Apple Earnings Highlights

Well, I was fairly close on my predictions for Mac units while iPods were stronger and iPhones were weaker. The star of Apple's report though is their gross margins. They hit an absolute home run with GM's of 34.7% versus 30-31% guidance. This was in a quarter where there were significant price cuts on the iPod Touch and the entire notebook line was revamped with increased features. It was quite a performance.

The two most important product highlights from the call were the comments on the possibility of a stripped down iPhone and a netbook. I had believed that Jobs had already squashed any possibility of such a device during the last call but that didnt stop speculation on the gadget sides. This time, Cook removed all doubt. Apple wont play in the voice only side of the handset business. He also stated commented on that Apple's entire approach was different from the rest of the industry as they see the iPhone as a software platform. I think this confirms the fact that Apple will do everything in their power to keep application development for the iPhone a single step process. This precludes multiple screen sizes and different input methods. We may see multiple versions of the iPhone but they'll all be based of the same basic hardware. First though, Apple needs to cut prices on the current iPhone. The December quarter saw a slowdown in sales which means the seasonally slow March quarter will see sales fall even more steeply. A price cut to $99 would reignite sales and allow Apple to clear out inventory ahead of the iPhone 3.0.

As for Netbooks, I think Apple has given sufficient hints to expect such a device later this year. Like the iPhone, once Apple acknowledges having ideas on the device, it is likely fairly far along in the development process.

Tidbit on Android and Netbooks

The former head of Android development at Google mentions that companies are working on Android based netbooks.

A Crucial Call

Tomorrow's Apple earnings call is likely to be the most important of the tech earnings season. Apple shares have been battered due to the ongoing worries about the health of Jobs as well as fears about the extent of the impact of the economic downturn on Apple's upscale products. The guidance that Apple gave back in October was widely panned as being outrageously conservative but analysts consensus projections on revenues are now within the range given by Apple. While there is no doubt that the steep dropoff in consumer spending has hit Apple, I believe that the various data points from the quarter indicate that the analysts have become too bearish with regards to Apple's earnings.

I am using a combination of NPD and Gartner numbers for the Macs/iPod's and the Net Applications OS share data for the iPhone numbers.

Unit Numbers
2.57m Macs
20.4m iPods
iPhones Sell-in 5m
iPhones Sell-through 5.5m

Financial Numbers
Revenue $10.45 billion
GM 33%
GAAP Earnings $1.49

These numbers would likely be enough to provide a nice jump in shareprice, but guidance will be a huge factor. The odds are that Apple will provide extremely conservative guidance. There isnt much to provide a boost to shipments as MacWorld was a non-event, however I expect to see a product update on the desktop side in the next few weeks or so. Apple also needs to cut prices on the iPhone to reignite demand ahead of an expected update this summer. The timing of such an event will be a large determinant on the course of the current quarter.

Another Apps Store Milestone

This is just an incredible accomplishment. Apple has hit a half billion downloads in the space of six months. The Apps store has transformed the iPhone from a best of breed single handset to a best of breed mobile platform....with all of that means in terms of the development of a value chain and switching costs for consumers. I dont believe that even the most optimistic forecasts foresaw these kinds of numbers this quickly.

Snapdragon and Android Confirmed

I expected an announcement in six months but Qualcomm decided to deliver a nice CES surprise.

This is just a demo of Android running on the chip rather than a full scale netbook implementation but it definitely looks like they are heading in that direction. It looks like the x86/Windows combination is about to get some competition in their fastest growing market. I fully expect Apple to enter this market as well, though whether it will be based on an Intel chip or an internally developed ARM chip is an open question.

One thing is for sure, this is very good news for consumers. The one mortal lock in this is that Snapdragon/Android based devices should have a significant cost savings over x86/Windows.

