An Alternative Perspective on Apple's iPod Growth
Apple Inc. (AAPL) analysts and the media have regularly cited slowing iPod sales as a major headwind for Apple shares. The iPod has been a major force in Apple’s total sales growth since it has been such a large percentage of Apple’s overall revenue. A common claim is that the iPod has been so successful, that everyone has one.
A seemingly positive statement, some choose to take a negative point of view. For example, “It’s not good for future growth because Apple is running out of new people to sell iPods to. Basically everyone who wants an iPod, already has one. While there will be sales resulting from the replacement cycle, it certainly won’t generate the magnitude of growth exhibited in the past. Therefore, iPod sales will significantly deteriorate.”
Apple has sold almost 175M iPods, and imagine if Apple created a new iPod that motivated iPod owners to upgrade, as well as appealing to non-iPod consumers. One can say Apple did, the iPhone. Apple reports iPhone sales in a separate segment apart from iPod, and it accounts for iPhone revenue using a subscription method that distorts actual performance due to spreading revenue over a 24 month period. If we were to combine iPhone sales, using traditional accounting, with the iPod segment, then we would get an entirely different picture. That wouldn’t change any of the overall numbers, but it would change the perception that iPod growth is rapidly slowing.
iPod Growth:
iPods were the primary growth engine for FY05 and FY06, responsible for roughly 58% of Apple’s total revenue growth for both years. In FY07, iPod segment generated only 14% of overall sales growth as iPod sales only increased 8% compared to 69% in FY06. Actually, revenue growth for the iPod segment ticked up in FY08, growing 10%.
Some cite market saturation as the major factor that will lead to a slowdown in iPod demand. Given iPod’s large revenue contribution along with having been the primary growth engine, critics predict a rough road ahead for Apple. As a percentage of total revenue, iPod accounted for 33% (FY05), 40% (FY06), 35% (FY07) and 28% (FY08). However, the iPod is becoming less significant for revenue growth due to the success of the Mac and iPhone segments. Yes, times have changed. It still seems that many have yet to catch on.
Apple’s revenue grew 35% in FY08 and 24% in FY07, yet the iPod was the slowest growing segment both years. In the last quarter (4Q08), iPod sales were only 21% of total revenue, and less than 15% not using iPhone subscription accounting. Thus, concerns about flagging iPod sales detrimentally impacting Apple’s overall business are stretched since the iPod is becoming less of a contributor. On a non-GAAP basis, the largest revenue contributing segments are the iPhone and Mac, which are the also the fastest growers.
Andy Zaky from Bullish Cross is a leading expert on Apple. Zaky recently wrote an excellent analysis regarding Apple’s dwindling reliance on iPod to fuel overall growth. He argues that too many are focusing on the slowing growth of the iPod segment and that they are misinformed as to the real impact any slowdown would have on Apple’s revenue growth. Zaky writes:
“Investors, the media and the analysts have consistently overstated Apple's dependence on the iPod for future revenue and earnings growth. In Q1 2008, the street, choosing to disregard iPhone and Mac revenue as being at the core of Apple's primary driver of future revenue growth, only focused on how iPod unit sales grew at a meager pace of 5% YoY.”
Zaky adds: “Even today, analysts and the media continue to question whether Apple could succeed in a recessionary environment due largely to the perceived uncertainty as to whether iPod sales can continue to grow in 2009. Several members of the media, including analysts and fund managers who don't cover technology stocks, continue to refer to Apple as the "iPod maker" or simply a "gadget maker" indicating that Apple's core business is derived from iPod sales.”
Viewing From an Alternative Perspective- iPod + iPhone Combined:
Arguably, The iPhone is just an extension of the iPod product line. Steve Jobs said “It’s the best iPod we’ve ever made.” The iPod segment has expanded with the Mini, Nano, Shuffle, and Classic model introductions. The iPhone is more/less a Touch with a cellular radio. Yet, one is an iPod and the other is an iPhone, at least judging by how Apple breaks out sales by product segment in its financial releases.
Until last quarter, whether Apple included iPhone revenue in the iPod segment, or reported it separately, there wouldn’t be much of a noticeable difference on the surface. This is because iPhone unit sales have been quite modest relative to iPod, and iPhone revenue is distorted from the subscription accounting that amortizes sales over 24 months. Management repeatedly said that iPhone wasn’t a significant portion of revenue. Very true using subscription accounting, 3% [Q1], 5% [Q2] 6% [Q3], 10% [Q4]. Yet, the GAAP accounting treatment isn’t an accurate reflection of Apple’s business performance.
