AAPL's massive holiday juice squeezing operation - Was it enough?

On January 27, AAPL will report its earnings for its fiscal Q1 (September 26, 2021 through December 25, 2021). Analysts have been steadily raising their expectations based on a number of factors - most of them related to a more normalized supply chain. As noted on its FQ4-2021 earnings call, the company indicated that supply constraints resulted in a $6 billion (with a “b”) shortfall to revenue in the September quarter AND that it anticipated an even larger shortfall in the holiday quarter due to ongoing supply chain issues.

The analysts have clearly factored that in and are anticipating very meager (by AAPL’s standards) results with expected YOY growth of 8% and net income of 13% for revenue and net income, respectively.

Dec-2020 actual vs. Dec-2021 expected revenue and EPS.

A Recent Historical Look - AAPL’s Reported Revenue and Net Income during the COVID Period:

History is not an predictor of the future, but AAPL has grown top-line by an average of 22% during the COVID period (which I define as the fiscal quarters March-2020 through September-2021) and net income by 42.4%. If you isolate the past twelve months (the four quarters beginning Dec-2020 through September-2021) the growth is even more insane with average top-line growth of 35% and average net income growth of 74%.

• Why is Net Income growing twice the pace of Revenue? I can’t do a full bridge but here are some reasons why…

  • Highest revenue product segments in FY21 have gross margins above the corporate average: In FY21, both the iPhone ($192 billion / +39% YOY) and Services ($68.4 billion / +27%), made up about 71% of total net sales. Those two product segments have margins that exceed the corporate average of 42%. AAPL’s Services category runs at a margin of anywhere between 70 - 75% (it was 70.5% in the Sept-2021 quarter). So when you talk about those types of margins on nearly 20% of your total net revenue, it’s going to disproportionately grow your profits.

  • Leverage on the higher revenue base: With revenue growing 35% in 2021, AAPL achieves margin leverage on that growth. Said differently, AAPL has roughly $44 billion of SG&A and R&D expense that does not scale with revenue growth like COGS does. There may be some components, but for the most part those expenses do not.

  • Operational efficiencies: Cook is known as an operational genius - during his time in the COO role before succeeding Steve Jobs, he basically built the most impressive, agile, and profitable supply chain in the world to turn brilliant ideas into pots of gold. And his predecessor in that role (and rumored future AAPL CEO), Jeff Williams, is known to be just as good. AAPL is notorious for squeezing every last penny out of suppliers based on the volumes of components they buy and the operating model of bringing products to market (i.e. AAPL’s contract manufacturers or 3rd party resellers (retail channel) typically takes on the burdens of inventory carry. If you don’t believe me, AAPL reported an inventory balance of just $6.6 billion as of Sept-25-2021, which is 1.9% of total assets and 1.8% of net revenue. AAPL has also achieved margin efficiencies with its Apple Silicon (which now powers every new iPhone, iPad, and Mac). SSD prices continue to fall and while DRAM has not seen the same fall in pricing, AAPL is able to offset this by passing on that cost to customers in DRAM-heavy products like MacBooks and iMacs.

I get it - AAPL clearly stated that it saw headwinds on the supply front in the holiday quarter, but 8% top line growth seems very very conservative. Additionally, while AAPL’s management commentary came about a month into the holiday quarter, there are numerous reports that the supply chain issues started to loosen up on the back half with the company’s most important product, the iPhone 13, achieved supply-demand balance for the lower-end models and backlog on the pro models (iPhone 13 Pro Max and iPhone 13 Pro) had significantly improved.

Additionally, customers continue to opt for the higher end models (Pro and Pro Max), which will only drive ASPs higher even on modest or no unit growth. But, it is worth looking some of the factors that may also be playing in here.

• Timing of iPhone launch: AAPL didn’t launch the iPhone 12 models until October 23, 2020 and the Pro Max (highest priced models) did not launch until November, while this year’s iPhone 13 entire lineup launched in AAPL’s biggest markets on September 24, 2021. Since the quarter ended a day later (September 25), most of that revenue gets pushed into the holiday quarter regardless. This is going to be more of an issue for the March-2022 quarter though as you’ll have disproportionate sell-in skewed to the holiday quarter.