Android + Snapdragon: A Perfect Match

The big gadget story of last week was the news that the guys over at VentureBeat had managed to port Android onto the Asus EEE. I believe that all signs point to the fact that this is precisely the direction that Google plans on taking Android. They have never been shy about their goal of dethroning Microsoft from the top of the tech hierarchy and netbooks provide an opportunity to do precisely that. They are exactly the type of always connected machines that can fulfil Google's visions of cloud computing. Google has also explicitly stated that they see Android eventually going far beyond its current home in smartphones and powering all sorts of new devices.

This is where Qualcomm and their ARM based Snapdragon chipset come into the story. Qualcomm has been quite public about their efforts to take on Intel's Atom chip directly in the netbook space. The problem for Qualcomm is simple, while the power consumption, size, and cost dynamics are all huge positives for Snapdragon, the fact that it will mostly be running obscure Linux variations means that consumers wont take a second look at Snapdragon enabled netbooks. The current sales numbers already show this with Windows netbooks far outselling Linux based versions.

This is why the pairing of Snapdragon and Android will work so well for both companies. Android on an Intel chip provides little in the way of positive differentiation versus the Softie/Intel combination. Similarly, Qualcomm needs an OS that is guaranteed to have a wide range of applications available and a brand that consumers will recognise. Google gets a hardware architecture that emphasizes substantially longer battery life than x86, lower cost, smaller form factors, and always on connectivity. That is exactly the recipe that is needed to give cloud computing a chance against Windows.

It also helps that these two companies have a bit of a history with Qualcomm being the first chipset manufacturer to support the handset version of Android. The T-Mobile G1 is running on a Qualcomm MSM7200a. I believe that we will see an announcement expanding this relationship into the netbook space within the next six months or so.

An interesting tidbit that might show that this effort is further along than most suspect....Net Applications has reported that a third of the visitors from Google.com had obscured the OS they were using. According to Net App, they would have had to go out of their way to make this kind of change. Perhaps an expanded version of the Android OS is being hidden?

An Apple Rumor That Makes Sense.

No, not the ever present commentary about Jobs's health, this is a new iPhone rumor that seems more plausible than the shrunken Nano's that has been bandied about. iPhone Alley is claiming that a new iPhone is being worked on that is in the form of the iPod Touch and may or may not include 3G. A cost reduced version of the current iPhone that still includes the current screen size would make sense. The key would be to reduce the cost of the data plan as well as the upfront price. If AT&T is willing to sell a $99 EDGE version of the handset that only requires a $25 a month data plan, that would significantly reduce the barriers of entry to owning the iPhone.

Doubts on the iPhone Nano

While the iPhone Nano rumors continue to swirl, I think it is worthwhile for investors and gadget freaks to go back to this quote from Steve Jobs during the October conference call about the likelihood of expanding the handset lineup.

http://seekingalpha.com/article/100980-apple-f4q08-qtr-end-9-27-08-earnings-call-transcript?page=-1&qa=true

Steven P. Jobs

Well, I wasn’t alive then but from everything I heard, Babe Ruth had only one homerun, he just kept hitting it over and over again. So I don’t think that -- I think the traditional game in the phone market has been to produce a voice phone in a hundred different varieties. But as software starts to become the differentiating technology of this product category, I think that people are going to find that a hundred variations presented to a software developer is not very enticing and most of the competitors in this phone business do not really have much experience in a software platform business. So we are extremely comfortable with our strategy, our product strategy going forward and we approach it as a software platform company, which is pretty different than most of our competitors.

This is about as straight forward a quote as you can get from Jobs. The iPhone Nano may have been a possibility prior to the gigantic popularity of the app store, but it would now represent a step backwards in Apple's quest to own the dominant platform within the smartphone space. Apple has seen first hand that applications define the winners and losers in computing and I don't see them taking the risks that fragmenting their handset lineup would entail.

