Apple: The Entrepreneurial Mega Cap

  • Posted: 20 July 2010 11:56 PM

    Earlier today I had the pleasure of working with Stephen Swift of TMO on the play-by-play blog of the conference call. One thing that came to mind as management offered vague responses to some of the direct questions from analysts. The top executives of this company are at times flying by the seats of their pants.

    The culture at this company remains entrepreneurial despite its size. For some of the analyst questions management simply doesn’t have ready answers. From the iPad’s amazing success to demand for the iPhone 4, management really doesn’t know how to gauge demand. They can’t make enough product and whatever product they might think is enough (a million unit a month production rate on the iPad) has proven to be insufficient.

    I don’t know of another mega cap that can’t reliably gauge product demand and has top management baffled as to how many units across multiple product lines could be sold if supply ever caught up with demand. Apple is indeed unique and the entrepreneurial drive of a start-up is much a part of the corporate culture.

    I don’t recall ever hearing Tim Cook unable to answer questions from analysts about the company’s growth potential and the company’s ability to meet demand before.

         
  • Posted: 21 July 2010 05:45 AM #1

    I agree.  I think listening to them discuss the iPad yesterday was probably the thing that makes me the most confident in the company going forward.  The fact that they can’t churn out enough of them and are ramping production further means estimating iPad’s for next quarter is going to be fairly tricky…

    I also thought it interesting to hear them mention on several occasions that peripheral’s/accessories were selling extremely well.  I think it is safe to say that the iPad is contributing to this significantly.  Almost everyone I know that has an iPad either has the case and/or keyboard.  I would hazard to guess that the margins on these products are very juicy (and confirmed yesterday on the call).  This means the real ASP for the iPad must surely be higher than $640?

         
  • Posted: 21 July 2010 06:34 AM #2

    Apple’s growth rate may surprise us all over the next two years. The competition has been so far behind that Apple has looked like a niche player. But it’s turning into the mainstream, as competition gradually comes out with their own version of Apple’s IOS devices, and the IOS installed base goes beyond 100M.

    The marketing efforts of any effective competitor will IMO generate several sales for Apple for each sale they generate for themselves, provided Apple has broad distribution. Exactly the reverse of the situation that drove Apple to the wall, where customers would be come to a computer store to see an Apple product, and then be sold a Wintel product instead.

    What I’m saying is, the more the competition catches up, the faster Apple will grow.  In fact, why won’t IOS become a natural monopoly, leaving Android/Linux behind, as DOS/Windows became, leaving the DOS/GEM competitor behind?

    What I’m saying is, it wouldn’t surprise me for Apple’s revenue growth rate to increase to 100% YOY for a couple of years. Why not?

         
  • Posted: 21 July 2010 07:16 AM #3

    sleepygeek - 21 July 2010 09:34 AM

    What I’m saying is, it wouldn’t surprise me for Apple’s revenue growth rate to increase to 100% YOY for a couple of years. Why not?

    Agreed.  In Asia over the next several years growth will well surpass 100%.

         
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    Posted: 21 July 2010 11:26 AM #4

    Hey DawnTreader -

    I didn’t get a chance to thank you for your running commentary during the Q3 earnings call yesterday. You, sir, rock, and your comments were a great addition to our live coverage.

         
  • Posted: 21 July 2010 03:26 PM #5

    Jeff Gamet - 21 July 2010 02:26 PM

    Hey DawnTreader -

    I didn’t get a chance to thank you for your running commentary during the Q3 earnings call yesterday. You, sir, rock, and your comments were a great addition to our live coverage.

    Jeff:

    Thank you for the kind words. It was a pleasure to work with Stephen. We should do this again next quarter. I’m planning to take the day off to prepare.  grin

         
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    Posted: 21 July 2010 05:48 PM #6

    I didn’t hear the discussion, so I know only what I’ve read here. Does anyone here see *any* chance of the big boys just playing a bit naive? “We’ve kept growing for the last decade such that now we’re sitting on some $40bill and we have, duh, no idea of how that happened. After several of our little initiatives going quite viral, we still don’t see how this turns out.”—

    And one thing I do recall from Econ 101, many moons ago, was that when the demand is high, and the supply is low, somebody’s gonna make some good money. Scarcity can add to desirability. I wonder sometimes if that’s all part of the picture.

    Sure, some garage-built projects do take off far more than its creators expect, and even a continued rise may exceed expectations. Again, I didn’t hear the discussion in context; still I don’t think they’ve gotten this far by being clueless.

    And if after this decade they truly can’t foresee how well these things can go, well, I hope they just stay clueless. Works for me.

         
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    Posted: 21 July 2010 08:52 PM #7

    It’s extremely disciplined, tightly controlled growth/expansion disguised as “naivete.”  And despite Apple’s very measured approach, they’re still forecasting an enormous $18 billion in sandbagged revenue next quarter.

    It’s probably true that no one in Apple in 1997 could ever have imagined things going so well now.  At the same time, I think it’s very clear that they’d planned for this astounding level of success from the start.  They’re all “stunned” by demand, and yet, it’s all part of the plan.

    Apple getting to $100, $150 billion in revs isn’t looking impossible now.

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  • Posted: 21 July 2010 11:11 PM #8

    I completely agree with mav. . Tim is sticking to the message and the naive response is just part of giving out the information that is desired. I don’t think there is a company on the planet that manages releases as well and profitably as apple.  There are so many competing factors to balance and they do a masterful job. I also think the question was probing to find out if there was a specific component shortage, quality issue, or other manufacturing bottleneck involved. Also, given the brand new category that is iPad, that is one where you really would have had to play with a lower probabilistic demand model.