• AAPL Watch and AirPods did not see significant upgrades: While the Wearables and Accessories categories is not AAPL’s biggest revenue stream, it was still $38.4 billion in FY21, of which I would guess most of that revenue is now coming from the Watch and AirPods. Given the fact that neither product saw a ‘must have’ upgrade in the holiday quarter, I would expect this category to have very little growth.

• Apple Silicon Macs (Air vs. Pro): Last year, AAPL launched its first Apple Silicon (M1) in the holiday quarter with the new MacBook Air and Mac Mini. This year, they launched the new 14” and 16” MacBook Pro’s. From a revenue perspective, this also may be a ‘push’. The MacBook Pro’s were highly anticipated, but are also very expensive - entry-level 14” starts at $1,999. These were significantly supply constrained throughout the quarter whereas the MacBook Air that was launched last holiday quarter was not. So I would not be surprised to see very modest growth in the Mac category (driven mainly by ASP).

• iPad Air 4 v. iPad Mini 6: Last year, AAPL made a significant update to the iPad Mini 4 - giving it the feel of the iPad Pro with nearly the same form factor - it also became compatible with the Apple Pencil 2 and the Magic Keyboard. The reviews on the iPad 4 were, and continue to be, quite good. This year, AAPL launched a refreshed Mini (6th gen) during the holiday quarter. The Mini 6 had mixed reviews due to the ‘jelly scrolling issue’ and I just think it’s a weird product that converges with the iPhone Pro Max. That is anecdotal, but I would not be surprised if it didn’t achieve great volume.

The Bottom Line:

SUPPLY SUPPLY SUPPLY: The question that will make or break this quarter is going to be about supply. That $6B of lost sales (I view it more as deferred) due to supply issues in the September quarter can only be a tailwind for the holiday quarter….but not if AAPL saw more supply constraints. It would merely be trading for supply constraints for supply constraints. AAPL acknowledged on its Q4 earnings call that iPhone channel inventory was below target levels, while demand was actually stronger for the 13 than the 12. The ability for AAPL to catch up on iPhone supply, which would include channel fill (recognized on a sell-in basis) will really dictate if that 8% growth is analysts’ not doing their homework, inability to interpret the actual state of the supply chain, or both…

What Deion Sanders' teaches us about the art of 'recruiting'

The facts are as follows: 1) Deion Sanders is the head coach of Jackson State’s football program; 2) Jackson State is an FCS program, which is NOT the top level of college football - the FBS is what everyone knows as ‘college football’; and, 3) Deion just flipped the nation’s top college football recruit (CB Travis Hunter) from his alma mater, Florida State (historically, a perennial powerhouse of college football), to Jackson State.

So how did Deion do it?

While some questioned how Deion Sanders could possibly pull off a coup of this magnitude by ‘flipping’ a kid who could go to any football program in the country to a tier-2 program, those who really know Deion Sanders were not the least bit surprised.

• RELATABILITY: Relatability is all about credibility. Kids want credibility - they want to hear from people that have been to the highest levels of the [name your profession]…and succeeded. Deion Sanders’ is in the NFL Hall of Fame, has multiple Super Bowl rings, is arguably the best two-sport athlete of all-time, and ‘Prime Time’ (a persona he developed at FSU) made him a master marketer…of himself.

• RELIABILITY: For all of the ‘flash’, everyone who has ever worked with Deion Sanders talks about his reliability. Whether it is guys like Rich Eisen who worked with him at ESPN or Shannon Sharpe who both worked and played with Deion in the NFL, they all have the same message - when it comes time to work, Deion is no ‘act’.

• HONESTY: When interviewed about this coup he pulled off that shocked the college football world, Deion did not talk about grand promises he made this kid and found it ridiculous that one would think he would use such cliche tactics. Deion talked about how he talks to every recruit about opportunity, the merits of hard work, earning your keep, and becoming a polished adult. He does not make promises nor does he make guarantees.

• PASSION: You can call Deion Sanders many things…and PASSIONATE would be right up there with anything else. Kids sense it and kids love it. Kids know what ‘going through the motion’ looks like and they know when somebody is trying to build something they truly love. There is no question in my mind that Deion’s ability to instill his passion in these kids has been a key ingredient in selling them on his program.

It’s amazing that such baseline principles such as RELATABILITY, RELIABILITY, HONESTY, and PASSION would resonate so well with a generation that nobody seems to understand, is being given every perk one can think up, and who is walking into the NIL professional environment that is now college football. But they do.

And the broader implications are (?)