Of course, this doesn't mean that Apple wont have a $99 iPhone fairly soon. A price cut in the first few months of the year shouldn't drastically impact margins and would spur sales ahead of the introduction of the iPhone 3.0. I actually believe that it would be in Apple's interest to keep producing this version of the iPhone and use it as their price driver in Christmas '09. A high-end 3.0 version of the iPhone and the current version given away for free with a contract would be a compelling combination covering the range of price points. It would suck the oxygen out of the smartphone space for the competition and deliver most of the benefits of the iPhone Nano without the drawbacks.

Nuvifone delayed

Not much of a surprise, the Nuvifone has been delayed into the first half of next year. This is going to be a real problem for Garmin as this Christmas is going to see an explosion of interest in GPS enabled functionality on handsets. The 2.1 version of the iPhone software looks set to support turn by turn directions and with Apple, you know that there will be a PR related blitz when it is introduced. While the capabilities have been available on handsets like the N95 for quite a while, the iPhone is likely to push it into the mainstream.

The complication for Garmin is that delays in handset introduction are an absolute killer. What looks like a well-spec'd handset for Christmas '08 may be an outdated dinosaur by June '09. Garmin has obviously seen the fact that stand-alone GPS units are going to become more and more of a niche as time goes on....unfortunately, the solution of attempting to compete in the mobile handset market is one that is easier said than done. Garmin is going to have a very tough road to travel in 2009.

Sony Ericsson going to abandon UIQ?

There are some rumors floating around that SE is preparing an announcement about the future of their UIQ platform. If the hints are to be believed, they are going to seriously scale back their commitment and perhaps even abandon the Symbian derivative all together. This would square with the various reports that the new high-end Symbian handsets scheduled for the 2nd half have been cancelled (Paris and BeiBei).

The implications of such a move depend on which direction Sony Ericsson chooses to go. If they plan to move towards a derivative of Linux, it will be a blow to Symbian, but the winners will be harder to figure. OTOH, if this move is a prelude to a strong commitment to Windows Mobile, Microsoft and Qualcomm should be in the catbird's seat. This would be the kind of tier-one handset support that Microsoft has longed for and Qualcomm's long work with Softie on the platform should pay off with future opportunities at Sony Ericsson. The Xperia X1 could just be the first of a whole new portfolio of devices based on Quaclomm's chipsts.

Supposedly we should hear something this week....

iPhone Subsidies

Apple delivered a mixed bag in terms of features upgrades but delivered a solid win with the revamp of their business model and distribution. While a June US launch would have been nice, the 22 country launch on July 11th delivers a broad rollout much more quickly than most had expected.

The key point here is the subsidies that are going to be provided around the world by the handset providers. AT&T is going to sell the 8GB model at an upfront price of $199 but has raised the plan prices by $15 a month. That works out to $360 more over the two year contract.

So what does the customer get in return? Subsidies....and comments from SK Telecom (500,000 to 600,000 Won wholesale price) as well as the Vodafone Italy prepay pricing ($644 for 8GB model) indicate that they will be in the $350-$400 range in the US. The figure is even higher in Europe where they are using their standard practice of varying upfront pricing based on the monthly spend. However, the numbers involved arent particularly unusual considering the fact that the N95 was available for free shortly after its launch a year ago (unsubidized price of $750).

These subsidies are going to drive sales substantially higher. While the total amount paid over the life of the contract wont change much compared to the 2G iPhone, the fact that the upfront price is now below $200 removes a key barrier to entry for customers. That is the price point that has consistently been shown to move consumer electronics products from cutting edge into the mass market. The DVD player is the classic example.

A WWDC Checklist

As usual, rumors are flying on what exactly Jobs will reveal at the latest keynote at WWDC. With the stock trading around 190, I think it would be useful to set out a checklist of what Apple absolutely NEEDS to announce and what would simply be a bonus for investors. A miss on these expectations might not impact the long-term performance of Apple, but I think you could see a significant pullback if the market is disappointed.

The Minimum.

Features
Obviously a 3G version of the iPhone is a lock, but beyond that the specs absolutely matter. An upgrade to the camera to 3 megapixels and video camera functionality plus GPS is a baseline for the new specs. Miss on either of those specs and the 2nd half projections will be risky.

