AAPL & iCahn - Was the Fruit Ripe?

Hindsight is 20/20 - we all wish we could have invested in GOOGL and AMZN in 1999, or basically any of the big tech giants of today (those that actually existed back then). Even investing across a number of equities by throwing darts at a board lined with ticker symbols during 'The Great Recession' would have paid off nicely as the markets have rebounded to new highs. Carl Icahn's investment in AAPL was an interesting one - a very wise move that proved to be quite successful, but it could have been far more lucrative if he had a little more patience with the tech giant, or perhaps he saw something that nobody else did. Now Warren Buffett is in AAPL - a most unusual investment for a man who loves businesses with stable growth and historic breadth (transports, industrials, etc.).

History

On August 13, 2013, legendary investor, Carl Icahn, sent a tweet stating that his firm, Icahn Enterprises, LP, had taken a large position in AAPL and that he believed the company was significantly undervalued.  Throughout August 2013 and May 2014, Icahn went on to acquire 52,760,000 shares of AAPL (post-split) with a cost basis of ~$3.74 billion ($70.84 per share). Icahn met with Cook and then CFO, Peter Oppenheimer, to engage them in discussions over upping the capital return program, which AAPL did. At one point, Icahn said that AAPL was worth $240 per share, which would equate to a market cap well north of $1 trillion. However, Icahn began unloading his AAPL position in December 2015 and at the end of 2015, had pared his position down to 45,760,000 shares.

Sour Fruit

In April-2016, after AAPL announced its first-ever iPhone unit decline in CQ1-2016 / FQ2-2016, Icahn acknowledged that he had unloaded his entire AAPL position. Icahn stated that he had concerns over the company's growth engine (China) and the potential for protectionist policies that would undermine AAPL's ability to compete in that market. Icahn stated that he made about $2 billion on the position. Based on my calculation, Icahn made roughly $1.7 billion (which includes both stock appreciation and dividends) - an extraordinary gain that any investor, on any level, would be happy with. 

However, since Icahn's disposition, AAPL has made quite an impressive run to all-time highs. Based on AAPL's closing yesterday (May 18th) at $152.54 per share, I believe Icahn left about $2.65 billion of gains had he held on to his entire original position of 52,760,000 shares. But who really knows? Perhaps Icahn was right and that this latest run is not indicative of the long-term trajectory of the company. Sometimes the ripest fruit turns out to go sour real fast, but I often wonder if he ever thinks about it.
 

AAPL's Enterprise Penetration – the Unspoken Pillar of Growth

Image Source: ZDNet

On its FY15 earnings’ call in October 2015, AAPL CEO, Tim Cook, unexpectedly revealed an estimate of just how big the Enterprise segment is for AAPL:

“We estimate that enterprise markets accounted for about $25 billion in annual Apple revenue in the last 12 months, up 40% over the prior year and they represent a major growth vector for the future.”

AAPL’s Enterprise Initiatives:

To understand that growth, it is important to understand the various programs that AAPL is using to penetrate the enterprise:

• Mobility Partner Program (MPP): An effort to boost sales of iPhones and iPads in the enterprise through collaboration with software developers and integrators.
   
• IBM MobileFirst for iOS: “IBM MobileFirst for iOS solutions combine the power of enterprise data, analytics and cognitive with an elegant user experience, to fundamentally redefine how professionals interact, learn, connect, and perform.” (Source)
   
• Other Strategic Partnerships: Collaborative go-to-market partnerships with enterprise service providers to optimize services and technology hardware for businesses.
   
• Enterprise Device Sales: Sales of iOS devices (specifically iPhones and iPads) to enterprise customers for use within their respective businesses.

AAPL has provided various commentary around these programs for the past two years:

Source: Various quarterly earnings' call transcripts for AAPL obtained through Seeking Alpha

Additionally, AAPL’s management has provided additional color around its enterprise efforts on its quarterly earnings’ calls:

• FY17 Q1: ”…the total number of joint customer opportunities has grown over 70% since last quarter…Corporate buyers reported a 96% satisfaction rate and a purchase intent of 66% for the March quarter”
   
• FY17 Q2: “All our products continue to be extremely popular and drive more buying transformation in the enterprise market. We set a new enterprise revenue record for the March quarter, and we expect this momentum to continue for the remainder of the year….Corporate buyers reported a 96% satisfaction rate and a purchase intent of 68% for the June quarter.”

Why AAPL is Seeing Increasing Success in Enterprise:

The dynamics of enterprise have drastically changed as mobile has become an increasing part of the daily workflow and AAPL has proven itself capable of leveraging its unique strengths and alliance partners to penetrate a space that was once an after-thought for the consumer-focused company:

• AAPL is bridging its Gaps with Partnerships: AAPL is continually focused on selling more devices both in consumer and enterprise markets. However, AAPL understands that its enterprise strategy needs to be much more reliant on integrating those devices into the workflow of the companies it sells to. Much like it is retaining customers in the consumer markets with an integrated offering of hardware, software, and services, it realized that it needed deep breadth in industry verticals to create the same effect in Enterprise.
  
  The once outlandish idea of AAPL actually partnering with IBM not only came to fruition, but has enabled AAPL to combine its deep breadth in industry verticals and enterprise-wide service / support with AAPL’s devices. This has inevitably enabled companies to dedicate resources to build native iOS apps that address specific pain-points in their businesses and deploy them at-scale. Additionally, AAPL has been aggressive in forming more partnerships with other enterprise service providers and consultants to further its standing as the leader in mobile – an area that is capturing increasing CIO wallet share every year.
   
• Employee Choice Creates a ‘Double-Down’ Effect: The ‘consumerization of IT’ is now in full swing. In its 2016 annual survey, Jamf reported that 44% of the companies it surveyed offered a choice to their employees between a Mac or PC, but a significantly higher 71% of the companies offered choice between different mobile devices.
  
  With AAPL reaching all-time highs in U.S. smartphone adoption, and its disproportionate share within the demographics that represent the enterprise segment, employee choice for corporate-issued smartphones is creating a “double-down” effect. Employees want the same experience and familiarity on their corporate smartphone as they do on their personal smartphones, not to mention the desire to access the same content through their Apple ID. This culminates in the all-too-common scenario where an employee has two iPhones – one for personal use and one issued by his / her company – both with upgrade cycles. This type of demographic also reaffirms Cook’s point about likely strong penetration in the Bring Your Own Device (BYOD) segment, which some companies have migrated to.
   
• Corporate IT Buyers want Higher Residual Values: There are many articles out there that discuss the very high residual values that iPhones retain over their competitors. No matter how enterprise customers buy or lease smartphones either through AAPL directly or through wireless carriers, higher residual values on iPhones will always be a differentiating factor in what smartphones are available to choose by employees. For example, some large consulting firms that still provide employees with a smartphone offer all versions of the iPhone, but only a few choices that run on the Android OS.  Residual values play a large part into that disproportionate representation - the unit cost of these phones is all within the same ballpark (AAPL iPhone 7 Plus vs. Samsung Galaxy), but the residual values over a two-year period favors the AAPL phones, creating cost efficiencies for the business.
   
• Overwhelming Demand and the Desire for a Consistent Mobile App Experience Favors AAPL: A report by Gartner indicated that by the end of 2017, the demand for mobile apps will outstrip available development capacity by 5 to 1. This lack of development capacity favors AAPL due to the lack of fragmentation afforded by the iOS ecosystem. Companies are, and will continue to have to prioritize development of mobile apps to ensure that applications have access to similar hardware to perform the desired task(s), are all running on the same version of software, and have the ability to deliver a consistent user experience (UX) for the tens-of-thousands of employees that these applications support. The same frustrations about fragmentation that have led commercial developers to develop first, and sometimes only for the iPhone will drive enterprise mobile app developer focus.
   
• Security Matters More: AAPL’s continued focus and unrelenting principles regarding security and privacy will only give it an advantage with corporate IT managers – executives who are keenly aware of both the powers of mobile, but also the related threats to their businesses. With its walled-garden approach of integrated hardware, software, and services, AAPL’s mobile device management platform provides a distinct advantage over other choices that continue to run on fragmented hardware and software, which only decrease the lack of control that corporate IT managers need in a sensitive environment.

As Enterprise Mobile Adoption Expands, AAPL Will be a Big Beneficiary

 We are now past the area where mobile in enterprise meant having a company-issued smartphone, which is still a big piece of the spend.  However, we are rapidly moving into the next phase where these mobile devices become a vital piece of the workflow for employees and engagement with customers. It is a convergence where the understanding of business needs meet proprietary app development and mass deployment to employees on cost-efficient devices in a secure environment. It is a huge area of opportunity that AAPL continues to highlight on its earnings calls, yet analysts continue to either tip-toe around it, or ignore it completely. And that is just the way AAPL wants it.

AAPL Watch: Much more Airbnb than Uber

Yesterday, there were data estimates which showed that AAPL is very likely the largest watch 'brand' in the world, as measured by revenue. The analysis estimated that AAPL's trailing twelve months (TTM) of watch revenue ($5.246 billion) surpassed that of Rolex, whose annual revenue was estimated at $4.5 to $4.7 billion.

While AAPL's ascension to the top watch brand revenue generator in about 2 years is no doubt astounding, it raises some questions about the overall industry - specifically, whether the AAPL Watch has cannibalized traditional watch sales or has grown the revenue pie. In many ways, the question is much more analogous to the debate of how much impact Airbnb has had on the hospitality industry than the 'clear-as-day' impact of how much hurt Uber has put on the taxi industry.

• Same Product? Much like hotels claim that Airbnb offers a different product, many traditional watchmakers have argued that the AAPL Watch is a completely different product that relies on silicon chips and a digital readout, rather than the hand-crafted precision of mechanical movements.
  
  In that vein, traditional watch connoisseurs would not consider the AAPL watch as an alternative to their mechanical watches, nor would a Millennial have the means to consider spending $7,000 on a Rolex. However, that is likely an extreme comparison. The more relevant question is whether a Millennial would consider an AAPL Watch over a traditional quartz watch in a similar price range, such as those offered by Fossil, Swatch or Michael Kors? It is this question that lends itself to a 'zero-sum game' where both products are viewed as equals and subsequent purchases are at the benefit of one, and the detriment of the other.
   
• Creating New Demand? I don't have any research evidence to support this claim, but I would argue that a large percentage of AAPL Watch owners did not wear a wristwatch prior to buying a smartwatch. The smartphone has replaced many devices in our lives - the digital camera, the calculator, the flashlight, and for some, the wristwatch. Millennials, in-particular, have proven to be far less likely to wear a wristwatch than previous generations.
  
