Earnings call wrapup

Seth Weintraub
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October 21, 2008
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Listening in on the call today, Apple's leaders including Steve Jobs (who made a rare earnings call appearance) seemed very upbeat and very - dare I say smug- about hording lots of cash.  It's funny to hear an investment banker wonder why Apple is hoarding cash (they really did ask) when their industry has been torn apart by the lack of prudence in this area.  Apple has $25 Billion which Steve said, could be used to hire every Engineer in the Valley "Good idea!"

When Asked about a tablet, Jobs said "we don't talk about future products"

When asked about Netbooks, he said "we compete in this market already with iPod Touches and iPhones.

Apple is the 3rd largest phone maker in the world by revenue!! 

 

Nokia#1
Samsung #2
Apple #3

Apple beat RIM by unit sales and as an analyst mentioned, most of RIM's sales are repeat customers.  Almost all usable iPhones are in use.

The iPhone accounts for 40% of Apple's business and is also its biggest opportunity for growth...

It is hard not to be optimististic after all of this.  Especially for the iPhone market.

Comments (13)

Matt Murray (not verified) | October 21, 2008 - 4:29pm

Investors don't like it when their portfolio companies keep a lot of money in cash because it isn't efficient. In other words, the investor view is that Apple should either do something with the cash that they do well (e.g., put it to work to develop new products, acquire complementary companies, etc.) or dividend it back to shareholders so they can do what they do much better than Apple does, invest cash to obtain above-average returns. Cash sitting in a bank account represents lost potential returns to investors.

Apple's core competency is developing technology products and so if it isn't going to use this cash for its core competency the investor view is that Apple should dividend the cash to its investors. The primary goal of a company is to generate free cash flows so if Apple is going to do that quite well as it does but sit on the cash then investors will view that as less than ideal.

9to5Mac Noob (not verified) | October 21, 2008 - 6:52pm

that was a great comment. I actually learned a good bit from it.

9to5Mac Noob (not verified) | October 21, 2008 - 9:21pm

Please don't say that you learned anything from Matt Murrays post because it is terribly inaccurate.

First, do a quick google for "commercial paper" and see that companies that do not have a strong cash position can barely even operate their companies in the current environment. The credit and lending markets are so frozen that a strong cash position may be required to even survive this storm.

Secondly, he talks about efficiency but then recommends a dividend. How efficient is giving a dividend payment and pass on a double-tax to share holders.(Corporations pay tax on their money earned, and then the shareholder pays a second tax on the dividend they receive.) It's the reason companies like Berkshire Hathaway have NEVER paid a dividend. In the words of Warren Buffet, if you think you can invest the money from a dividend better than I could by keeping it within the company, then you shouldn't be a shareholder. (paraphrasing)

I think the same holds for Apple and Steve Jobs. If you don't think they can manage that 25 Billion in cash better than you could, then you should be invested in some other company.

9to5Mac Noob (not verified) | October 22, 2008 - 4:21am

A strong cash position is indeed a good thing in times like these - but nevertheless Apple's cash position might be much stronger than needed.

Giving money "back" to the shareholder is a very good option.
-Not in every country shareholders have to pay taxes on income generated from dividends.
-Another way would be a share repurchase program, where the company buys its own share from the market and therefore increases the value of the shares that remain on the market. Especially with low stock valuations, this is a very good strategy if you believe that the market undervalues your company.

Matt Murray (not verified) | October 22, 2008 - 6:18am

Apple should certainly keep some cash on the balance sheet. I don't think my comments stated they should liquidate the cash, just that keeping so much is inefficient if Apple isn't going to invest it into their business. It is just sitting in money market fund.

Apple is already overwhelmingly cash flow positive; in other words they are a very well run company and finance R & D from their cash flow from operations (e.g., R & D expense was $292MM for the entire quarter). Thus the lack of debt on their balance sheet.

The comment on Berkshire is interesting, but that company's core competency is acquiring companies, an activity for which cash is needed. What is Apple going to do with $25B in cash besides earn 5% on it in Money Market funds? If you owned half of Apple would you want your $12.5B sitting in Apple's bank or would you want some of it back so you could invest it elsewhere and earn more than 5%/year on it?

The comment on dividends is a fair one but dividends are the purest form of passing free cash flow onto investors as they can be modeled into the future and discounted back to arrive at a value for those cash flows. That is why SO many companies use them.

Finally, here is the take from a financial publication: http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080225/REG/259...