Pricing.
The rumors of subsidies have become so strong that this is now in the minimum camp. Apple might not even announce pricing outside the US, but the minimum price for an iPhone has to move below $300...and even $299 might not be enough to satisfy the market. Pricing outside the US might not even be announce by Apple as this may be completely up to the operators.

Timing.
Commercial availability in the US by the end of June with rapid successive launches in Europe by the end of July. Asia can wait until the fall.

I see the above data points as the absolute minimum that Apple needs to announce to keep the stock from cratering following WWDC. Luckily, I do believe they will hit all of those marks.

Bonuses

Apple doesnt need to hit all of these, but likely they need a few to satisfy both the market and consumers.

The latest rumor that is gaining steam is one of Apple launching multiple iPhone models on Monday. This nicely dovetails the various sources saying that the new iPhone will both be thicker (3G, larger capacity) and thinner (new EDGE version). If true, this would be a clear indication that Apple is looking to grab substantial share in the near-term.

There are rumors of support for iChat, multiple colors and a bump in the maximum capacity to 32GB. All would be nice to have, but unlikely to be a real sales drivers.

Perhaps the most interesting announcements will revolve around the new Apple store. How compelling will the new apps be? This will be the hardest to judge, but if Apple pulls this off, they will be able to generate a whole new revenue stream for many years to come.

Longshots

One analyst is predicting a 50% chance of an Apple MID (4-7" screen) being announced. While I think these devices are in development, I think that this fall would be the natural time for such an announcement. Apple's reference to the Touch as a WiFi enabled mobile computing platform basically revealed their future product direction. The iPod is going upmarket....but I very much doubt it would be today.

Likewise revised Macs/Macbooks are more likely to be introduced later this summer.

The key to Apple's trading today is going to lie in the pricing and timing. A $199 pricepoint with availability next Tuesday in the US and in Europe by the end of June and I think we should see a nice multiweek run. The 10 million unit estimates would all be getting revised upwards as analysts realized that Apple was serious about grabbing share.

Dont forget the Feature Phones!

Lost in the building fervor over the raft of new smartphone devices expected over the next six months (3G iPhone, Blackbery Bold, HTC Diamond, etc) has been the absolute onslaught of new high-end non-smartphones (or "feature phones")from LG and Samsung. This is a definite mistake as the unit volumes of these handsets are likely to be absolutely huge and have as much impact on marketshare for both the semi and handset players as the upcoming smartphones. The Samsung Soul has hit the market to rave reviews and the LG Secret is getting similar early press before its launch at the end of the month. Both these devices, as well as others such as the Samsung F480, pack in 5 megapixel cameras, touchscreens, user friendly interfaces and top of the line display technologies into some very hot form factors. It is these devices that are driving Samsung and LG's share gains as well as the continuing momemtum in Qualcomm's chipset business.

The question is when Nokia/SE/Motorola will manage to respond. The current announced products from those vendors for the 2nd half of the year simply dont measure up to what LG and Samsung are putting on the market right now. The combination of these feature phones and the newcomers to the smartphone segment present a serious challenge to the high-end shares of the current market leaders. Both TXN and Nokia are bouncing today on an upgrade from SSB, but I must say I'm not optimistic about their prospects in the 2nd half.

Motorola up to bat at CTIA

A new video on Youtube (since been pulled) looks like it has provided another set of leaks of Motorola's upcoming lineup. Yes, the ones that were originally scheduled for MWC, but were mysteriously pulled at the last minute. Some details and specs are available here.. The 5 Megapixel Kodak enabled handset is the most interesting, but the rest of the devices look like updates to existing designs. If these leaks accurately reflect Motorola's roadmap for the 2nd half of the year, I am decidely underwhelmed.

Right now I'm guessing that Motorola will do better than 2.5G for their Kodak enabled handset and/or just a couple of updates to the Q/Ming, but if not, it really could get worse during the 2nd half of the year. Amazing.