  So if you go back to the Airbnb analogy, many argue that Airbnb has fulfilled demand that was never being funneled to hotels. Examples include getting an Airbnb rental instead of staying with friends / relatives or renting a home on Airbnb for a bachelor party instead of renting a place on another alternative accommodations platform. So in those cases, Airbnb has actually expanded the lodging revenue pie, rather than eaten into it.

If the argument is that the AAPL Watch has added more revenue to the wristwatch industry than taken away from it, then the natural counterargument is the fact that traditional watchmakers have seen significant financial decline over the past couple years. However, it would be wrong to assume that this decline is a direct result of the emergence and momentum created by the smartwatch. An article published in the Wall Street Journal in August 2016 detailed the sales decline of the high-end watch segment, and outlined many factors underpinning that struggle, many of which were unrelated to the emergence of smartwatches.

“Luxury watches are losing much of their luster. Blame a sluggish global economy and changing consumer tastes. Worldwide, Swiss watch exports dropped 16.1% in June from the year before. But exports to Hong Kong plummeted 29%, which retailers say is largely the result of a strong Hong Kong dollar and the Chinese government’s crackdown on gifting.”

— "Hard Times for Luxury-Watch Dealers", Wall Street Journal, August 5, 2016

There is no question that the luxury watch market has been in decline, but the aforementioned article was written about a year after the launch of the first AAPL Watch. And while the article acknowledges the emergence of smartwatches as a factor in the decline, it points to a many other economic issues as the underlying cause of the high-end watch market distress.

Final Take

Just as hotels should be worried about the exponential growth of Airbnb, and must proactively develop strategies to combat its disruptive effect, traditional watchmakers need to do the same. While smartwatches have eaten into the revenues / profits of traditional watchmakers, the extent of that cannibalization is unknown because of the new demand that smartwatches have created and in some cases (especially at the high-end), the lack of comparable products.

In my opinion, the disruptive effect of the quartz watch on traditional mechanical watches that began in the 1980s is very different than what the industry faces today with smartwatches. Quartz watches were a direct assault on traditional mechanical watches predicated on pricing. Smartwatches are attacking traditional watchmakers on functionality - the AAPL watch tells the time, yes, but it is also provides a digital gateway to services through applications that enable a wearer to make payments, request a ride, track fitness activity, etc.

So the traditional watch industry will face much larger, and much different hurdles in dealing with smartwatches than it ever did with the emergence of the quartz watch. We have already seen a response from LVMH's Tag Heuer who debuted its 'Connected' smartwatch in November 2015 running the Android Wear OS. Breitling came out with its B55 Connected smartwatch in December 2015 and most recently, Swatch announced its plans to develop its own smartwatch operating system, which it would license out. The success of these 'pivot products' is largely unknown, but the sense in the industry is that they are merely band-aids to address the much larger wound that the AAPL Watch has punctured.

AAPL Becomes Largest Watch Brand in World by Revenue

It is VERY likely that AAPL has become the largest watch 'brand' in the world, as measured by revenue. During its September 2016 special event when it launched the iPhone 7 / 7 Plus, as well as the AAPL Watch Series 2, AAPL CEO, Tim Cook, put up a very interesting slide. It showed AAPL as the second largest watch brand in the world, as measured by revenue, just behind Rolex for 2015 - a year in which AAPL only shipped watches for 9 months. I believe that slide needs to be adjusted:

After looking at the numbers and relying on some very intelligent analysts who have put forth reasonable quarterly estimates on AAPL Watch shipments for the past four quarters (June 2016 through March 2017), it is very easy to conclude that AAPL has overtaken Rolex in TTM revenue, and by a rather large margin - approximately $650 million. Rolex revenue has been stagnant and estimates have pegged its annual revenues at $4.5 billion to $4.7 billion, annually.

Further to this assertion is commentary that was recently provided by AAPL Management when discussing its Fiscal Q2 earnings:

Cook on state of the Watch product:

Opening Remarks:

"Apple Watch sales nearly doubled year over year. Apple Watch is the best-selling and most loved smartwatch in the world, and we hear wonderful stories from our customers about its impact on their fitness and health."

Analyst Q&A:

"We have seen the watch as a really key product category for us since before we launched it. We took our time to get it right, and we've made it even better with the Series 2 offering. And we're really proud of the growth of the business. The watch units more than doubled in six of our top ten markets, which is phenomenal growth, particularly in a non-holiday quarter. And so we couldn't be more satisfied with it."

“Name another company that can enter a stable industry over 100 years old & become the most lucrative player inside of two years...”

One Caveat:

It is important to note that AAPL is likely the largest watch BRAND as measured by revenue, but it is not the largest WATCHMAKER by revenue. The consolidation of watch brands under one company has created conglomerates like Swatch, which includes the Swatch brand, Omega, and Breguet (just to name a few). The luxury brand conglomerate LVMH has a number of luxury watch brands including Hublot, Bulgari, Zenith and Tag Heuer.

AAPL FQ2 2017 Earnings - 10 Key Takeaways & Projection Variances

After the close of trading on May 2, AAPL reported its results for its 2nd fiscal quarter of 2017 (ending April 1, 2017). Soon thereafter, AAPL hosted its normal analyst call to discuss its earnings as well as provide its annual update to its capital return program - the April earnings call has been the time where AAPL has chosen to update its shareholder return program, which includes changes to its dividends and authorized share repurchases.

Here are 10 Key Takeaways from AAPL's FQ2-17 Earnings Call

• 'Services' is a beast. Services revenue again topped $7 billion at $7.041 billion, a bit short of the holiday quarter (FQ1-17), where it hit $7.244 billion. It was also the first time that Services was the second largest revenue contributor of AAPL's 5 product segments. In his opening remarks, Cook reiterated the fact that the Services business is "well on its way to being the size of a Fortune 100 company." Just for reference, on the last Fortune 500 list, number 100 was Northwestern Mutual with annual revenue of $28.111 billion. This implies AAPL's expectation that its Services business will meet or exceed an average quarterly revenue run-rate of a bit north of $7 billion, which it just did in both FQ1 & FQ2.
  
  This is significant because it shows the underlying strength and engagement of AAPL's ecosystem and installed base. As a reminder, Services revenue encompasses AAPL's share of paid downloads & in-app purchases from its App Store, digital content revenue from iTunes, AAPL Music subscriptions, iCloud storage subscriptions, ApplePay residual revenue, AppleCare, and licensing of its Made for iPhone (MFI) technology provided to 3rd party peripheral makers.  More than anything, this revenue stream is particularly critical to AAPL because much of it is annuitant in-nature AND it has a very high profit margin (e.g., the revenue from paid App Store downloads is booked on a 'net revenue' basis with little-to-no attributable cost). The strong Services revenue undoubtedly contributed to AAPL coming in at the very high-end of its gross margin guidance (38.9%).  
   
• The App Store is Stronger than Ever: In its prepared remarks, AAPL indicated that App Store revenue grew 40% year over year to an all-time quarterly high AND the number of developers offering apps for sale on the App Store was up 26% over last year. It's a bit difficult to correlate App Store revenue to AAPL's Services revenue as AAPL only retains a percentage of sales (in most cases - 30%). However, it is safe to assume that the App Store is a huge driver of the Services revenue segment, regardless of the revenue retention rate.
  
  Additionally, AAPL indicated that 'paid subscriptions for our own [AAPL's] services and the third-party content offered on our stores' now exceed 165 million. That is a crapload of subscriptions and that momentum should continue to carry the Services segment to new highs. AAPL restated its ambition to double the size of the Services revenue segment by 2020.
   
• That is a lot of iMessages: AAPL indicated that during the Super Bowl this past February, people were sending 380,000 iMessages per second - more than double the number of messages sent during the previous Super Bowl. It's all about ecosystem - AAPL iPhone users don't pay to use the iMessage service, but it certainly is a huge benefit to staying on the platform as iMessage is not licensed out.
   
• Enterprise Penetration Continues to Grow: AAPL pointed out that its enterprise partnerships are really starting to scale, in-particular its partnership with SAP. SAP recently released the SAP Cloud Platform SDK for iOS at the end of March, and over 3 million SAP developers now with access to the tools needed to develop more powerful native iOS apps for enterprise. Additionally, IBM Mobile First iOS apps have been deployed on 3,300 client engagements. One specific company it pointed out was Capital One, where AAPL has helped empower the consumer banking experience by providing Capital One Associates with 40 native iOS applications running on nearly 30,000 iPhones and iPads. I believe a couple years back, Cook indicated that AAPL's enterprise business (not counting BYOD) had a $25 billion annual run-rate - I wonder what it is now?
   
• AAPL Watch - The Most Successful 'Disappointment' Ever: AAPL mentioned that AAPL Watch sales 'nearly doubled' year-over-year in the quarter, after what was also a very strong holiday quarter for the product - one might expect a post-holiday sales fatigue. One of the analysts even pointed out that many of the original competitors competing in the smartwatch space are either dropping out or re-evaluating it. Cook re-emphasized AAPL's dedication to the product and how difficult it is to curate the right experience on the wrist, thus leading to dwindling competition.
   
• AAPL Has a Huge Wearables Presence: AAPL categorizes its wearables (AAPL Watch, AirPods, & Beats headphones) into its 'Other Products' segment. It was interesting that when asked about AAPL's presence in wearables, Cook mentioned the following for the trailing 12 months: "...when we combine Apple Watch, AirPods, and Beats headphones, our revenue from wearable products in the last four quarters was the size of a Fortune 500 company". That's only going to grow considering the AirPods ($159 a pop) have only had very limited shipments due to heavy supply constraint.
   
• AAPL Pay Adoption Rolling Along: AAPL Pay may not have jumped out of the gates, but mainstream adoption (including my own) continues to increase with additional merchants supporting the technology. AAPL indicated that AAPL Pay transaction volume was up 450% over the past 12 months and it continues to roll out the service in more countries. In Japan alone, where AAPL Pay became available this past October, transit customers are already completing nearly 20 million transactions per month. AAPL Pay is not about the revenue stream as I believe it creates very little, but it is about additional touch-points of user engagement within the ever-sticky AAPL ecosystem.
   
• Retail is not dead everywhere: While headlines in retail suggest that the industry is facing its dooms-day scenario, AAPL continues on its aggressive retail brick-and-mortar expansion plans. It now has 495 retail stores worldwide, and just opened its first ever store in Dubai in late-April. Clearly, AAPL is not seeing the physical retail trends that is forcing others to shutter stores at a record pace.
   