For all the recruiters out there selling such stupid sayings as “work hard, play hard”, “life-changing experience”, “our brand will create your brand”, [insert next cliche], there is something so fundamental and effective about selling reality and a vision of ‘building something’ bigger to kids - and that comes from people who have been there and done that; it comes from people who consistently evoke genuine passion about what they do and why they do it; and, it comes from people who are honest that success is an earned choice…not a granted right. After all these years, it begs the question: Why is Deion still winning? He has an innate ability to make a kid feel that what he is selling not only bigger than any one person but most importantly, that it is…the truth.

Recruiting is not about perks and those that believe it is are just throwing good money after bad - if you win over a kid with ‘perks’, what happens when reality hits and the perks end? [hint: disappointment, resentment, and a lot of ‘next best thing two-week notices’].

——

*Fast fact: Deion Sanders is widely known for his play on the gridiron, but his baseball career is largely overlooked. In postseason play (aka…when it really matters in the marathon known as MLB), Sanders had a career .348 batting average and a .400 OBP with the Atlanta Braves. Frank Thomas, who was inducted into the MLB Hall of Fame, has a career postseason batting average of just .224 with only 10 more ABs.

Deion was never as big of a side-show as the ‘Prime Time’ mantra would have you believe - it succeeded in its purpose of creating a ‘larger-than-life’ distraction predicated on real substance. Guys like Deion Sanders and Dennis Rodman are in their respective Hall of Fames (both on the first ballot) for a reason - they were incredibly good athletes and team players who fulfilled their potential and ultimately became winners. Did they have their quirks and faults resulting from the sideshows they seemed to embrace? Absolutely. But in the end, they ARE winners.

Ranking My Run Through German Cars...

Starting in 2013, I migrated away from an entry run with Lexus and switched to German engineering. What I have learned over the past 7-years is that not all German cars are created equal, and it has taken a number of cars to finally help me understand what really matters in a car. For contextual purposes, I do not drive very much and have not put over 5,000 miles on a car in any year since switching to German cars.

1a) Porsche 997.2 911 Carrera (Current)

About two months before my Audi S5 lease ran out (which I could not wait for btw), I did the natural thing and ordered a Tesla Model 3 Performance - the version of the Model 3 that does 0 - 60 mph in 3.1 seconds. However, Tesla kept pushing the delivery date back and I also noticed something else. Here in Scottsdale, EVERYBODY has a Tesla - it’s beyond ridiculous. My parents have one and driving that car truly is an amazing experience, but I started to question whether it was amazing because of the technology or the actual experience. If I drive 5K miles per year, I want to actually ‘drive’, and as great as a Tesla is, the fact is that 1) it’s far more suited for daily commuters; and, 2) whether self-driving mode or not, the car drives you….you do not drive the car. So, I went from the ‘practicality’ of a Model 3 to the exact opposite end of the spectrum - a Porsche 911. It is about as analog as a car gets these days - you really feel the road, you have to pay attention, and you’re going to spend time at gas stations no matter how much you drive. I looked around for a while and talked to a number of Porsche aficionados, of which there is a diehard following unmatched by any other car - it is only rivaled by BMW M3 fans. In the end, I settled with a 997.2 with the PDK transmission and could not be happier. There are a lot of used Porsches on the market with over 100,000 miles on them and that tells me one thing - people love to drive them…and now I know why. The engines are workhorses and while it will not beat a Corvette or even a Tesla in a straight line 0-60 drag race, the precision that you get when cornering and doing more technical driving (especially when you take off traction control) is unmatched. It’s a RWD 3.6L 6-cylinder ‘Naturally Aspirated’ engine that pushes 345 horsepower - meaning, it’s a real engine - none of this crap with taking a 2.5L, strapping 2 turbochargers on it and pushing it up to 450 hp. Naturally aspirated engines are unfortunately at the end of their time as emissions laws kick in and we start to see more hybrid or pure electric performance. While cars are never investments, I do believe that you should buy something that ‘stores value’ and I believe well maintained Porsche 911s will hold value (much better than a Tesla battery maintaining its charge) over time. If there was ever a time for me to buy a completely unpractical car as a ‘daily driver’, it was now…so I did.