EMP vs. Qualcomm

It wasnt quite an earthquake in the mobile world, but Sony Ericsson's decision to use Qualcomm for their baseband/apps processor in the Xperia was certainly unexpected. After all, the two companies have never been friendly, with Ericsson being one of the six companies that brought an anti-trust complaint before the EU in 2005. On top of that Ericsson has their own in-house chipset division in EMP which is the source of the vast majority of their 3G chipsets. The choice of Qualcomm for the handset was at least as curious as their choice of Windows Mobile.

Well, now we know the reason for that choice. This above specs detailing the EMP enabled ASUS ZX1 tell the story, and it isnt pretty. The fact that the EMP U360 needed to be paired with a TI OMAP2430 to run Windows Mobile with a touchscreen wasnt surprising, but the resulting 3G talktime is stunningly abysmal. A 90 minute talk time guarantees that this handset will be a commercial flop (though the GUI looks very cool). Luckily for shareholders, Sony Ericsson was flexible enough to go in another direction.

This is going to lead us to an interesting decision for Sony Ericsson later this year. The Xperia X1 was the highlight of Barcelona and interest from various mobile forums make it look like it will be a smashing success. So, where will Sony Ericsson go for the baseband of its successor? The EMP U380 is due to be released in the 1st half of '09, so it is the most likly winner....but a succesful X1 launch might give Qualcomm a realistic shot at continued business within SE. That is something I never would have expected a year ago.

Bit Pipes are the Future

Unlike just about every other wireless operator in the world, Sprint is moving to embrace its roll as a bit pipe to its customers. The price plan they announced this morning delves perfectly with their plans for their upcoming WiMAX network.

These moves are going to have a profound impact on the wireless industry in the US. The combination of the next generation of touchscreen mobile OS's with flexible pricing and open networks is exactly what the industry needs to drive the innovation/adoption life cycle. The key is simplicity on all fronts and we are seeing moves across the board towards that goal. The industry is going to look quite different when the iPhone isnt alone in driving huge amounts of web traffic from mobile phones.

Sprint might be good for a turn around play, but I see the real winners in the smartphone/chipset and content spaces.

MacBook Revamp

Dissapointing.

That is the first word that comes to mind when looking at the new MacBook's that Apple released today. The spec upgrades were sorely needed and the addition of multitouch to the Pro line is nice to see, but overall, I think expectations were higher. These upgrades certainly wont provide any sort of step function boost to Apple's sales in the near-term. I am more than a little surprised that Apple didnt attempt to incorporate facets of the Air's design into this upgrade. The current design is getting a little long in the tooth.

The Next Generation of Mobile OS's

The hype over the iPhone was absolutely overwhelming and while sales have only been lukewarm thus far, there is one area where it did live up to its billing. It truly has changed the game in terms of the development of the mobile OS. Intuitive, receptive and just downright fun to use, the iPhone is light years ahead of the competition. However, Barcelona gave us an idea as to what some of the competition has up it sleeve. Most have rightly focused on the development of Android, but I think Nvidia's demonstrations provided a far more revealing look at the capabilities of the next generation of OS's.

As one blogger wrote, it looks like it is right out of Minority Report.



Now Nvidia isnt in the OS business. They were just using this as a demonstration for their ARM11 enabled AXP 2500 processor, which is what makes this demonstration all the more stunning. They put that OS together in five weeks. Imagine what Apple, Sony Ericsson or Nokia will be able to do when they get their hands on that kind of horsepower. Unfortunately, the AXP 2500 wont be available in handsets until the 2nd half of '09....it is going to be a long wait!

Joining the hunt for the 3G iPhone

There has already been a vast amount of speculation as to the timing of the 3G version of the iPhone. This is for good reason. A late year launch would mean drastic price cuts would be needed to keep sales going over the summer. The handset market moves much to fast to keep a year old device selling for $400 relevant to the majority of consumers. Conversely, a late spring launch would bring a jolt to iPhone sales that I think would go well beyond most analyst expectations. The customer satisfaction numbers for the iPhone are off the charts, but the fact that it is well known that a 3G version will launch in '08 has kept many consumers on the sidelines. Nobody wants to buy the current iPhone only to see a more advanced version released a month later.