• One-Quarter of a TRILLION Dollars of Cash: AAPL reported total cash of $256.8 billion in cash exiting FQ2 - a sequential increase of $10.8 billion. Of that $256.8 billion, about 93% of it (or $239 billion) was held overseas. It did raise another $11 billion of debt during the quarter bringing its total debt to ~$98.5 billion. Even so, netting out the debt still leaves AAPL with a massive pile of $160 billion of cash. If congress can ever get a tax reform bill passed with a reasonable repatriation rate, AAPL will undoubtedly be a huge beneficiary. 
   
• Huge Returns to Shareholders: Shareholders have not only seen large returns in share price appreciation, but they have also been the beneficiaries of $211.2 billion of AAPL's capital return program, which includes $60.2 billion of cash dividends and $151 billion of share repurchases. AAPL indicated that the Board has authorized an increase in the dividend by 10.5% to $0.63 per common share, and authorized another $35 billion of share repurchases. The capital return program has been extended by a year, and total returns at the end should be $300 billion with the majority of that coming in the form of share repurchases. The aggressive share repurchases signal that Management still believes AAPL's shares are undervalued. If you look at its multiple even at near-record highs, it's hard to argue with that.

Source: Seeking Alpha

So How Did I Do on My Projections?

Pretty well, actually.

• I missed the iPhone number, which effectively made me miss on revenue. I was a bit over on ASP as well.
• On total revenue, I only missed by $617 million, which is a 1.2% variance - not bad.
• Additionally, I was extremely close on gross margin (38.8% projection vs. 38.9% actual), and therefore my EPS number was under by $.04 ($2.10 actual v. $2.06 projection).

AAPL FQ2 Earnings Estimates

Date of Estimate: April 30, 2017
Date of Reporting: Close of Trading - May 2, 2017
Period: Fiscal Year 2017 - Q2
Period Dates: January 1, 2017 - April 1, 2017

FY17-Q2 Estimates:

Year-Over-Year Compare:

32GB Entry-Level iPhone? Keep Dreamin....

The public has been calling for AAPL to raise its entry-level iPhone models from 16GB to 32GB - a move the company recently made on the iPad Pro's (and added to the price to compensate). AAPL is all about squeezing margins out of its hardware.  This is no more true than looking at the way AAPL has historically adopted components for its products - if it doesn't think the latest version of a component is going to make a difference for the customer experience, they won't spend the extra money to include it.  Examples of this include:

• Foregoing the latest QCOM RF transceiver on several iPhone models because they didn't feel like the networks would actually enable the faster wireless speeds 
• Being one of the last handset OEMs to adopt an 802.11ac BT / WLAN Module to enable faster wi-fi speeds.  
• Consistently undercutting other OEMs on RAM - others have been piling in 4GB of RAM in their smartphones for years now - AAPL went to 2GB in September-2014 with the new iPhone 6 and 6 Plus handsets
• Moving the new 9.7" iPad Pro power wall adapter down to 10W, when the iPad Air 2 (an inferior product ships with a 12W plug).

The iPhone 6 and 6 Plus models were the first iPhones that included a 128GB storage configuration, and also the first in the product's history that eliminated the 32GB storage option.  The new storage configurations are 16GB / 64GB / 128GB, with each tier adding $100USD to the price. AAPL also eliminated the 128GB storage configuration on the legacy models (e.g., iPhone 6 and 6 Plus) and did not offer it on the new 4" iPhone SE.

Something very interesting happened to the iPhone's Average Selling Price (ASP) when AAPL changed the storage configurations and added the larger 5.5" Plus models (which started at $749 off-contract for 16GB) in September-2014 with the iPhone 6 and 6 Plus variants.  Even with currency headwinds, iPhone ASPs jumped significantly Y-O-Y:

• FQ1-15: $687 (+8%)
• FQ2-15: $687 (+15%)
• FQ3-15: $660 (+18%)
• FQ4-15: $670 (+11%)
• FQ1-16: $691 / $740 Constant-Currency (0% / 8%)

What's Driving Record iPhone ASP?

FQ1-16 (Dec-15) produced the highest iPhone ASP in the history of the most profitable product franchise, both on an actual and constant-currency basis.  However, the trend of rising ASPs really started with the iPhone 6 / 6 Plus.  While one could argue that the iPhone 6 Plus (with its incremental $100 price-point) is driving ASPs higher, the fact remains that the iPhone 6 and 6S models are still the most popular handset within the installed base.  Mixpanelshows that as of April 15th, the iPhone 6 and 6S constitute over 52% of all iPhone usage,while the 6 Plus and 6S Plus represent a little over 14%.

So while it is true that the 5.5" models are helping overall ASPs, there is something going on with the 4.7" models (6 & 6S) that is a much bigger factor.  As AAPL continues to add better cameras with more functionality (e.g., 4K video), people are finding that 16GB just isn't enough storage as they still like their photos stored locally (on the handset). So, what they're doing is jumping from the entry-level 16GB to the mid-level 64GB and shelling out an additional $100. According to an analysis by IHS Technology below, NAND flash storage prices continue to fall and are now at ~$0.35 per GB.  So, 16GB of storage is costing AAPL $5.50 and 64GB is costing the company an incremental $17. Meanwhile, they're charging the customer $100, which equates to an incremental $83 of margin on each 64GB convert. Note that the data is for a 6S Plus model, but is used to show the effect of additional storage from a component cost and incremental margin standpoint with all else being equal:

Source: IHS Technology - Estimated Cost of Apple iPhone 6S Plus (A1634)

The Bigger Issue With Offering a 32GB Entry-Level Storage Configuration...

If you believe, as I do, that the iPhone's record ASP is being driven more by people migrating up to larger storage configurations than by adopters of the larger 5.5" models at the higher price-point, then the bigger issue is the amount of customers that have been willing to pay the extra $100 for the extra storage that would feel comfortable with 32GB being enough:

"AAPL would lose significant revenue (and associated margin) from the "tweeners" who have been moving up to 64GB storage configurations at a $100 premium that would be happy to settle with 32GB of storage." 

If AAPL was to start offering a 32GB entry-level configuration at the same $649 / $749 entry-point (for the latest flagship 4.7" and 5.5" models, respectively), not only would they be losing margin by having to add in the extra 16GB of storage, they would also find a lot less customers moving up to the 64GB model.  After all, a lot of people likely fall into the "16GB is not enough and 64GB is probably too much" category.  ASP trends indicate that those people are playing it safe and shelling out the extra $100 at the luxury of excess capacity, rather than the risk of falling short of storage just when they're about to leave on a vacation.  If they had the option of a 32GB model, those people would likely resort to practicality and settle for the additional 16GB rather than pay the $100 premium for the extra 48GB.

The Bottom Line...

Could AAPL begin offering 32GB as the standard entry-level storage on new iPhone models?  Absolutely.  Should they? Financially-speaking - Absolutely Not.  The ASP trends' data proves that by keeping the entry level at 16GB, people desire the additional storage so much that they're willing to spend the extra $100 for the additional 48GB to move to the next storage tier (64GB). And for every person that does that, IHS' data would suggest it's an additional $100 on the top-line and $83 of gross margin.  83% margin is never a bad thing in tech hardware, and AAPL knows this better than anyone. 

Another iPhone Launch - the 6S / 6S Plus

Apple (AAPL) officially launched its new iPhone handsets, the iPhone 6S and 6S+ yesterday (Friday September 25th at 8:00AM local time). I have been through the launch “shenanigans” a number of times – as a consumer, investor, re-seller and blogger. Ironically, I have been in Hawaii for the past three launches, but was in Dallas for the 6S / 6S+ launch yesterday. I wanted to outline a few items that I observed about the new products, the launch, and the financial implications of the fiscal calendar.

WHAT DID I GET?

I opted for the 128GB T-Mobile (unlocked) 6S+ in Space Gray. As a frequent business traveler, I like the bigger screen, the extended battery life and the 6+ / 6S+ are still the only iPhones that have Optical Image Stabilization (OIS) – most people don’t know this (and I would bet, most do not care either, haha).

THE NEW PHONES:

This year was a “tock” year in the tick-tock tech nomenclature, which for Apple means same form-factor (for the most part), with new components and an OS with certain features that can only be used on the latest versions. I am not going to do a full of review the phone here, but here is a summary of the key feature upgrades:

• TouchID: TouchID is ‘markedly’ faster and more reliable than in any other previous iOS device.  This may seem ‘inconsequential’, but there is near instantaneous access now between ‘locked’ and ‘unlocked’. If you want to see how much faster, click here.
   
• New SoC: Apple continues to move its proprietary chip designs (based on ARM architecture) forward and the A9 promises 70% more CPU performance and 90% more graphics performance than its predecessor (the A8) – what this means for actual ‘normal’ use – I can’t really tell you. For the first time, Apple has embedded the M9 motion coprocessor in the A9 chip, which should improve efficiency and battery life.
   
• 2GB of RAM: Apple has historically been very conservative with RAM, with the iPhone 6 and 6+ still only having 1GB of RAM. Apple has doubled the RAM in the 6S / 6S+ to 2GB. Once again, what this means for your normal user, not sure yet, but certainly factors into some of the new features.
   
• 3D Touch: Ok, let’s face it. 3D Touch was, by-far, the most discussed feature of the new handsets. Essentially, it is as it sounds – it enables a 3rd dimension (pressure sensitivity) that enables direct access to certain key features within apps. One example is if you hard-press on the camera icon, it gives you direct access to a set of features such as taking a selfie, recording video, etc. This may sound like “I’ll try it a few times and never use it again”, but I think that is very premature. I view 3D Touch as all about efficiency – in the way you navigate the interface, which enables faster access to the features within apps that you use the most. I think we know that Apple has a pretty phenomenal developer community and they will probably do some things with it that even Apple has not thought of. Most apps are not 3D Touch enabled yet, so we’ll just have to wait-and-see.
   
• 12MP iSight Camera: Apple has never had the highest MP cameras (6 and 6S used an 8MP shooter), but it seems that its control of the entire silicon infrastructure has allowed it to stay on-par, if not exceed, its competitors, when it comes to image quality. Additionally, the new camera enables 4K video, which is sure to make all those that opt for the 16GB configuration feel very inadequate.  
   
• Rose Gold Option: The rose gold option was new for the 6S / 6S+ and it appears to be the most popular color as all configurations (storage capacity / carrier) of the rose gold color sold out first and have the longest current wait times. The ‘most mysterious Apple analyst in the world’ (they need to make a Dos Equis commercial about him) has gone on record saying that as much as 40% of pre-orders were rose gold 6S models. The real question is – could a guy get away with the rose gold variant? After seeing it in person – more than I thought, but still questionable.
   
• Weight: The 6S is 14 grams heavier (10.8%) than the 6, and the 6S+ is 20 grams heavier (11.6%) than the 6+.This weight gain was originally thought to be due to the new 7000 series aluminum chassis, but it is actually attributed to the taptic engine and associated display components that enable the 3D Touch functionality. I will say that the weight is noticeable. After all, you hold this thing a lot throughout the day – all the more reason why the Apple Watch serves a big purpose - limiting the need to pull your phone out (oh yeah, it tells time too).

