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

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.