Apple CFO’s remarks: What analysts are saying

Investors got a rare treat Tuesday: 35 minutes with CFO Luca Maestri.

You can listen to his remarks at the 2017 Goldman Sachs Technology and Internet Conference here. Below: Excepts from the analysts’ commentary we’ve seen, new notes on top.

Steven Milunovich, UBS: Installed base supports growth, gross profit dollars the focus. Luca Maestri said he sees growth for the iPhone given its increasing relevance and opportunity in emerging markets. Loyalty, satisfaction, and engagement remain encouraging. He defended China, pointing out that the ecosystem is strong there with services revenue doubling last year. In content, he indicated that exclusives boost transactions and free trials. However, he didn’t bite regarding an increased willingness to make large acquisitions. Stock buyback appears to be the top priority for repatriated cash. He pointed out that while Apple has kept the gross margin in the 38-40% range with services offsetting a declining iPhone margin, gross profit dollars are most important. We think trading off margin for growth may increase the P/E multiple. Buy. $138. 

Neil Cybart, Above Avalon: Apple CFO’s Fireside Chat at Goldman Sachs. Apple’s gross margin has been in the 38 percent to 40 percent range over the past five years. Every time Apple launches a new product, the cost structure is higher versus the product it replaces because new technologies and features are needed. Apple offsets this pressure by being able to take those cost structures down over time across the product’s life cycle. Apple also uses pricing to offset cost pressures. In addition, the Services business mitigates some of the hardware margin pressure. The Services business, as a whole, is margin accretive. This means Services has an overall margin more like 50%+. Apple strives to optimize gross margin dollars, not just gross margin percentages. While not too surprising, that is a very interesting statement from Luca. He is basically saying that Apple does care about market share to a certain extent. We can look at Apple’s iPhone SE strategy as a perfect example of this in action. Apple works on bringing iPhone pricing down over time (to increase sales), while margins remain relatively unchanged.

Walter Price Allianz Global Technology: Apple and the border tax. Apple’s in the same boat as every other cellphone company. If you put a tariff on Apple phones that are brought into the country, that tariff will apply to every other phone, so it doesn’t really change their competitive position. We think the right valuation is something like 15 to 17 times earnings, a slight discount to the market multiple.  That gives us a price target of somewhere between $150 to $180 a share. 

5 Comments

  1. David Emery said:

    The report I read about this cited substantial remarks from Maestri on Apple R&D. No product revelations, but some interesting comments on philosophy.

    It’s particularly interesting to note how Google has admitted to some really big R&D investment hits lately.

    1
    February 15, 2017
  2. Fred Stein said:

    Agree with Milunovich – growth over margin can increase P/E multiple.
    But Apple does compete below $400 with used iPhones. This addresses market share for IB rather than shipments. And the market for used phones, reduces the cost for the high-end iPhone upgrade buyers.

    1
    February 15, 2017
  3. Fred Stein said:

    Just listened to the Luca. He addresses the increased R&D costs in $s and %’s – important insights. While Apple Watch and AirPod R&D is less efficient that the iPhone, both are big successes and industry leaders. Both are bets on the future. Apple’s R&D efficiency still leads the tech industry. He also addressed their R&D in silicon design for CPUs, sensors, etc., which keeps Apple ahead of the competition and preserves margins.
    Luca did not mention increased compensation for top talent as an R&D expense driver. This is a factor, now in Silicon Valley. Not only is the competition for talent fierce, younger talent need a lot more money for housing.

    2
    February 15, 2017
    • Jonathan Mackenzie said:

      I think Apple’s chip strategy was brilliant and caught a lot of folks (and maybe some competitors) by surprise. They quietly seized control of some key circuits that are intimately tied to the end product. And they obviously intend to do more and more of this.

      This gives the company the obvious advantage of designing chips that work very efficiently with the software Apple designs to accomplish the task at hand. But perhaps more importantly, it allows Apple to explore capabilities completely in house without having to collaborate and tip their hand.

      So for example, if Apple does make a pair of AR glasses, they will likely be powered by custom silicon which is best suited to their specific approach to AR. So they get maximum efficiency and maximum secrecy, producing the most end user surprise and enjoyment. This is why I say it was a brilliant move.

      1
      February 15, 2017
    • David Emery said:

      Well, if you can’t find talent (that can afford to live) in Silicon Valley, time to set up some offices elsewhere…

      But frankly the talent is out there, I know a lot of good developers who don’t have all the buzzwords on their resumes, but who have demonstrated the ability to learn new technologies. The problem with tech companies in general is their unwillingness to retrain existing workforce, in favor of getting people with limited experience but some training on The Hot New Thing.

      (How long before we see ads asking for “10 years experience with Swift”?)

      0
      February 16, 2017

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