THE PRE-ORDER PERIOD AND SAME-DAY RESERVATION SYSTEM:

Apple has, for all the launches I can remember, had a pre-order period between a few days after the product unveiling and the actual availability:

Note: [1]: The iPhone 5S was not available for pre-order and was available in extremely limited quantities on launch day – this was largely attributed to this model being the first where Apple implemented its TouchID biometric authentication home button based on technology acquired from AuthenTec in July-2012.

In any case, the decision for the longer pre-order period could have been due to a number of reasons:

• Simultaneous China launch
  One of the big mysteries from the 6/6+ launch in 2014 was the delay in the launch of the new handsets in China due to necessary “regulatory approvals”. The 6/6+ was eventually launched in China on October 17, nearly a month after the U.S. launch. It is possible that Apple wanted to ensure a simultaneous U.S. and China launch with the 6S and 6S+ this year, and therefore had to wait that extra week to obtain necessary approvals.
   
• New Same-Day Reservation System
  This was the first iPhone launch where customers could reserve a specific model when pre-orders started and be able to have a guaranteed time slot to pick-up the phone without having to wait in some crazy line – it is basically the “Personal Pick-Up” equivalent. In past launches, the Personal Pick-Up reservation system usually becomes available after the launch weekend. With this new system, Apple very well could have wanted that extra time for people to utilize the reservation system. It proved very effective and efficient for those (like me) who used it – no lines, no camping out, no robots (yup – robots). I put this pretty high up on the ‘reasons list’ for an extended pre-order period.
   
• Apple Financing
  As many people have heard, Apple is now offering its own financing (“The iPhone Upgrade Program”) to compete with the carriers’ installment plans. Apple is using Citizens Bank to provide 24-month financing on its iPhones to customers with an optional upgrade right after 12-months. The new plan allows a customer to finance with Apple and have an unlocked phone that it can then take to its carrier of choice and basically be on a month-to-month plan. While I will not discuss the ramifications for Apple or the carriers with this new plan, there very well could have been an extra ramp-up period needed to ensure that this could be logistically supported. The Apple-provided financing seems to be quite popular as people would rather direct their loyalty to Apple, as opposed to the wireless carriers. There were multiple reports floating around about Citizens being overwhelmed with the amount of credit checks it was running for these financings yesterday. A sales rep that I spoke to said that a little over half of the phones he sold during his 8-hour shift were done through Apple’s financing program.
   
• Revenue Smoothing
  While Apple claims that it never does anything for the “90-day clicks” (e.g., quarterly financials), it is still the most valuable and watched company in the world that is judged on its quarterly reporting. Apple recognizes revenue on its iPhone units using the following criteria: In-store purchase at an Apple retail store: Point-of-Sale; Online purchases through Apple.com: Evidence (via signature from a 3rd party carrier) that delivery has been made; and, 3rd Party channel sales: Sell-in to authorized 3rd party retailers (wireless carriers, big box retailers, etc.) – note that these sales are recognized at the point when the channel takes delivery, regardless of when these units are sold through to a 3rd party.

So what’s the point? Well, given that Apple’s fourth and final fiscal quarter will end today (September 26th at 11:59PM PDT), there will only be 2 full days of sales of the 6S / 6S+, as compared to last year when there was 9 full days (a point originally surfaced by my friend, Chuck Jones of Forbes – the most accurate Apple analyst in the world). That extra week may not seem like a lot, but when you think about the types of volumes of iPhones that Apple moves at the front-end of a launch, it is very significant. Last year, Apple shipped (or recognized sales of) approximately 10 million units in its launch weekend alone, and it was extremely supply-constrained (as it is this year). I have done an analysis of what the potential revenue and unit shift impact could be of having only 2 full sales days of the new iPhones (6S / 6S+) this year versus the 9 full sales days last year:

Notes & Assumptions:
[1] For FQ4-14: A low-end of 15M iPhone 6 / 6+ units and a high-end of 20M iPhone 6 / 6+ were included. Of the 10M units reported as sold during 2014 opening weekend – 50% sold on Friday, 30% sold on Saturday, and 20% sold on Sunday.
[2] For FQ4-15: A low-end of 11M iPhone 6S / 6S+ units and a high-end of 13M iPhone 6S / 6S+ units will be sold on opening weekend, with the same pro-rata allocation by-day as 2014.  However, amounts only include Friday (9/25/15) and Saturday (9/26/15) as all sales on Sunday (9/27/15) will be pushed into FQ1 16.
[3] ASP of $650 – this is an estimate based on 6 / 6S ASPs knowing that ASPs were depressed at the beginning of the cycle and will be again due to supply constraints of the 6+ / 6S+ model, which has a +$100 entry price.

So ultimately, I am estimating that the 7 days of fewer sales of the new iPhones that Apple will be recording in its fiscal fourth quarter on a year-over-year basis will ultimately shift:

• Between 6.2M and 9.6M iPhone unit sales into the holiday quarter (FQ1-16)
• Between $4.0B and $6.2B of iPhone revenue into the holiday quarter (FQ1-16)

I did mention “smoothing”. It is no secret that Apple is facing tough year-over-year compares this upcoming holiday quarter. They shipped a staggering 74.5M iPhone units in last year’s holiday quarter (most of which were assumed to be 6 / 6+ models) and recorded total revenues of $74.6B. So, this shift may actually prove to be a tailwind for that year-over-year compare. Of the 32 analysts polled on Yahoo! Finance, they have an average estimate of $74.54B for Apple’s FQ1-16, which is pretty meager growth of less than 3%. While that number may rise, there is still many questions about growth that will probably keep it range-bound.

BUT WHAT ABOUT THIS QUARTER?

So with my estimates of $4B - $6B of revenue being shifted to the holiday quarter, the question becomes, how will Apple make up for it this quarter? After all, the company provided decent guidance of revenues between $49 billion and $51 billion. Assuming they come in at the top-end of that range (as has been the norm), it would imply year-over-year revenue growth of 21%, which would include forex headwinds (likely 8% – 10%).  I think it is safe to say that Apple knew exactly when they would be launching the new iPhones and how the quarter cut-off would affect the recording of revenue – meaning, I don’t think Luca Maestri provided the guidance to the Street and then looked at the calendar and had an “oh crap” moment.  Here is where I think they make it up:

• Stronger sales and higher ASPs of the iPhone 6 / 6+ models than the 5S / 5C leading up to the respective product refreshes. 
  You will certainly have that contingent of buyers that will hold off on purchases knowing that a refresh is coming. However, the “S” refreshes tend to be more subtle to the general public and there was so much ‘buzz’ last year about the larger screens which I believe led to a lot more people hold off on buying. Going along with that, let’s call a dud a dud – the 5C did not sell very well and I would imagine that Apple was not refilling the channel on those SKUs in FQ4-14. In fact, they were likely just watching any remaining channel inventory bleed off until it was officially discontinued.  Additionally, the 6 / 6+ has significantly higher ASPs than the 5S / 5C did. In fact, even with the challenging forex headwinds, iPhone ASPs were up to $660 last quarter. Apple went so far as to mention that on a constant-currency basis, ASPs would have been up by an additional $24 to $684. Given these data points, there is clearly strong demand for higher storage configurations and the 5.5” 6+ form-factor (+$100 addition to ASP).
   
• The Watch
  The Street was not particularly impressed with implied watch sales when the company reported in late-July. Estimates have been all over-the-board, but I would say consensus was about 2.5M units shipped. On its earnings call, Apple noted significant supply constraints, including not being able to put inventory into its own retail stores until mid-June – specifically it noted that distribution was limited to 680 points-of-sale (for perspective, the iPhone is distributed at over 200,000 points-of-sale). In the September quarter, Apple will receive the one-time benefit of building a channel inventory for Watch, where revenue is reported on a “sell-in” basis, as well as expanded geographical distribution through its own retail stores. This expanded channel and geographic distribution includes:
  
  Best Buy. The electronics retailer reported that given strong demand, it had accelerated the rollout of the Apple Watch to include 900 of its “Big Box” stores carrying the product by the beginning of September, and all 1,050 “Big Box” stores carrying it by the end of September. Given that sell-in happens in-advance of actual sales to end-customers, I would imagine that all of this sell-in revenue will be captured in the September quarter.
  
  U.S. Wireless Carriers. Both Sprint and T-Mobile indicated that they would both be carrying the Apple Watch starting on September 25th at 200+– once again, sell-in channel revenue that will be captured this quarter.
  
  International Retailers. In addition to Best Buy, T-Mobile, and Sprint, Apple has expanded 3rd party Watch sales to retailers throughout Europe, Australia and Canada.
  
  Geographic Expansion. Lastly, Apple expanded sales of Apple Watch at its own retail stores in 7 countries (Italy, Mexico, Singapore, South Korea, Spain, Switzerland, and Thailand) on June 26 and another 3 on July 17 (Netherlands, Sweden and Thailand).

 While the 3rd party channel inventory build will be a nice tailwind revenue stream in the September quarter, it is unknown how many units are being carried by these retailers. Additionally, there is a one-time benefit nature to this revenue as once it is established, Apple will refill it, but you’ll likely not see the unit sell-in at the levels they are to initially establish it. I fully expect that once the holiday season rolls around, Apple will further expand distribution of Apple Watch in the United States and abroad, which could be the second catalyst to Watch revenue growth. In the United States, I could foresee the following being strong candidates to carry the product: Hermes (Confirmed – sales to start in October – proprietary model); Target (Sport only); Nike (Sport only); Nordstrom, Neiman Marcus & Bloomingdales (Watch and maybe Edition).

OVERALL THOUGHTS:

• The iPhone 6S and 6S+ appear to have gotten off to strong starts with healthy demand (as evidenced by lead times) and will receive a nice tailwind from the quarter cutoff helping with the year-over-year compare;
   
• The iPhone units and revenue that will be shifted to the holiday quarter (FQ1-2016) due to the quarter cutoff will be made up by: Stronger sell-through and higher ASPs of the legacy 6 / 6+ models, and strong watch revenue due to substantial expansion of the 3rd party channel as well as expanded geographic distribution.
   
• The mechanics of iPhone launch distribution (e.g., reservation system) and the new financing programs are both net positive to the brand and will further increase retention of the growing installed base;
   
• Apple will report strong Mac sales based on the back-to-school season and very weak iPad sales, neither of which will be significant to the Street’s sentiment; and finally,
   
• I will be keenly interested in any changes to the revenue recognition of iPhone sales specifically related to units financed through Apple’s Upgrade program. 