1b) Mercedes Benz C63 AMG Edition 507

Ummm yeah - this car may look practical, but when you drop a naturally aspirated 6.2L V8 engine in it that pushes 507 horsepower, it quickly becomes a beast. I loved this car and selling it is probably my biggest regret - I bought it pre-owned from the owner of a Mercedes Benz dealership in the DFW area and it only had 14,000 miles on it. It was in pristine condition and it had the Edition 507 package on it, which remains very rare. It was completely spec’d out. I loved driving this thing and probably is the one car that I ever felt ‘scared’ when driving. I’m just not sure C-Series sedans were ever meant to have 6.2L V8 engines in them. AMG is the pride of Mercedes Benz performance and this car reminded me of that every time I drove it. I will also say that I probably filled up every time I drove it as it got about 8 - 10 miles per gallon. If I could buy this car back, I would do it in a heartbeat - this 6.2L V8 is a highly-coveted engine - I would not use it as a daily driver, but it is a car that I believe will only go up in value as you cannot get these hand-assembled (and hand-signed btw) engines anymore. The valet drivers at my condo loved parking this car and the sound that it made when you would start it up was one that cannot be replicated by AMG anymore.

2) Audi S4 Sedan Supercharged

Ayrton Senna remains one of my all-time favorite drivers and it was always fascinating to me that a guy that knew car performance at the highest of levels had 2 favorite cars that he drove off the track: 1) the original Honda NSX (which he helped design and calibrate into an absolute legend); and, 2) an Audi S4 Quattro. This Audi S4 was unique in the long line of Audi “S” lineage - it was a 3.0L supercharged V6 engine - Audi had a 2 -3 year model run where they moved from turbochargers to superchargers. Without knowing or getting into the mechanics of it, a supercharger is ‘always-on’ and does not have the ‘lag’ that a turbo experiences as it relies on airflow to kick-in. This car was probably the perfect balance of “practical performance” - it put out 330 horsepower and you could have fun with it without feeling like you were going to kill yourself. Had it not been for ‘stumbling on’ the C63 AMG Edition 507, I likely would have kept this car for a while (which is about 2 - 3 years for me). It was a great looking car, and even had the rims re-finished in a gunmetal gloss - something that I rarely do on a car.

3) Audi S5 Coupe Turbocharged

Yeah - it looked nice. That is about all I have to say about this car. I regret getting this car AND I regret leasing it because I had to wait 3 years to get out of it. By 2018, Audi had gone back to turbochargers (due to the high cost of the supercharger) and while this S5 was tuned up to 354 HP, it was clear real fast to me that Audi was no longer about selling performance; it had become about selling its MMI in-car electronics. The funny thing is that this car also was the first year that Audi enabled Apple CarPlay. So once you connected your iPhone, it basically made all of those fancy in-car entertainment features useless. Yeah, it had the Bang & Olufsen sound system, but it never had the performance of the lower horsepower, yet supercharged S4 sedan. This car is the last Audi I will ever drive because it is stuck somewhere between trying to be a Tesla with none of the performance or electric power. I never had fun driving this car and always felt like it was driving me. I put 16,000 miles on it in 3 years, so I did drive it a bit more than my usual 5,000 miles per year, so I guess it was actually decently practical.

4) Audi A5 Coupe - Prestige Plus (2.0)

Yeah - I don’t even have a picture of this one, but it looked almost exactly like my S5 - same Daytona Gray color too. The problem with this car was it was way underpowered. In 2013, the VW group (Audi included) was using a 2.0L across a number of platforms with some modifications - for example, the A7 (sportback sedan) used a supercharged 2.0L. However, the A5 2.0L was not supercharged and therefore, was underpowered. Audi’s are AWD, which makes them heavy and the coupe versions, which you would think are lighter than the A4 sedans, are actually heavier. So when you combine an underpowered engine with an all-wheel drive sport coupe, you end up with a cool looking slow car. I could not deal with it and traded it in up to the aforementioned S4 with <5,000 miles on it.

Where from here?

I’m not sure what’s next for me - I do think I’ll keep the Porsche, but am very intrigued by the high-performance sport sedan segment again - the BMW M3 F80 sedan is a pretty amazing platform and they are starting to come down in price now that the G80 platform has replaced it. They aren’t cheap, especially one with low miles and the CS package, but would be a nice complement to something that has absolutely no cargo space whatsoever. I’ve been looking and if there’s a good deal to be had, you never know…As far as Tesla’s go, I would wait until the highly-anticipated 4680 battery that Tesla unveiled comes out - analysts don’t expect that battery to be fully commercialized until 2023 or 2024 (which really means 2025 in Tesla time), but it does hold the promise of raising battery capacity and range on a sedan up to 1,000 miles or more. And who knows what else will come out in the EV space between now and then. There is a lot in the pipeline and some exciting stuff from companies not named Tesla. I do think a Plaid version of the Model 3 would be an intriguing proposition.