Matt S (not verified) | October 21, 2008 - 6:57pm

So with Steve on the call and answering certain product questions does that mean anything big (no, I don't think the MBA was big) is coming at Macworld? Was he making sure nothing slipped this time like the "product transition" last time? Maybe the tablet's actually coming in January... Usually he talks about how the market's no good for one (he's said it about the tablet, lately about a netbook, etc.) This time he said "we don't talk about future products." Were they tipping their hand again by not tipping it? I'm not pretending to know anything, just wishfully thinking out loud.

9to5Mac Noob (not verified) | October 21, 2008 - 9:50pm

They are always asked this question and they always answer it the same way.

They don't talk about future products and they never had. I don't think you should infer anything from those comments one way or the other.

There's other statements that are of interest.

9to5Mac Noob (not verified) | October 21, 2008 - 7:32pm

TO: Matt Murray

RE: "In other words, the investor view is that Apple should either do something with the cash that they do well (e.g., put it to work to develop new products, acquire complementary companies, etc."

REPLY: Apple is "doing" something with the cash. It's going to use it to keep investing in research and development DURING the downturn, while other companies let employees go, cut research, reduce marketing, etc. Apple will be able to launch new products, and update current products, even if the recession does become longer and deeper than is expected.

In addition, Apple does NOT have to go to a bank to borrow to fund operations or infrastructure, or plant and equipment.

========================
RE: "or dividend it back to shareholders so they can do what they do much better than Apple does"

Apple, especially at this stock price, can do BETTER for investors than most shareholders will get by investing elsewhere.

If Wall Street and the retail investor handled their cash as well as Apple does, the world would not have this global financial crises now.

Oh Blah Dee Blah Dah (not verified) | October 21, 2008 - 7:34pm

RE: "In other words, the investor view is that Apple should either do something with the cash that they do well (e.g., put it to work to develop new products, acquire complementary companies, etc."

REPLY: Apple is "doing" something with the cash. It's going to use it to keep investing in research and development DURING the downturn, while other companies let employees go, cut research, reduce marketing, etc. Apple will be able to launch new products, and update current products, even if the recession does become longer and deeper than is expected.

In addition, Apple does NOT have to go to a bank to borrow to fund operations or infrastructure, or plant and equipment.

========================
RE: "or dividend it back to shareholders so they can do what they do much better than Apple does"

REPLY: Apple, especially at this stock price, can do BETTER for investors than most shareholders will get by investing elsewhere.

If Wall Street and the retail investor handled their cash as well as Apple does, the world would not have this global financial crises now.

9to5Mac Noob (not verified) | October 21, 2008 - 9:57pm

When asked about Netbooks, he said "we compete in this market already with iPod Touches and iPhones.

====

That is THE most important statement from the entire conference call. Period. End of story.

9to5Mac Noob (not verified) | October 22, 2008 - 12:03am

Hahaha, that was a good one on Netbooks Steve. Seriously, now we know he is losing his mind. So I can work on Open Office or Word on Ipod touch or Iphone? Yeah, a great Netbook, indeed. Steves arrogance is becoming really annoying.

9to5Mac Noob (not verified) | October 22, 2008 - 5:35am

My guess is that the comment about the iPhone/iPod Touch being the Apple entry in the netbook market says that any apple "tablet" will probably be part of the iPhone/iPod Touch product family.

Perhaps a larger format device with support for blue tooth keyboard/mouse data entry?

It's an important comment because it tells you that Apple isn't going to approach the market from the laptop direction.

Personally, having physically handled a number of these devices... they are exactly what he said they are: junk. The feel like crap. They are made of crappy parts. They are really slow.

Based on past performance and the statements today, I think we can expect apple to not make a play into this market until they have a product that they feel is "worth it". I think that means either waiting for Intel to improve the Atom line of processors and using PA Semi to come up with improved chipsets (where the Atom line is currently very much lagging) that enable Apple to seriously differentiate themselves OR PA Semi will design the whole kit, CPU and chipset. In addition, there is probably a need to make further use of the aluminum manufacturing processes being used in the new macbooks in order to produce a solid, larger format iPhone/iPod touch. I am going to guess that Apple will wait for the current product cycle to die down a bit so that they have more capacity available to produce new products. I'm thinking that that will be a further limitation.

Whatever Apple does, don't expect it to be a smaller/cheaper macbook. Expect it to be a larger/more expensive iPhone/iPod Touch.

9to5Mac NotSoNoob (not verified) | October 22, 2008 - 4:51pm

is a little out of it if he really belives that Apple is only getting ~5% on their cash stash.

Apparently he has been reading too many books and not paying attention to how adults run things.