PDF File

A 'Refreshing' Exit For Apple's iPhone Channel Inventory

I previously estimated that AAPL would need to draw down its channel inventory by around 2.5 million iPhone units in order to meet the $2 billion channel inventory draw down (across all product lines) that the company projected on its FQ2-2016 earnings call.

That 2.5 million units turned out to be significantly less than the actual number of iPhone units (4.0 million units) that AAPL cleared from the channel in FQ3-2016. My 2.5 million unit estimate was significantly off for a couple reasons (the latter being the most significant):

• I projected iPhone channel inventory draw down based on an ASP of $640, which turned out to be $45 higher than the actual ASP of $595 - a factor of both forex and a strong mix of the SE model.
   
• Actual channel inventories were reduced by $3.6 billion (across all product lines) compared to the projected $2.0 billion, of which the majority the company said was related to the iPhone.

Performance within the iPhone product line:

To understand the full dynamics of the unprecedented iPhone channel inventory draw-down, it's first important to look at how the various models performed:

The iPhone SE: The iPhone SE's popularity was underestimated by the company, but it was able to adjust production to satisfy demand. AAPL stated that the iPhone SE was in short-supply for basically the entire quarter, although it was in supply-demand balance by quarter's end. This popularity also was seen in the $65 y-o-y drop in ASP, of which $20 was attributed to forex.

The iPhone 6S and 6S+ underwhelmed: It is not a "shocker," but the 6S and 6S+ has not sold as well as expected, which was no more evident than in Tim Cook's response to a question about the upgrade cycle on the earnings call:

"...the iPhone upgrade rate for the iPhone 6S is very similar to the iPhone 5S. And I guess in retrospect, maybe that was a predictable thing, although we didn't predict it in the beginning." (Emphasis added)

How iPhone product performance factored into the massive channel inventory drain:

Simply put, the iPhone SE played a major role in AAPL's quarter in a couple of ways:

• Demand stimulus: It helped AAPL hit the high-end of its revenue guide by creating a new demand stimulus for the product category that makes up the majority of the company's revenue.
   
• Unit volume target: Although AAPL states it does not manage to The Street, it is widely-known that The Street puts extreme scrutiny on iPhone shipment volumes, not ASP. The iPhone SE enabled AAPL to not only hit unit shipment expectations, but it also helped it drain significantly more 6S and 6S+ units from the channel than it had projected. AAPL stated on its earnings call that the 4 million unit channel draw-down was of the "higher-end" iPhones, which one could logically infer were 6S and 6S+ units.

Implications for FQ4 and the iPhone 7:

While it might be easy to assume that the strong iPhone SE performance was a one-time benefit, it will certainly factor into the current quarter's performance (FQ4-2016), which is expected to include a product refresh (the "iPhone 7"):

• Low-end of target channel inventory: By enabling AAPL to clear the channel of 4 million iPhone 6S and 6S+ models, the company exited the quarter in a favorable position as shown by Cook's response to a question on the earnings call about iPhone channel inventory:

"...we were able to end basically right at the bottom end of our range and we view that as a good thing, not a bad thing. Obviously the revenues could have been much higher if we would have expanded the channel, but if you don't need to do that, that's not how we think about the business." (Emphasis Added)

• Model composition of channel inventory: In FQ2-15, the company drew down 1 million iPhone units in advance of the 6S / 6S+ refresh in Sept-2015 and also exited at the low-end of the 5-7 week forward-looking channel inventory target. What is different about this year's channel inventory is that the mix is likely much more favorable for the product refresh. As the SE was in supply-demand balance by quarter's end, you would have to assume that the channel inventory is far more favorable with a 'healthier' mix of SE units combined with a substantially reduced amount of 6S / 6S+ units.

AAPL has positioned itself, via the unexpected success of the SE, to unburden itself from excess 6S and 6S+ units heading into the expected product refresh in September. FQ2-2016 was a positive quarter for AAPL on a number of levels, but one of the most significant and least discussed was its ability to clear the channel of a couple million more units of the underwhelming 6S and 6S+ than it had originally projected.

I believe Cook's uncharacteristic commentary about a specific product's channel inventory during his "prepared remarks" to open the earnings call underlies the optimism that was recaptured during FQ2-2016:

"iPhone accounted for the vast majority of the channel inventory reduction. iPhone unit sell-through was down just 8% year on year, an even greater improvement over the March quarter than we predicted, and we expect the September quarter sell-through comparison to improve further. We feel good about our channel inventory levels and believe they position us well for the months ahead." (Emphasis Added.)

Apple Channel Inventory - FQ3-2016 Takeaways

Despite my prediction of relatively flat iPhone channel inventory movement exiting fiscal Q3, Apple drew-down 600,000 units from the channel, which put them at the low-end of its 5-7 week forward-looking target range.  The draw-down is not all that surprising given that the 6S / 6S+ are both expected to launch in the current quarter and Apple has historically always taken down channel inventory in a quarter preceding an iPhone refresh.

Source: AAPL 10-Q Filings and Earnings Call Transcripts from Seeking Alpha

Katy Huberty of Morgan Stanley probed on this a bit with Cook in the Q&A:

• Q: ...why drain channel inventory when iPhone 6 is selling so well?
• A (Cook): As Luca mentioned, the channel inventory did go down by 600,000. We sold more units than we thought we would and so that was a part of that. The other part of it is that we always run with just the amount of inventory that we think we need. And so to the degree that sales are distributed in the countries with disproportionally with shorter supply chains, or the standard deviation demand is less, we would always choose to have less.  And so in this particular quarter, we were able to end basically right at the bottom end of our range and we view that as a good thing, not a bad thing. 

I interpret this as Cook basically saying that the sell-through was stronger-than-expected and that they chose the "conservative approach" to avoid future large fluctuations in channel inventory (e.g., FQ1 2013, FQ4 2013).

Here are a few things that I think the channel inventory movement means:

• Apple will, as widely suspected, refresh the 6 and 6+ at the back-end of the current quarter (late-September) given the historical nature of draw-downs on this particular product.
   
• Both Cook and Maestri indicated that the channel inventory exiting the current quarter was at the "low-end" or "bottom end" of the 5-7 week forward-looking range. If you assume, as I have, that channel inventory was likely at 5-weeks - this comes out to 3.29M units per-week (16.45M / 5-Weeks) of forward-looking demand. If you extrapolate this to the 13-week quarter, it implies forward-looking demand of 42.77M units. However, given the nature of refreshes with so many units back-loaded, it would be incorrect to assume that demand is equally weighted by-week throughout the quarter.  For example, during FQ4 2013 and FQ4 2014, the launch weekends of the 5S / 5C and 6 / 6+ accounted for 27% and 25% of reported unit sales for the quarter, respectively.
   
• And one other thing - channel inventory reflects inventory held by 3rd party sellers, which does not include sales made directly by Apple - either through its brick-and-mortar or online stores.

AAPL's Big Surprise (March-2016)

AAPL held its annual spring event on March 21st, which Cook claimed would likely be the last media event ever held on the current AAPL campus as the company migrates to its new headquarters, which will have a much larger, state-of-the-art auditorium for future product unveils.  So what did they announce?

• Environment - AAPL discussed its commitment to the environment. The company showcased its ability to run 100% of its U.S. operations on renewable energy and now has 93% of its Chinese operations on renewable energy. Additionally, AAPL showcased a new R&D project called "Liam", which is a robot that is able to facilitate the recycling and reuse of components by using precision robotics to breakdown the components of old iPhone's for alternative use.
   
• CareKit - AAPL announced a new software development kit focused on disease management - a creation off of the success the company has had with its ResearchKit platform - it's an open-source project.
   
• tvOS 9.2: AAPL announced that it had released a new version of its tvOS software for the Apple TV. Improvements include the ability to create app folders, bluetooth keyboard support and Siri remote dictation.
   
• iOS 9.3: AAPL announced the release of iOS 9.3 for all of its latest iOS devices.  The main improvements include a new "night vision" feature, upgrades to its Notes app (password protection & sorting), and upgraded CarPlay features.
   
• New Apple Watch bands: AAPL introduced new bands made from a nylon material & introduced new colors of both the sport straps and milanese loop bands.
   
• Apple Watch Sport price reduction: AAPL reduced the entry-level price on the The Apple Watch Sport (aluminum case) with the 38mm now starting at $299 and the 42mm starting at $349 - both down $50.  Interestingly, they did not move the price down on the Apple Watch (steel case).
   
• iPhone SE: AAPL introduced the newest member of its iPhone family - an upgraded 4" iPhone w/ the same chassis as the iPhone 5S, but with significant upgraded internals [more below]
   
• iPad Pro 9.7": AAPL also introduced a smaller companion to the 12.9" iPad Pro introduced in October that has many of the same features, and even some new ones (upgraded screen technology, 12MP camera w/ flash, & 256GB configuration) that leaves its larger 'brother' yearning.

Like many things AAPL-related these days, much of these announcements (mainly on the product side) were already known via various leaks from the supply chain and other "sources familiar with the company".  So the biggest surprise was not any of the new products but rather, the price of the iPhone SE.

AAPL Surprises on Price, but Rarely to the Downside:

The iPhone 5C 'saga'

In September-2013, AAPL introduced its first plastic iPhone - the iPhone 5C. It wasn't described as plastic, but for all intents-and-purposes, it was.  The 5C was expected to be AAPL's foray into the mid-tier priced smartphone market, until it wasn't. The entry-level 16GB 5C (which was essentially the iPhone 5 in a colorful plastic shell) started at $549 (off-contract), which was only $100 cheaper than the flagship at-the-time (the iPhone 5S). The 32GB version was $649 (off-contract), which was equal to the base-price of the entry-level 16GB 5S.

Nobody knows exactly how many iPhone 5C's AAPL ended up selling prior to its discontinuation in September-2015, but consensus is that the product never really caught on in large part, because of price, and overall lack of the latest features.  I was actually very favorable of the 5C - it was a great phone with good build quality, but like many, my only complaint was that it lacked the features that I had grown used to with the 5S (TouchID mainly).

The iPhone 5SE 'surprise'

After hearing Greg Joswiak (which was somewhat of a surprise in-and-of-itself) go through all of the specs of the new iPhone 5SE, I was completely expecting the entry-level 16GB configuration to be priced at $499, which would be $50 less than the entry-level iPhone 6.  That made sense to me based on prior AAPL pricing decisions combined with the specifications of the new device:

Source: www.apple.com

So out of 19 different specifications, the iPhone 5SE wins on 6 of them [Green shaded cells], while the iPhone 6 wins on 2. They are 'equals' on 11 of them [Yellow shaded cells]. Some may argue that the 4.7" screen size is not necessarily a positive, but given the acceleration of iPhone sales post Sept-15 (launch of 6 & 6+), it's pretty clear that the broader market favors larger screen phones. 

