Apple’s Invitation To Come Out And Play
I’ve been following Apple since the first time I heard the original Mac’s startup chime. The original Mac was alluring and inviting as if to say “come out and play.” My investment in Apple goes well beyond the interests of a shareholder. Over the past 30 years I’ve invested literally tens of thousands of dollars in Apple-branded products and every day and throughout the day I use the company’s devices to enhance the way I work and the way I choose to live.
I no longer subscribe to a cable service and our household receives its entertainment content through Apple TV. We’re about to dump our landline because members of our household use iPhones for voice communication. Thanks to the iPad, I no longer need a laptop and apps are far less expensive for productivity and content acquisition and consumption than traditional applications.
Over the next few years our household will save thousands of dollars from forgoing cable service, landlines and purchases of new laptop computers. Even the Super Bowl is now streamed over the Internet. What important service does cable TV provide at a cost of over $100 per month? I have a maxed out AT&T Family Plan for our iPhones and yet collectively we use less than the 700 minutes available under our plan. There’s no need for a landline.
For many in our society today, voice-only communication is the communication method of last resort. For intra-household communication, FaceTime is way more cool than voice-only communication and messaging is far more efficient than voice calls to relay shards of information or quick updates to family and friends. In our household we run more of a risk of a “throttle back” notice from AT&T for data usage on so-called “unlimited plans” than we risk using too many voice minutes.
30 years from the introduction of the original Macintosh, Apple hasn’t steered away from the path of product innovation. But at this time and until the next big new product announcement, innovation from Apple is subtle but no less impactful for those who invest in the company’s eco-system of products and services.
The “Problems” With Steve Jobs
In the years following the first exit of Steve Jobs, I watched a parade of people occupy the CEO’s chair. I was covering Apple in late 1996 when then CEO Gil Amelio stunned the Apple enthusiast community with the announcement the company wasn’t buying BeOS to provide the foundation for the next generation Mac OS but was purchasing NeXT and the NeXTStep operating system to complete the daunting task. With the acquisition of NeXT, Steve Jobs was returning to the company as a special advisor.
From within the Mac community screams that the return of Steve Jobs to Apple would ruin the company were on high volume and the term "mercurial" was used to describe him so frequently, a casual observer might think Steve was the man’s middle name. Within months of his return to the CEO’s chair in July of 1997, the term mercurial to describe him was seldom heard anymore and little more than one-year later, the term “beleaguered” was no longer used as an informal prefix to the company’s name.
The “Problems” With Sir Jony Ive
I recently finished reading Leander Kahney's book about Jony Ive. The book contains colorful insights into the career of Jony Ive at Apple. Contrary to common belief, Jony Ive began his career at Apple years before Steve Jobs returned to the company. No one can dispute his design genius nor the influence his design leadership has contributed to Apple’s amazing success over the past 16 years and the influence of his work on Apple’s products in the twenty two years he has been associated with the company. In addition to his influence on such products as the iMac, the iPod, the iPhone and the iPad, he was also involved in the development of the Apple MessagePad, the Macintosh Cube and the cost-challenged original iPhone 5.
Jony Ive’s design genius and approach to product development often incorporates use of materials such as aluminum and glass in revolutionary ways and production techniques Apple must pioneer to bring new products to market. Product success isn’t guaranteed and breakthrough designs have inherent market risks.
New products and new product designs take time. Although it seems like a long time from the release of the original iPad in 2010 to today, the design of the original iPhone released in 2007 was spawned from an existing tablet project. Initial development of the iPad preceded development of the iPhone though the iPad came to market three years later.
Apple’s attention to detail, decisions to create products requiring pioneering manufacturing techniques and products that disrupt sleepy old economy industries take time to develop, design and manufacture. Four years since the release of the iPad to today is really no time at all when disruptive new products are the expectation for Apple.
The “Problems” With Tim Cook
There isn’t a person on the planet with greater knowledge and understanding of how Apple operates its businesses than Tim Cook. As much as Steve Jobs was a visionary and Sir Jony Ive is a design genius, Tim Cook has business development, supply chain management and strategic planning skills unmatched by any CEO on the planet.
