completely pull all operations in China, Google is looking to foster a groundswell of individual support to force the Chinese Government into change, most important of which is the curtailing of Internet censorship.

Will it work? History would say no, as China is looked upon as the most vigilant of Governments when it comes to control, censorship and human rights. Google's timing could help shift the needle, but by how much? With a presence now built in China, Google has more influence than it ever had in the region, and perhaps just maybe, a compromise does exist and can be reached.

But what if it can't and Google leaves China for good? Well, that's the worst case scenario for the company as the business opportunity in China is only getting bigger. Analyst reports have pegged Google's China sales at about $600Million, but have highlighted the incredible opportunity that awaits Western companies in this region over the next decade and beyond. Not something that Google could seriously walk away from just like that if it indeed is balancing the needs of Consumers, Shareholders, Employees and its Don't Be Evil mantra.

Right now Investors are trying to figure out the seriousness of Google's threat. Company shares are down about 1%, which is a muted move to a potentially landscape changing decision. Baidu shares on the other hand, are up 11% as the potential to dominate the Chinese search market, without a looming competitor like Google is just too large to ignore.

Something will have to give and at the end of the day the opportunity of capitalism is too great and the pressures from shareholders will force Google's hand to have a presence in China. In the interim, Google's step will be to ensure complete security in its online services to try and isolate and prevent these types of attacks, even if the source may be a Foreign Government, but the smart money has to assume Google and China will be back at the table constantly, working to compromise, making it possible for the Chinese people to see and click on Google Ads for the next decade and beyond.

Disclosure: Author is long GOOG

04 January, 2010

James Cameron: News Corp's Billion Dollar Man

Hollywood is on fire these days at the box office, having just set records for cinema receipt revenue in 2009 of more than $10.5Billion the trend looked to continue into 2010, and at the center of box office success now stands a single filmmaker: James Cameron.

The latest film from the man behind Terminator, Aliens and Titanic is called Avatar, and it seems like quite a few people have seen it already. $1.0Billion in ticket sales worldwide in only 17 days makes Cameron the only Director with 2 films crossing the lucrative billion dollar mark. His last directorial feature Titanic just happens to be the biggest movie of all time with a box office gross of $1.8Billion.

All good news for News Corp (NWS), as its 20th Century Fox movie division has hit a home run here with the marketing and technical logistics of Avatar, a 3D adventure film based on a far away world showcasing next generation computer generated characters. By no means was this film a sure thing and with reports of ballooning budgets and muted anticipation the execs at Fox certainly had reason to worry. Cameron's eye for visuals and his general audiences flair for story-telling went on to rule the day and 3 weekends into its box office run Avatar remains at number 1, at a time when blockbusters generally open to huge crowds and dramatically fall-off at a clip of nearly 50% each weekend. For Avatar, buoyed by the holiday season, each weekend's drop has been nothing short of remarkable, under 10% in both cases, signaling continued word-of-mouth and repeat business.

News Corp. over the last month, in the lead up to Avatar and its continued success has seen its stock rise 14%, this compares for a 2% rise in the Dow and a 5% rise in the Nasdaq. But there's another success story to come from the Avatar-verse, and that's the pioneers of the biggest movie experience around, IMAX (IMAX). With the stock gaining 23% over the last month, Avatar is to be the biggest IMAX movie to date besting the performances of Transformers: Revenge Of The Fallen and The Dark Knight.

IMAX is being promoted heavily in the media as the best way to fully experience the world of Avatar and this comes as no surprise since the screen and sound systems are amongst the biggest and most powerful in the world. In a technological age in which Hollywood tries every gimmick to get the movie-goer to pay up for the experience it is these event films, these Concorde moments in cinema, the Avatars of film-dom that make the proposition worthwhile. Avatar in this sense is the real deal for Fox and News Corp. and from a business sense, with IMAX 3D commanding between 2-3x the admission price for a regular cinema screen, IMAX is the real deal as well.

Disclosure: Author holds no position in NWS, IMAX