From a pure "spec" basis, I was actually pretty surprised by the 2GB of RAM in the 5SE - AAPL historically has been very conservative with RAM in its iOS devices.  The iPhone 6S / 6S+ were the first iPhones to get 2GB of RAM and even the iPad did not get 2GB of RAM until the iPad Air 2, which was released in October-2014.  The new 9.7" iPad Pro is also only running off of 2GB of RAM, as compared to the 12.9" iPad Pro, which has 4GB.  My 'guess' is that the bare minimum amount of RAM needed to fully utilize the power of the A9 SoC processor is 2GB. I'm sure AnandTech will be able to discuss it in much more depth, and with much more expertise that will put my speculation to shame.

Price:

Back to price. I would argue that this is AAPL's first foray ever into the "mid-tier" smartphone market. I do not consider lowering the price on legacy models to the "mid-tier" equivalent to pricing a new phone with the latest specs at the "mid-tier".  Many will argue that paying $399 for a phone that's been on the market for over 2.5 years is ridiculous. What those same people don't realize is that this $399 phone has specs that are superior to a phone released in September-2015 on many different levels, AND is $150 cheaper.  

AAPL truly astonished me with this pricing..and in a good way.  I think it's a clear sign that AAPL has generated enough economies of scale by leveraging tooling on a proven chassis & a global supply chain, to make a quality phone with sufficient profit at a "mid-tier" price point.

Will people buy it?

People buy smartphones on the specs that matter most to them - and generally-speaking, those are consistent across the board. Most people do not know, nor care what SoC (processor) is in their smartphones; they also don't care how much RAM is in the phone.  What they do care about is the camera, the screen size, the battery life, and the price. That said, as shown by AAPL's charts during its keynote on Monday, there are still many iPhone users that value the one-handed use that a 4" phone affords.  When you combine that with the upgraded camera, increased battery life and the price-point, I think the iPhone SE has a very good chance of becoming a successful addition to the current iPhone lineup.  It's not going to win over people who just want the bigger screen sizes.  But, it's also not going to provide a "compromised" experience - something that the iPhone 5C did in spades.

I am excited to see the reception of this 'new' phone from the masses.

The Bottom Line:

As smartphone adoption continues down the path of saturation abroad, AAPL's ability to continue attracting the emerging middle class to its most profitable product will become increasingly important.  Bringing an 'accessible' smartphone to the market with the company's incredible brand-power will enable it to reach a demographic that historically settled for "dumbed-down" versions of its latest models.  The iPhone SE is on-par with AAPL's flagship models, but at a significantly reduced price-point, and that will enable it to continue building sales overseas in markets that never could afford its products.

MacRumors has compiled a number of reviews that are generally favorable to AAPL's newest iPhone:

iPhone SE Reviews: Blazing Fast with Impressive Battery Life

The iPad Pro 'Mini' Review

On Thursday March 31st, AAPL shipped its 2nd iPad Pro - a mini version of its 12.9" older 'brother' in the traditional 9.7" form factor - the same size display that the original iPad and every iPad since (with the exception of the Mini & Pro) have had. Here's my take on the 9.7" iPad Pro.

The Good:

• Weight & Size: The 12.9" iPad Pro is a great machine, but frankly, it's like carrying around a 13.3" MacBook Air once you add on a silicon case and the AAPL Keyboard.  The 9.7" iPad Pro maintains basically the exact same profile (dimensions - including weight) as the iPad Air 2.  It is definitely a feeling of "welcome back" when you pick up the new iPad Pro and remember how light and thin AAPL has achieved with these devices without compromising battery life.  There is a time-and-a-place for the 12.9" iPad Pro, but for many things, the 9.7" form factor is "just right".
   
• Performance: The 9.7" iPad Pro carries the same silicon as its bigger brother - a 3rd-gen 64-bit A9X CPU with an embedded 3rd gen M9 motion co-processor.  It should be noted, however, that the 9.7" CPU is clocked slightly lower (2.16 GHz) compared with the 12.9" (2.24 GHz), which produces slightly lower single-core and multi-core scores on all of those benchmark scoring apps.  It should be noted that I am not a gamer and have not noticed.
   
• Screen: So AAPL's big feature on the 9.7" iPad Pro was the "True-Tone" Display, which automatically adjusts the color gamut based on the lighting conditions.  Essentially, I see it as a much more powerful and precise version of the "Auto Brightness" feature.  However, instead of adjusting brightness, it adjusts the actual color.  I have tried this out in the sun and then back in darker light and it is pretty amazing.  It definitely cuts down on reflectivity and also produces much more accurate colors in different lighting situations.  This technology should be the standard on AAPL displays going forward as it really does make a difference.
   
• The Speakers: Like its 12.9" counterpart, the 9.7" Pro has 4 speakers and they put out ample sound, or rather, as much as you could ever expect from a device that is 6.1mm thick and weighs less than a pound.  The fact that you have sound coming from all 4 corners is a huge bonus.
   
• AAPL Pencil support: I have praised the AAPL Pencil as likely the best AAPL iOS accessory of all-time and it works exactly the same on the 9.7" Pro as it does with its larger counterpart.
   
• "Antenna-Hide": On every previous iPad that has ever shipped with cellular connectivity (including the 12.9" iPad Pro), AAPL has this plastic antenna bar at the top that is either white or black - it never matches the color of the chassis and is just ugly.  The 9.7" iPad Pro no longer has that plastic discolored cutout, it merely has an antenna line that is nearly identical to the lines that people have complained about on the iPhone 6 models.  However, I will take the lines over the ugly plastic cutout any day - it's not perfect, but it is a step forward.

The Bad:

• Does not Support USB 3.0: So I just got introduced to the 29W USB-C power charger, which I am using with the 12.9" iPad Pro and it is amazing.  It basically charges the 12.9" iPad Pro 3x faster than the 12W power adapter that it ships with.  The 9.7" iPad Pro does not support any USB 3.0 accessories (including the 29W power adapter) and mysteriously ships with a 10W power adapter as compared with the 12W standard.  It's one of those choices that you wish AAPL would have thought a bit more about when it comes to standardizing certain features for the "Pro" moniker - USB 3.0 support SHOULD BE one of those standards.
   
• 2GB of RAM? Once again, I am mystified by the 2GB of RAM, as compared to the 4GB that ships in the 12.9" version.  Like USB 3.0 support, I think 4GB of RAM (or at least parity) across the "Pro" lineup should be the standard.  The fact that the 9.7" iPad Pro ships with the same amount of RAM that is in the new 4" iPhone SE makes me wonder.  The only thing I can think of is that the A9 / A9X chips require a minimum of 2GB of RAM, which would justify the 2GB that is shipping inside the iPhone SE (which also runs the A9 SoC).  It seems that the amount of RAM needed has nothing to do with screen size because the iPad Pro 9.7" display (3.1M pixels) has 4.3x the number of pixels as the 4" iPhone SE (727K pixels).  So I question what functionality or specs of the 12.9" iPad Pro necessitate twice the amount of RAM as the 9.7" version -or put another way- what lack of functionality in the 9.7" version allows for it to get by with just 2GB of RAM? 
   
• The Camera Hump: So as AAPL increased the iSight Camera, they also increased the thickness of the sapphire cover glass so it does not sit flush with the chassis - same as with the iPhones 6, 6+, 6S, and 6S+. It is just annoying.

The "Whatever":

• Improved Cameras: I have never been an iPad camera user and I don't think I ever will be.  Sure, the new 12.0MP iSight camera on the 9.7" iPad Pro with true tone flash is a welcome addition for many.  For me, I don't think it's going to make me want to use the iPad Pro as a camera anymore than it has with any other iPad.  But, you never know...

The Things That Make You Say "Hmmm":

• 256GB Storage Support: While I think it is great that AAPL has made its first iOS device with a 256GB storage option, I question why it wasn't made available on the 12.9" version.  Now, there may be a very legitimate reason for this.  Samsung announced in late-February that it had produced the first 256GB Universal Flash Storage chip for high-end mobile devices.  My guess is that this is the chip that is in the 256GB versions of the 9.7" iPad Pro that simply were not available in mass quantities at the time the 12.9" went into production.  My guess is that all future iPad Pros and perhaps all future flagship iPhones will include a 256GB storage configuration.  And yes, AAPL will make a killing on selling you that additional storage capacity.

Overall Take:

The greatest part of the 9.7" iPad Pro is that there are no surprises.  It brings me back to the "Air-like" size & weight of iPad's from the past, yet packs a powerful punch with the A9X processor.  The new display technology is pretty amazing that really can't be described until you have used the device in an array of lighting conditions.  I am disappointed by the lack of USB 3.0 support, which would have enabled use of the 29W power adapter for super fast charging.  I have not seen any negative effects of the 2GB of RAM (as compared to the 4GB on the 12.9" version), but perhaps I am the very user that AAPL thought of when making that decision.  The AAPL Pencil is as amazing with the 9.7" Pro as it is with the 12.9" Pro.  Both iPad's are keepers for me.  If I was using the iPad Air 2, I'm not sure I would make the jump to the 9.7" Pro unless you do heavy graphic design or other precision work that things like "AAPL Pencil support" will really make a difference -or- if you happen to be one of those people that loves using your iPad to take pictures it may also be a worthy upgrade.  If I was running anything prior to the iPad Air, it is a great upgrade that will provide a host of power and benefits that 2.5-year old devices in today's world simply cannot. 

Random prediction: The iPad Mini will stay in the lineup, but I think it will essentially become the iPhone SE for iPads.  It will get updated, but those updates will be far less frequent and it will be sold in limited configurations. The good news is that I could see AAPL phasing out the iPod Touch in favor of the iPad Mini and with that, we should continue to see its entry-price move down to access more markets overseas.  The reality is that AAPL wants to sell more iPhone 5.5" phablets, not more iPad Mini's - that is a business decision focused on margins and upgrade cycle that the iPhone simply kills the iPad at.   

iPad Pro 12.9" vs. 9.7" Tech Specs:

AAPL iPhone Prices Around the World

It is no secret that AAPL has faced significant foreign currency headwinds across the world as its worldwide revenue diversity has increased in combination with the strengthening of the U.S. dollar against nearly every foreign currency. Below is a chart of what each iPhone model costs by-configuration from a cross-section of key AAPL sales' regions across the world including China, Japan, Australia, the UK, and Italy.