Hired by Apple in 1998, Tim Cook is as much an architect of Apple’s global empire as the two other luminaries mentioned above. Tim Cook is not a “barker.” He’s a hard-driven and determined executive who has mastered the quiet work needed to deliver long-term success.
In response to seemingly disappointing December quarter results and underwhelming March quarter guidance, Tim Cook acted quickly to use a portion of Apple’s huge cash pile to repurchase $14 billion in stock. The $14 billion Tim Cook deployed in two weeks to repurchase shares is equal to Apple’s reported revenue in fiscal year 2005. The repurchase is only seen as small by Apple’s outsized standards.
Tim Cook is not a showman. But Steve Jobs did not run Apple alone. Without Tim Cook’s masterful operational designs, Apple would not be a $170 billion revenue enterprise today.
The “Problems” With Too Much Cash
Apple has cash problems. The first problem is the company has a lot of it. Net of debt, the company had over $140 billion in cash, cash equivalents and marketable securities on its balance sheet as of December 28, 2013. It seems everyone has an opinion on how Apple should invest the massive sum or how it should be returned to shareholders. Despite a plan to repurchase a total of $60 billion of shares by the end of 2015 and no matter the fact Apple is among the biggest dividend payers on the planet, the talk of what Apple should do with its cash never ceases.
The second problem is the bulk of the cash is outside the United States. Although Apple imputes and reports a US tax liability on its foreign earnings, the taxes aren’t paid until Apple repatriates the money. In the grand schemes of things, amassing a huge cash pile and holding off on the remittance of taxes until such time as the taxes are due are enviable problems for a corporate entity. If Apple deploys its foreign-earned cash on foreign ventures, no US taxes are due on the funds.
The “Problems” With Deferred Revenue
As of December 28, 2013, Apple had $11.428 billion in deferred revenue on its balance sheet. That’s revenue received with recognition postponed to later periods. The recent increase in deferred revenue per Mac, iPhone and iPad sold influenced Apple's December quarter results and March quarter guidance. The revenue deferred has no associated deferred costs. Apple picks up the full costs associated with the acquisition of the deferred revenue in the current period while deferring recognition of the revenue to a later time. Eventually, the increase in deferred revenue will benefit reported revenue in seasonally low fiscal quarters while softening the increase in reported revenue in seasonally strong quarters. In other words, revenue isn’t lost. It’s revenue to be recognized in future quarters. Of the current deferred revenue total, $3.071 billion will be reported in periods beyond this fiscal year.
The One Solution To Apple’s “Problems”
While many of us adopt Apple products to enhance the ways we choose to work, communicate and live, there’s a prevailing belief Apple’s best days are in the pages of history and not on today’s horizon.
That was the prevailing belief before the return of Steve Jobs in 1996, before the introduction of the iPod in 2001, before the release of the iPhone in 2007 and the iPad drew the loud cries of skeptics as much as it drew applause when it was announced by Steve Jobs in early 2010.
For those of us who actively track the company and follow company-related news from many and varied sources, it’s more than obvious new products and even new product “categories” are on the horizon. This doesn’t mean Apple isn’t keeping its product plans secret. It does mean no matter how hard the company may try, bits of information from different sources leave a rather compelling evidence trail. The fun of attempting to put the pieces of evidence together is almost as much fun as using the company’s popular products.
While I wait on Apple’s next big step, I’m saving over $1,500 per year on cable, will soon save about $600 per year on a landline and save thousands over the next four years by no longer needing a laptop.
Apple’s next big step will resolve the company’s “problems” as they are perceived today. In the meantime, I’ll take a look at what new movies are available through Apple TV, step into the Braeburn Group to discuss what the different pieces of information available suggest about Apple’s next big step and appreciate the fact Apple has so many “problems” that can be easily resolved with the next big product announcement that will come tomorrow someday, but not tomorrow today.
Robert Paul Leitao