Lance Armstrong Still Matters, and Here's Why...[UPDATED]

UPDATE (2021):

After years of speculation, ESPN finally did a two-part series titled “LANCE” as one of its 30-for-30 specials, which is a very well crafted series that seeks to bring ‘cultural perspective’ to sport. There was a lot I had already seen from previous documentaries on Armstrong, but one scene in-particular was interesting. They asked Lance about his visit a couple years back with Jan Ullrich (his main rival during all of his TDF wins), and Armstrong broke down and cried on camera. Ullrich was also caught for doping and his life has been anything but kind in the ensuing years - divorce, jail, etc. I’m not sure what to take away from that scene - Was it trying to show sympathy? Was it trying to show contrition? Or was it merely Armstrong trying to stamp down a point he continues to make - “Everybody was doing it, so why do we celebrate some and demonize others?” And to that end, he has a point. There have been many cyclists who have been caught doping, have served their respective bans, and are celebrated. What makes them different? The fact that they admitted it quicker? Cheating is cheating and while I get the argument that Armstrong went out of his way to make the lives of his accusers miserable, there were a lot of cheaters who were not ‘choir boys’. But perhaps the most captivating line came at the very end when a former Armstrong teammate and admitted doper said the following…

“After all of these years, I’m not sure what to think of Lance. There are good people who do bad things...and bad people who do good things. I’m still trying to sort that one out.”

— Bobby Julich (Former Armstrong teammate and celebrated now-retired US cyclist)

Lance Armstrong. You can love him. You can hate him. You can adore him. You can despise him. Armstrong mattered when he won the World Cycling Championship in 1993. He mattered when he won a stage at the Tour de France in 1995, just days after his Motorola teammate, Fabio Casartelli, was killed when he crashed on a mountain-top descent. He mattered on October 2, 1996, when he was diagnosed with metastatic testicular cancer. He mattered in July 1999 when he won his first Tour de France. He mattered in July 2005 when he won his 7th Tour de France. He mattered in January 2013 when he finally admitted that he deceived the world for nearly 15-years, and that he did, in-fact, use performance-enhancing drugs during all 7 of his Tour de France victories. He matters today...

Cancer:

Lance Armstrong was diagnosed with advanced metastatic testicular cancer on October 2, 1996 - a condition so advanced that it had invaded his abdomen, his lungs, and his brain. His doctors gave him a 20 - 50% chance of surviving - an optimistic estimate just to keep his hope alive. Miraculously, after a number of surgeries and numerous rounds of chemotherapy, Armstrong was declared cancer free and began his return to cycling in 1997. There was nothing fake about Armstrong's cancer - it was as bad as he said it was; he was as desolate as they said he was.

Armstrong was involved in cancer therapy trials at Indiana University, where he received the majority of his treatment - most of those trials were related to variants of chemotherapy that wouldn't scar his lungs so that if he did survive, he could have a chance of cycling again. But...he did not have access to many of the treatments that high-wealth individuals like Steve Jobs had. And you want to know why? He didn't have healthcare at the time. Most people don't know that the only way he got his cancer treatment was because one of his sponsors, Oakley Sunglasses, stepped in and covered the costs. It's the very reason that Armstrong remained so loyal to Oakley and its founder (Jim Jannard) throughout his career - Oakley would later cut all ties with Armstrong as detailed a bit below.

Post-Cancer Return:

He was a very different cyclist post-cancer - he lost 20 lbs. and the once-muscular triathlete-turned-cyclist was a very lean shadow of his former self. He did not perform well upon his return to pro cycling and was virtually ready to quit, until his friends convinced him to give it "one more go". Armstrong ended up changing his cycling style by increasing his cadence and using a lower gear - the once powerful cyclist was now using a much smaller gear, but was peddling at over 100 RPMs. The change in style allowed him to rely more on his aerobic endurance than on his muscular power - it made him a threat both in the time-trials and the mountain climbs. Hence, his increased aerobic dependence made EPO and blood transfusions the perfect method of cheating as both provided increased oxygen to the blood.