Notes:
1) Premium represents price gap between local currencies (as converted to USD) over U.S. prices
2) Conversion prices as of March 29, 2016

Source: Apple.com

Key Observations:

• All current iPhone models carry an average premium of 25% over U.S. prices across the 5 regions - based on all models and configurations (storage capacities).
   
• HIGHEST / LOWEST Premium by Model / Configuration / Region:
  
  HIGHEST: 16GB iPhone SE in Italy (43.8% price premium over U.S.)
  LOWEST: 64GB iPhone SE in Japan (15.1% price premium over U.S.)
   
• HIGHEST / LOWEST Average Price Premium by Region:
  
  HIGHEST: The region with the HIGHEST average price premium is Italy (Euro), where the average premium for all 5 models is 34.1%.
  LOWEST: The region with the LOWEST average price premium is Japan (Yen), where the average premium for all 5 models is 17.6%.
   
• The newest iPhone SE actually carries the highest average premium across the 5 regions - an average of 27.9% over the prices in the U.S.
   
• The Model / Country with the lowest premium over U.S. prices is ironically, the iPhone SE in Japan, where both configurations are priced on-average, 16.2% above U.S. prices for the same phone.  I find it ironic for 2 reasons: 1) the iPhone SE overall carries the highest premium over U.S. prices (+27.9%); and, 2) the Yen, in-particular, has been particularly weak compared to the U.S. dollar.
   
• AAPL's current flagship phones (the iPhone 6S / 6S+) carry the lowest average price premiums across the 5 regions with the iPhone 6S carrying a 23.9% premium and the iPhone 6S+ carrying a 23.2% premium.

Introducing the iPhone SE

Much speculation has been floating around and virtually confirmed that AAPL does indeed plan to release an updated 4" iPhone, named the iPhone 5se. Many of the rumors claim that the new device will use virtually the same chassis as the iPhone 5s, which was released in September-2013 - shocking, I know.  However, what's really important is what the new device will have inside, rather than what it looks like on the outside.

Why would AAPL release a new 4" iPhone

The fact of the matter is....as much as people have embraced the 4.7" and 5.5" phablets that AAPL debuted with the iPhone's 6 and 6+, there is still a large contingent of people who want a smaller device.  However, what they also want is a smaller device that has all of the power and features of the new devices. But don't think this is about price - AAPL has already tried that with the iPhone 5C and I just don't think it ever caught on very well. The iPhone 5se is STILL going to be a premium-priced phone. It will be cheaper than the the newest devices, but don't expect a $350 phone.  AAPL has gone on record time-and-again and said, "we're not going to build a cheap phone for the sake of capturing market share". They want to capture market share, yes, but they are far more concerned with the "quality of that market share" to continue fueling that little $22 billion services business that they have going.

So what will the iPhone 5se have?

• Chassis: Aluminium - would expect them to be able to use much of the same tooling that they have been using on the iPhone 5S to keep the cost curve down.
• Processor: A9 - I would fully expect them to use the TSMC A9 processors - TSMC has the scale and has been able to move down the cost curve and is fully capable of supplying AAPL with enough A9 processors for this new device.
• Screen Size: 4" - AAPL will use the same LED screen that is used on the iPhone 5s - a 1136 x 640 screen that produces a resolution of 326 pixels-per-inch (PPI)
• Camera: 8mp shooter w/ Sony sensor - live photos
• 3D Touch: No - cost prohibitive and would require too much internal re-tooling to enable the feature
• TouchID: Yes - same as iPhone 5S (the first AAPL device ever to support the biometric sensor)
• Apple Watch Support: Yes
• Storage Configurations: 16GB / 64GB / 128GB
• Unsubsidized Prices (US): $549 / $649 / $749
• Colors: Space Gray / Silver / Yellow Gold / Rose Gold
• Unveiling Date: Tuesday, March 15th - Yerba Buena Center (YBC) in San Francisco
• Release Date: Friday, March 18th

A Deeper Dive into AAPL's FQ1-16

A look into AAPL's FQ1-2016 quarter - was it as bad as it looked? Download file here.

AAPL Went Bullish...On Itself

I looked at the past 7 quarters of share repurchases (all of the quarters post-split).  During that period, the company repurchased 591.6 Million Shares (420.6 Million in Open Market and 171.0 Million through an Accelerated Share Repurchase (ASR) Program).  The total amount of open market purchases is $46 Billion at a weighted-average price of $109.37, which is ~15% higher than it trades today.  The Company was on a buying spree leading up to the holiday quarter.  In the September-2015 quarter alone, the company repurchased / retired 132 Million shares, the second highest quarterly repurchase in the period I looked at (they retired 162 Million shares in the September-2014 quarter).

In a recent discussion with Ovi Popescu he mentioned something to me that I didn't really think about when looking at the Company's FQ1-16 results - the relatively small amount of stock that the company repurchased during the quarter. As many know, the Company has a $200 Billion capital return program in-place, which is a combination of both share repurchases & dividends.  Through the December-15 quarter, the Company has returned $153 Billion of that $200 Billion, with $110 Billion coming in the form of Share Repurchases.  

But in the most recent quarter (Dec-2015), the Company only repurchased 46.4 Million shares - the lowest of the 7 quarters.  Now, to be fair, they only repurchased 53 Million shares last holiday quarter (Dec-2014).  There's always a big debate about share repurchases and the financial engineering that companies mess around with.  That said, I think AAPL truly buys back shares when it feels like the Company is undervalued.  I still think they believe it's undervalued, but the repurchases in Dec-2015 prove that they are a bit more cautious on that thought.

Note: Does not include shares that are retired as part of the net issuance of RSUs to employees.

FQ1-16 Operating Cash Flow

When looking through AAPL's financial statements for its first fiscal quarter of 2016, I noticed something odd when looking at its cash flow statement. Although AAPL generated $337 million more in Net Income, it somehow generated $6.3 billion less in Operating Cash Flow. Last holiday quarter (FQ1-15), AAPL converted 45.2 cents of every revenue dollar booked during the quarter to cash. This quarter (FQ1-16), AAPL only converted 36.2 cents of every revenue dollar booked during the quarter to cash - a year-over-year drop of 20% - I would call that significant:

Source: Apple.com 10-Q Filing

So when you look at the line item details of the cash flow statement there are a few big items that swing the number in both directions, but ultimately the negatives far outweigh the positives. 

Large Gains:

• Accounts receivable, net: AAPL generated $3.9B more this holiday quarter compared to last
• Vendor non-trade receivables: AAPL generated $5.3B more this holiday quarter compared to last

Large Declines:

• Accounts payable: AAPL used $9.9B more this holiday quarter compared to last
• Other current and non-current liabilities: AAPL used $5.0B more this holiday quarter compared to last

All-in-all, these declines outweighed the gains to the tune of $6.3B. The odd thing is that these big shifts all occurred in accounts that one would consider "normal, ordinary-course, working-capital accounts". The one that baffles me the most is Accounts Payable. To see a $9.9B year-over-year decline in that account alone is pretty remarkable. I'm an accountant - I understand that balance sheets are snapshots-in-time and that there could be extenuating factors that play into an account moving significantly, but this takes "significantly" to a new level. Even if AAPL received a generous offer to pay its A/P early, that just seems like a lot of cash to move.  I've charted Operating Cash Flow as a % of Revenue for the last 13-quarters, and of all the holiday quarters, Dec-2015 (FQ1-16) was the lowest out of the past four holiday quarters:

FQ1-16 AAPL Channel Inventory

On its FQ1-2016 Earnings' Call on Jan-16, AAPL was probed during its analyst Q&A session about its iPhone channel inventory levels. This was odd in one sense. AAPL historically has disclosed the exact amount of channel inventory it builds or draws-down during its prepared remarks. This quarter, AAPL's CFO, Luca Maestri, merely said:

"We started the quarter below our channel inventory target range and thanks to an extremely successful manufacturing ramp; we were able to exit the quarter slightly above the low end of our target range of five to seven weeks of iPhone channel inventory." [Emphasis Added]

It was only during the Q&A, where Toni Sacconaghi pressed Maestri on the actual channel inventory levels when AAPL revealed exactly how much inventory it had built during the quarter. Maestri indicated that it had an iPhone channel build of 3.3 million units during the quarter. He went on to indicate that it entered FQ1-2016 significantly short of the 5-7 week forward-looking target. The 3.3 million unit build is a significant number of units and matches the highest channel build in the product's history - it built 3.3 million units during the FQ4-2013 quarter, which coincided with the launch of the iPhone 5S / 5C. Additionally, the combined sequential builds (FQ4-15 + FQ1-16) was 5.25M units - that is the highest sequential build ever. Here is AAPL's historical iPhone channel inventory dynamics with reported (sell-in) and underlying sales (sell-through):

Sources: Reported sales are from AAPL SEC Filings (10Qs & 10Ks); End Channel Inventory numbers are obtained from AAPL's earnings' call transcripts posted on Seeking Alpha.

Here's some food-for-thought on the channel inventory build in FQ1-2016:

• When taking into account the channel build, underlying iPhone unit sales contracted 4.3% year-over-year, vs. the reported sales growth of 0.4%. This is interesting because of a comment made by Cook during the AAPL's FQ4 earnings' call in October, once again in the Q&A portion in response to a question posed by Toni Sacconaghi about expectations for iPhone growth:

"The same – my same response applies and I think we'll do quite good in iPhone. I do believe we'll grow this quarter as we put in our guidance that when you start with a number in the low 30s in terms of the percentage of the installed base that’s upgraded that had a phone pre the iPhone 6 and 6 Plus, that number still likely to leave a lot of headroom beyond December."

Cook is often very careful with his words so the fact that he believed the company would grow sales both in the December quarter and beyond implies that the company fell short of internal expectations on iPhone sales. It also is corroborated with the fact that AAPL would have missed the low-end of its revenue guidance range (an unprecedented scenario) but-for the booking of a $548 million settlement from Samsung in its "Services" revenue - as discussed by Chuck Jones of Forbes.

• The 4.7% gap between reported sales growth (0.4%) and underlying sales growth (-4.3%) is the largest gap since FQ4-2013 when there was an 8.8% gap (reported sales growth of 25.6% vs. underlying sales growth of 16.8%).
   
• To simply analyze channel inventory builds in historical context is not exactly an accurate measurement of the product health because the channel (3rd-party points-of-sale) have expanded significantly over the past few years - specifically in China. For example, AAPL was not selling the iPhone through the world's largest wireless carrier (China Mobile) when it had the 3.3M build in FQ4-2013.
   
• However, the 5.25 million unit build that occurred between July 26, 2015 (beginning of FQ4-15) and December 26, 2015 (end of FQ1-16) is concerning. It means that AAPL has a lot of units sitting in the channel that it has already recognized revenue on that it will need to work-off during the March quarter (FQ2-16). This likely lends credence to the relatively low guidance that it provided for the March quarter and related commentary about March being a very tough compare.
   