What if we took a different perspective and adjusted iPhone revenue to reflect the total amount earned in each period instead of the distorted subscription basis? And, what would it look like if iPod and iPhone were combined into a single reported segment?
Apple very easily could have decided to report iPhone sales as a part of the iPod segment, as well as using normal accounting. It’s all a matter of choice, the real figures stay the same. We probably wouldn’t still hear misguided comments such as “iPhone sales may be growing but it’s a very small revenue contributor. iPod is a huge revenue contributor and its sales are slowing.”
Without subscription accounting coupled with combining iPhone sales with iPod, revenue dollar growth (Y/Y) for combined would be: 41% vs. 4% [4Q07], 47% vs. 17% [1Q08], 59% vs. 8% [2Q08], 26% vs, 7% [3Q08], and 184% vs. 3% [4Q08]. With the iPhone’s $199 price tag and Apple’s plans to be in over 70 countries by the end of the year, we should expect to see growth figures like the 184% [4Q08] going forward. See the tables below.
Click to enlarge
Conclusion:
From a combined iPod & iPhone perspective, we wouldn’t hear these misplaced concerns of an iPod slowdown. Instead, it could be characterized as “Apple tackled the issue of slowing iPod growth by introducing a new iPod with cell phone functionality which has reignited sales growth in the iPod segment.” “Apple could sell another 175M iPods as users upgrade to the iPod cell phone.”
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This article has 10 comments:
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Murphy
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65 Comments
My Website
Nov 04 06:53 AMWhy is a stock that's so widely held not soaring from the buzz alone? How could all of Wall Street be so wrong about a company smack in the middle of the spotlight - and not be caught out?
Many have suggested manipulation, with zero concrete evidence. If Apple is being gamed I'd like to see an article that explains exactly how that's being done and by who. Maybe Andy's next story can explain what Wall Street is up regarding Apple, who the players are, and how much they've profited.
Your article was interesting, but I'm more interested in WHY Apple's results and outlook are being ignored quarter after quarter. And conservative guidance is not the answer. Neither are clueless analysts like Berger.
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gspet
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1 Comment
Nov 04 06:57 AM-
KenC
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146 Comments
Nov 04 10:34 AMwww.deepcapture.com/ji.../
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KenC
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146 Comments
Nov 04 10:34 AMwww.deepcapture.com/ji.../
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mollytjm
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322 Comments
Nov 04 12:06 PMand to the person who doesn't think the stock is manipulated...well...n... another company where the head of it has been listed by a major news network as dead or having a massive heart attack or dying of some dread disease.
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Head_Hunter
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3 Comments
Nov 04 03:09 PM-
Head_Hunter
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3 Comments
Nov 04 04:08 PM-
TTBF
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5 Comments
My Website
Nov 04 05:20 PMOn Nov 04 04:08 PM Hi_Hater wrote:
> There's also a new alternative to the iPhone called the Krave (motorola.com/krave).
> It has a QWERTY keyboard and its narrower then the iPhone. It's a
> flip phone that has a clear top and its touch sensitive, so you can
> use your phone without even opening it!
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Momina
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3 Comments
My Website
Nov 04 09:21 PM-
chano
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30 Comments
Nov 06 01:22 PMThis is a problem that has gone on too long with no analysis, finger-pointing or remedy. Wall Street has always hated Apple as a company. WS is full of reactionary people who cannot dislodge a way of looking at things once a given perception has lodged inside their heads. They cannot learn to look at Apple as it is. They only remember Steve's (perceived) reckless days pre the 90s.
How would you go about effecting a change Mr. Miller? It is time to stop fretting about and to start building counter-strategies. The market and its manipulators are too big and too well entrenched. Only continuing stellar results can cause the share price to rise significantly. And this is not the time, realistically, to look for stellar results, given the hurting economy worldwide.
A final point. I agree that it is not valid to compare Apple with say, Sony because culturally they are vastly different. But Sony has one strength that Apple has not yet achieved. It has a very broad range of products. It's like holding a broad portfolio of shares, rather than just one or a few, as a defensive investing strategy. One or two lines in the portfolio may under-perform or even fail, but that is not a liquidating killer. My point is that, among the other strategic pre-occupations that Apple's board members are surely pondering over, they should pay attention to diversification within the consumer electronics space. They can do it in a way that no other company can. A range of products based around Mac OS X. Without hesitation, I can think of about half a dozen broad interest devices. And who am I but a committed shareholder?
Let us have some discussion on issues like these too.