7X the Miracle:

And so the man once regarded as a threat to win single stages shocked the world by winning the Prologue (opening time trial) at the 1999 Tour de France, beating Alex Zulle by 8-seconds on the line - a large margin of defeat for such a short distance. Armstrong went on to win the 1999 Tour de France by over 7-minutes - to give you a sense of how big of a margin that is, most Tours are won by a minute or two. The great Greg LeMond won the second of his two Tour de France victories by just 8 seconds. And the rest as they say is...history. After the 1999 Tour, Armstrong went on to win the next 6 Tour de France's, eclipsing the record of five held by a number of cyclists. The closest victory he ever had was in 2003, when he won by a mere 62 seconds, a decent margin by most standards, but a razor-thin margin for Armstrong.

The Comeback and Fallout:

In 2009, Armstrong returned to the Tour de France believing that he could win the Tour "clean" - he eventually finished a very reputable 3rd place - a remarkable feat for a guy who had been out of pro competition for 4 years and was nearly 40 years old. He made one last run in 2010, which turned into a disaster due to a number of factors including a fall. And so many, including me, thought the Armstrong story was basically played out - cancer survivor turned 7x Tour de France winner turned philanthropist turned washed-up cyclist finally ready to settle into retirement. Armstrong had one problem - a guy named Floyd Landis. Landis was a former teammate who won the 2006 Tour de France only to be stripped of that title for testing positive for a banned substance and suspended from the sport for two-years. Upon his return, he sought out a position on Armstrong's Team Radio Shack, only to be told to effectively "take a hike". Landis turned out to be the grenade that exploded in Armstrong's face. Landis went on to tell his story to the press about the years of doping practices that took place on Armstrong's USPS team. But, then he went to the Federal Government, which opened an inquiry into the matter as Armstrong's main sponsor for the team was the USPS - a division of the Federal Government. Several inquiries and numerous depositions later, the United States Anti-Doping Agency (USADA) turned over its findings to the UCI, which found enough credence in the report to strip Armstrong of all 7 Tour de France victories. What transpired within a matter of weeks was an avalanche that completely buried Armstrong - all of his major sponsors left him (Nike, Oakley, Trek, Giro, FRS, etc.) - an event that Armstrong calls a "$75 million day" and then then the biggest hit came, Armstrong was effectively forced to resign from the Livestrong Foundation - the charitable organization that he started to provide support and research in the fight against cancer.

A Complicated Legacy:

Whether you like it or not, Lance Armstrong raised $500 million for the Livestrong Foundation and provided hope to thousands of people who faced cancer - you can say it was a facade for his lying and cheating, but I know a lot of liars and cheaters who haven't raised a dime for anything good. And Armstrong was more involved in that organization and the cause itself than most would like to believe. He visited people; he sent text messages to people battling the disease; he recorded video messages; he showed up at events; he showed up at hospitals - he was an active member of the cancer community. Who am I to say whether it was genuine or not? But I do know this - he was there and he sent one of the most powerful messages that has ever come from a professional athlete or other public figure who has survived an illness as pervasive as cancer is: "Not only can you overcome the odds and beat the disease; you can actually be better than you were before." In a 2008 Livestrong blog post, Armstrong wrote to one of the many people battling cancer that he built a relationship with - a kid named Jimmy Fowkes. He wrote:

"Lastly, My thoughts and prayers go out to Jimmy Fowkes who is one of most amazing young men I have ever met. He is a survivor who is awaiting test results on a possible recurrence. He is an inspiring individual who has not only raised large sums of money for the LAF but who has taught so many people what it means to LIVESTRONG. Best wishes to his little sister Molly, and his parents Margo and Dan whom I have come to know well. They are truly part of the family and as I told Dan over the weekend, the entire LIVESTRONG Army stands ready to help."

Fowkes endured 4 recurrences of brain cancer and went on to raise $230,000 for the Livestrong Foundation. He went on to attend Stanford University. He remains the only four-time winner of the National Collegiate Cancer Foundation scholarship. Fowkes passed away from cancer in February-2014 and Armstrong sent out the following tweet:

View fullsize

To this day, he still sends private videos and notes (like the below) to people afflicted by cancer - there is no longer any media coverage. There isn't hoards of people lauding him anymore for being some hero. So I have no idea why he does it. But does it really matter? The act of it counts for something - it has to:

"Hi, Melody. I’m Lance Armstrong. I just wanted to send you a short video message to let you know that I’m thinking about you and I’m pulling for you. I understand you’ve had some up-and-down news when it comes to your health. Just hang in there and know there are brighter days ahead. If there’s anything I can ever do to help you, please let me know. In the meantime, keep kicking cancer’s ass. Best of luck."