• In short, there are a lot of eerie comparisons this time around with iPhone channel inventory between what occurred in the FQ4-13 / FQ1-14 period, which may not bode well for Street expectations and actual performance. It should be noted, however, that the all-but-confirmed launch of an updated 4" iPhone in March-2016 (dubbed the iPhone 5se) could create new dynamics that haven't been seen before. It could be the first-time ever that AAPL has had two different timed iPhone release cycles in one fiscal year (assuming they bring out an iPhone 7 / 7+ in September-2016, as-expected).

I still think there is much headroom for iPhone growth both domestically and abroad. The research firm Mixpanel put out a report recently showing that 32.2% of active iPhone users are still using a 4" screen (5 / 5S / 5C) meaning they are either not enamored with the larger 4.7" / 5.5" offerings or are still waiting to upgrade. Additionally, the enterprise uptake of iPhones has been accelerating - Cook indicated at the BoxWorks conference that AAPL's TTM enterprise sales (ending in June-2015) were $25 billion - while that includes iPads, iPhones and Macs - I would suspect that the most significant acceleration of those sales is coming from iPhone. Lastly, the Android-switch rate that Cook keeps referring to is real - and that has nothing to do with whether the current installed base has upgraded or not.

What is the iPad Pro?

The iPad Pro with Smart Keyboard and AAPL Pencil charging (not awkward-looking at all...LOL)

I know that the iPad Pro has been subject to a number of reviews since its release on November 11th - but those reviews have largely been superficial. Instead of putting something out as soon as I got it, I wanted to really use the thing for a while and test its capabilities (or lack thereof) before putting putting forth some thoughts on the new device. I think it is great for people to write about it at the launch event or even several weeks after, but I've always believed that the best reviews come after a person's been able to really use the device over a sustainable period. I also believe you have to understand the context of the user - that influences a review tremendously - somebody streaming Netflix all-day has a very different opinion than somebody actually trying to do something 'useful'.

My Profile:

I'm a consultant that travels quite a bit. I am a heavy MS Office user (Excel, PowerPoint, and Word). I read and write a ton of emails on a daily basis. I'm a tweeter. I'm a blogger.  I AM NOT a graphic designer nor a heavy photographer. I use an iPhone 6S+, but a PC for work (due to the heavy use of the MS Office Suite).  I am also not a gamer.

AAPL Adoption Patterns:

I have had every major AAPL 'device' at some point. I have never had an iMac ironically, but I've had the following:

• MacBooks: 11" & 13" MacBook Airs, 12" MacBook, 13" & 15" MacBook Pro Retina, 13" MacBook
• iPads: iPad 2, iPad 3, iPad 4, iPad Air, iPad Air 2, iPad Mini 1, iPad Mini 2 Retina
• iPhones: iPhone 3GS, iPhone 4, iPhone 4S, iPhone 5, iPhone 5C, iPhone 5S, iPhone 6, iPhone 6+, iPhone 6S+

*MICROSOFT SURFACE: I HAVE USED ONE, BUT NOT FOR A LONG PERIOD OF TIME.

My Setup:

So I'm the definition of an 'early adopter' for AAPL products (if that wasn't) - I bought the iPad Pro on the morning of its U.S. public release date - November 11, 2015.  Here's what I have:

• 128GB Space Gray with LTE (Verizon) iPad Pro
• AAPL Charcoal Gray Silicon Case
• AAPL iPad Pro Smart Keyboard
• AAPL Pencil x 2 (lost the first one)

Needless to say, I'm in about $1,350, which exceeds the price of the base new 12" MacBook w/ Retina Display. I had one and got rid of it (a whole different story for another day), but basically I felt it was an under-powered laptop with a nice screen - I expect v2 to be greatly improved. But nonetheless, on with the iPad Pro:

The Good:

• The display is amazing: You can't really appreciate such a large canvas with such high quality until you've used it for a while.  Most media content looks great on it - HD Movies, Hi-Res Photos, YouTube videos, etc. Absolutely no complaints here - I know there are some always complaining about % of RGB, color spectrum, etc...I'm not one of those people. As long as its not a completely over-saturated Samsung screen, I'm perfectly fine with the standard AAPL 326 PPI LED-backlit laminated screen (no air-gap).
   
• Speakers are great: AAPL added stereo speakers on all four corner of the iPad, as opposed to the two that are on the iPad Air 2.  They also reconfigured the internals to enhance the sound - it's a significant improvement.
   
• The AAPL Pencil is 'magical': Like I said, I'm not a graphic designer, but I still use the Pencil. I've used other stylus-type pencils before, including some pretty high-end ones from the likes of Wacom. Nothing really compares to the Apple Pencil. The latency between pressure and screen visualization is virtually zero.  I have primarily been using it with the Paper53 App. I have heard that the Pencil does have variable performance with different apps. My only gripe with the Pencil is 1) charging it is really awkward; 2) there is no logical place to store the thing (hence, I already lost one). All told, it's hard for me to believe you could buy this device without also buying the Pencil.
   
• The Smart Keyboard holds its own. I've seen a lot of reviews both on the AAPL Smart Keyboard and other 3rd party offerings. The greatest part about these keyboards is that they don't pair through bluetooth.  They pair physically through a magnetic charging port on the iPad and keyboard - this is true for both AAPL's Smart Keyboard and at least the Logitech offering - not sure about others. The 'key travel' is pretty good - I actually find it a bit better than the keyboard on the 12" MacBook.  Using it in your lap is doable albeit a bit awkward.  It folds up nicely and doubles as a Smart Cover.

The Bad:

• It's really just a 'Big iPad': Other than the Pencil, there is nothing that I am doing more of (in-terms of productivity) than on the iPad Air 2.
   
• It's not a laptop replacement. Many have claimed that they have replaced their laptops with an iPad Pro - if you're simply doing email, that's likely possible - but you could also use an iPad Air 2 for that.  I still cannot see myself building PowerPoint decks, writing long documents or even working in Excel on the Pro. I do blog on the Pro, but I was doing that on the Air 2, so once again, not sure how the Pro justifies that use-case.
   
• iOS: Either iOS needs to be 'pushed-up' or OS X needs to be 'pulled down'. It's still a mobile OS that makes it very difficult to do a lot of core productivity work. I have not been all that enamored with the split-screen mode - it's just a bit awkward to use and many apps still don't support it.  I rarely, if ever, use the feature.
   
• It's heavy. The iPad Pro (bare) weighs 1.59 lbs. The silicon case + Smart Keyboard add another 1.59 lbs. This brings the total weight with keyboard and case to 3.18 lbs. For reference, that's heavier than all of the non-Pro MacBooks: (12" MacBook is 2.03 lbs; 11" MacBook Air is 2.38 lbs; 13" MacBook Air is 2.96 lbs). It truly makes the iPad Air 2 feel like...well...'Air'.
   
• Battery life: For some reason, I am not getting great battery life out of the device. I don't have the screen brightness turned up; I don't run a lot of apps in the background.  I set it up as a new device, as opposed to restoring an iCloud backup, but still not getting great battery life.

The Final Take:

Everybody talks about this A9X chip as a modern marvel of silicon technology that outperforms Intel's Core M processors (the same one that comes in the 12" MacBook with Retina Display).  I don't do the types of things with this device to really see it.  I think it's a great device.  I use it daily, but I struggle with the question of: 'what am I doing with the iPad Pro that I couldn't do with the iPad Air 2 (other than using the Pencil occasionally)?  The hardware is there; I'm waiting for the software to catch up.  Who is this device for? Likely best suited for power users like graphic designers or gamers. If you have an iPad Air 2, not sure this is a step-up I would make right now.  As the MS Surface is still more a laptop occasionally used as a tablet; the iPad Pro is still a tablet that can occasionally be used as a laptop.  If AAPL ever put an LTE radio into a MacBook Air, I'd switch in a heartbeat - constant connectivity (especially for frequent travelers) is key, which is why I've always loved the iPads. I saw an iPad Air yesterday and I thought it was a Mini - I might be at the point where I can never return to a smaller iPad (similar to how I'd likely never be able to go back to a 4" iPhone screen after using the 5.5" 6 / 6S+ for so long).

Apple's App Store Developer Payouts Accelerate Again (Aug-2015)

On August 6th, it was revealed that Apple's App Store saw record billings in July-2015 with $1.7 billion in sales, driven primarily by growth attributed to its revitalized smartphone lineup as well as its continued momentum in China.  Along with its record billings, Apple also revealed that it has paid a cumulative $33 billion to developers since the inception of the App Store in July-2008.  Apple provides data related to developer payouts sporadically throughout the year - the historical trend has been at least twice a year (January and June), but as seen below, there have been instances where they have provided three updates (e.g., 2013 and 2015).  I have been tracking this data as seen below:

Source: Various Press Releases and WWDC Announcements

A few points of interest:

• The $3 billion incremental payout between June-2015 and August-2015 was achieved in 59 days, leading to a per-day payout of $50.8 million.
• The $50.8 million payout is a 53.6% acceleration vs. the previous per-day payout measured when the company reported $30 billion of developer payouts at WWDC in June.  This was was highest acceleration in developer payouts seen since June-2013.
• Apple has already paid out $8 billion in 2015 alone, which aligns with the announcements made in January-2015 ($25 billion in cumulative payouts) and August-2015 ($33 billion in cumulative payouts).
• Based on the above announcements, Apple paid developers $3 billion in 2012, $8 billion in 2013, and $10 billion in 2014.  Considering that Apple has already paid out $8 billion through July-2015 and the number appears to be accelerating, it's likely that cumulative developer payouts will reach $38B+ by calendar year-end (implying $13 billion of payouts in 2015).

Here's the some things that are a bit mystifying to me:

• Very few, if any, people I know pay for apps, yet the developer payout numbers suggest that a crap-load of people are buying apps.  Since developers get 70% (roughly) of app purchase revenue, the 2014 payout of $10 billion implies $14 billion of app purchases.  As a point of reference, Netflix reported $5.5 billion of revenue in all of 2014.
• While one would logically assume that developer payout growth is a function of the iOS ecosystem growth (e.g., number of devices sold -> installed base), is that a correct assumption?  For example, if you are one of the people that buys apps and you're already in the ecosystem, you don't need to keep buying the app over-and-over as most paid apps are one-time purchases (not subscription-based).  Point being, developer payouts (which is a function of app purchases) should really be a function of incremental additions to the iOS ecosystem. 
• If you assume that developer payouts are a 'proxy' for incremental additions to the iOS ecosystem, then that ecosystem's growth continues to accelerate in markets that everybody calls "saturated".