    Let’s hope they can ramp up all production, including product x, to meet what I expect will be a holiday quarter of epic proportions.

         
  • Posted: 22 July 2010 12:02 AM #9

    cranium - 22 July 2010 02:11 AM

    I completely agree with mav. . Tim is sticking to the message and the naive response is just part of giving out the information that is desired.

    I don’t think it’s an issue of naivet? feigned or otherwise. I think it’s an enterprise with a entrepreneurial mindset despite the oft-reported structure and controls. I’ve listened to each Apple conference call since Webcasts of the calls began. I’ve watched this company reinvent itself no fewer than three times since SJ returned to the company.

    There’s no reliable metric for the iPhone’s demand in a subsidized environment and the Apple iPad has achieved success beyond that of the early plans.

    We are looking at an enterprise that could reach $100 billion in revenue as soon as next fiscal year. There isn’t a fixed plan that can accommodate or manage this kind of dynamic growth. Genius can reveal itself in many forms many forms including fast adaptation.

         
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    Posted: 22 July 2010 12:11 AM #10

    I am sorry guys, but I have to chuckle about this. Lets not forget that Apple is driven by the most aggressive CEO in the world. SJ is very passionate by all accounts and does not let things just happen. He is the conductor and the world is his orchestra. You have watched the SJ presentations, mistakes are not allowed. The amount of preparation that goes into making things go off without a hitch takes a lot of time. I just wish they could teach AT&T a few things.  :apple:

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    Posted: 22 July 2010 01:17 AM #11

    DawnTreader - 22 July 2010 03:02 AM

    We are looking at an enterprise that could reach $100 billion in revenue as soon as next fiscal year. There isn’t a fixed plan that can accommodate or manage this kind of dynamic growth. Genius can reveal itself in many forms many forms including fast adaptation.

    I’ve been thinking about this - whether or not Apple could get to $50 billion in the second half of the year.

    Here’s a few numbers (calendar quarters)

    Sept 09 - $9.9B revenue (unadjusted)
    Dec 09 - $15.7B revenue
    (Source: http://phx.corporate-ir.net/phoenix.zhtml?c=107357&p=irol-news)

    Forecast directly from Apple:
    Sept 10 - $18B or 82% YOY growth

    If you extend that same growth rate to the Dec 10 quarter, you get ($15.7*1.82=)$28.5B

    So, in the second half of the year, using Apple’s quarterly forecast to extend to the following quarter, you get $18B+$28B = $46 Billion.  And Apple is ALWAYS conservative on their numbers.
    Now, you might argue that 82% isn’t sustainable, but I’ll tell you that Apple is the one who thinks there’s a serious uptick coming.  Is it just production catching up with demand? Is it a new product?  Is it both? We just don’t know.

    Anyway, if Apple underestimates their quarterly guidance just a bit, they could easily break $50 billion for the second half of 2010.  And that’s more than Dell or Microsoft, and within striking range of HP.  Maybe then, Wall Street will see that Apple is better than the overall economy and value it accordingly.

         
  • Posted: 22 July 2010 06:22 AM #12

    If you don’t think it was deliberate, check out the 1997 Think Different manifesto ad again.

    ...While some see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do.

    It is quite clear that SJ’s intention was to run Apple in a way that would make it possible to change the world. Apple’s differentiating factor was the focus, since the very beginning, on the individual user as customer; not on his manager or his company or his IT department, or his job or his desk. And the two reasons why Apple actually succeeded were 1. larger, more powerful companies didn’t even try to move forward, but instead presumed their established position could keep customers shackled in perpetuity, and 2.  SJ is a brilliant entrepreneur; for each step he takes, he will find a way turn a profit on that step alone, so the path forward is forever flexible, and cannot be blocked by those more powerful and established.

    Edit: and of course, although Apple takes every step they can see to make success possible, it doesn’t mean that success is a given, so it’s fair enough to express naive delight on the conference call, and, I think, genuine that they don’t know where iPad will take them or how fast.

    [ Edited: 22 July 2010 06:46 AM by sleepygeek ]      
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    Posted: 22 July 2010 10:02 PM #13

    sleepygeek - 22 July 2010 09:22 AM

    and of course, although Apple takes every step they can see to make success possible, it doesn’t mean that success is a given, so it’s fair enough to express naive delight on the conference call, and, I think, genuine that they don’t know where iPad will take them or how fast.

    Right.  It’s not that isn’t genuinely surprised and delighted with its great success - but Apple is well prepared for it and is constantly striving for blowout results, albeit in a sustainable manner.

    From various conference calls in the last few years we’ve gotten bits and pieces of Apple’s fundamental supply and demand strategy.  It makes “bets”, as it must, of certain base sales levels and snaps up the super-high-volume, best-price long-term supply contracts (and manufacturing capacity).  Everyone knows that Apple is infamously “conservative” about its growth, so it won’t produce a first run of 10 million iPads and risk having half of its supply still lying around at quarter end.  Really, supply of iPads and iPhones is just like Oppenheimer’s earnings forecasts - they build for what they’re reasonably certain they can sell, and when supply is constrained, they ramp things up as fast as they can.  Not everyone has Apple’s ability to “play it safe” with 60& YOY growth versus, say, 100% YOY, and not lose appreciable business, true.  But since it can, Apple’s application of “smart growth” principles is very effective.

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    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
    AFB Night Owl Team™
    Thanks, Steve.