So the question is, how do we narrow down the launch window for the iPhone? I think the best clues come from the suppliers. The baseband and applications processor for the iPhone are, by necessity, going to require the latest and greatest chipsets.

The Baseband

Infineon won the 2G iPhone slot with their ARM9 enabled S-GOLD2 EDGE baseband. This likely gives them the inside track for the 3G iPhone, though it is by no means a lock. Infineon has stated that their S-GOLD3 HSDPA processor will be in volume production in the 2nd quarter. They have been close mouthed about the identity of any customers for this chip.

Qualcomm is also a possibility though I'd place the odds considerably lower than for Infineon. One advantage to Apple for going with Qualcomm is that they have a much better application processor combined with their baseband. The MSM7200a is a 65nm chipset with a 528MHz ARM11 enabled apps processor. In the past, Qualcomm has indicated that this chip would be capable of running the iPhone. I have my doubts though that it could do so without another dedicated apps chip. However, coupling the MSM7200a with an apps processor would provide more than enough horsepower for a fully featured iPhone (5 megapixel camera, GPS, 30fps video capture). The MSM7200a sampled in the 1st quarter of 2007 and I believe that volume shipments would likely begin in the spring.

Broadcom is the last of the likely candidates. At one time, I had thought that the iPhone could be their break through win in the mobile space but I think that this has become unlikely. The press has focused their attention on the single-chip HSUPA chip that they announced in October, but this chip wont show up in handsets until 2009. Their ARM11 enabled HSDPA chip that was announced last February (BCM2153) is a possibility, but Broadcom's public comments on wireless have downplayed the prospects for wireless in 2008. It seems unlikely that this chip is going to get much traction.

Apps Processor

Many choices, but porting the iPhone OS to a new applications processor seems unlikely unless it involves the battery/cost savings of a converged chipset. That means that Samsung's 2G design win is going to give them a considerable advantage in the 3G slot. Their 2G chip was the S3C6400, which was a 667MHz ARM11 enabled processor on a 90nm process. The 65nm version of this chip (S3C6410) is due to begin sampling in May with volume production in the 3rd quarter. As they did with the S3C6400, it is entirely possible that Apple will get early access to a custom version of this chip.

My best guess is that Apple will go with a repeat of their 2G iPhone partners. Infineon and Samsung both look to be in position to have volume shipments of the required chipsets by the summer. While the exact timing would be nice to know, I dont think it is necessary to profit on Apple. The key is that they should be able to avoid the worst case scenarios of a November launch. That would have been disastrous for the summer/fall sales and would have left them launching directly opposite Nokia's expected S60 touchscreen device. A late spring or summer launch avoids this and sets Apple up to do very well in the back half of the year.

The iPhone's Stunning Search Numbers

We all know that the iPhone has changed the rules of the mobile handset game....watching the other handset manufacturers fall all over themselves in their rush to embrace touchscreens is just one sign of the new environment. However, even knowing that the iPhone has caused a revolution doesnt diminish my astonishment at these new numbers from Google

50 Times!

That is how many more Google searches have been performed on the iPhone than any other mobile handset. While this data is obviously skewed by the Apple-Google partnership, the overall trend is backed up by the browser stats that have been released. You can argue endlessly about the merits of the iPhone, but it is indisputable that the iPhone has transformed the mobile internet. The rest of the industry is trying to adapt with the touchscreen S60, Android, and Xperia heading the list of new initiatives. Unfortunately, all three of these were still in very rough form at MWC, so we wont have a very good idea on their progress until the end of the year.

One question I'd like to have answered, does Google split any of their search revenue with Apple? That built-in search box could eventually become a very lucrative piece of real estate for Apple and their search partner.