So while it may sound like I'm a fan of this guy who ignores the fact that not only did he cheat and lie, he made life hell for anybody who posed a doubt (via lawsuits, taunting, etc.), I'm not. I'm fully aware of the brutal nature at which he treated anybody who doubted the credibility of his miraculous recovery. I think it's disgusting. In some ways, I think his actions in response to the allegations of wrongdoing were worse than the wrongdoings themselves.

Armstrong lives a quiet life now that he says is "thinning out". He is still facing a number of lawsuits that threaten any semblance of wealth that remains. He has five kids now, a gorgeous girlfriend / partner (who is also mother to one of his children), and frequently does interviews where he discusses the very things he's despised for. He says he's sorry, but nobody really knows if he's sorry for cheating -or- if he's sorry for getting caught for cheating.

I don't know what the future holds for Lance Armstrong, but for the vast majority of people that hope we never hear from him again, I'm not one of them. I think he still holds a lot of 'potential' to do good for two fights:

1. The fight against cancer, and,

2. The fight against that fine line that exists between 'winning' and leaving your character behind in the process. 

I'm not actually sure which is more significant or relevant in today's world. They're both afflictions that the new generation is constantly faced with - one of the afflictions (cancer) invades the body. The other affliction (the pressure to win even if you have to lie, cheat, and steal) invades the mind. Both awful; both pervasive.

And that's why Lance Armstrong still matters - he's been afflicted with both, and [I believe] he has much left to teach us about those fights - one of the fights [cancer] can teach us about the power of hope and courage; the other [lying, cheating  and stealing] can teach us about the power of deceit.

How Zoom has made the awkward the new normal...

What can I say, Zoom has forever changed the way we interact, and with that comes a new normal or awkward moments that happen all the time and what is most funny….is we often think nothing of them now.

View fullsize

Just a few of many awkward yet normal moments on Zoom.

The Diversity of Time: 3 Italians, 1 German, 1 Swiss, 1 Japanese and 1 American Walk Into a Bar

Just when luxury mechanical watches were deemed a thing of the past with the entrance of smartwatches, they have had a phenomenal renaissance over the past 6 or 7 years, regaining their status as precious possessions that hold very little functional value, but very high sentimental value. We live in a day where vintage plays its role as a consistent trendsetter - an antithetical observation to say the least. While many will argue that we have way too many brands right now, too manly everyday watches being sold at premiums with the label of ‘limited edition’, and absurdly high premiums being paid for rare watches at auction, I would argue that watches are an asset class…and like any asset class, you’re going to buy, hold, transact, hedge, and leverage.

View fullsize

A portion of my collection not in the safety deposit box: L-to-R: Panerai Luminor PAM00088; Panerai Luminor 1950 Carbotech PAM00661; Panerai Radiomir PAM00187, IWC Big Pilot 2009-01; Rolex Explorer II 42mm 216750-002; Seiko SRPC91; Apple Watch Series 1 Edition 18K 42mm

Diversity of Time - Singularity of Desire

Sure - I love Rolex watches and have a number of them, but so do a lot of other people. I happen to love Panerai watches a bit more - a lot of people don’t - they’re too big, too bold, too crude, too Sly (as in Sylvester Stallone who really brought the brand to prominence). And that’s fine, because as many people drool over Rolex watches, there are millions of “Paneristi’s” out there and there are also millions of people who love the classic $300 Seiko diver - it’s reliable; it’s replaceable; it’s comfortable. There are too many things in this world that we’re told we should like - whether that’s political ideology, Netflix shows, or electric cars. Watches still enable to like what they want even if nobody else does not - the watch snobs of this world have a place….and it’s at stuffy tradeshows like Baselworld (RIP). Watches come in all shapes, sizes, colors, and functions…and you can lust after all of them.

Richard Mille v. Audemars Piguet

Richard Mille is a genius who has created incredibly technical status timepieces that are seen on the wrists of celebrities spanning from motorsport to NFL football to Olympic track stars. Richard Mille’s watches are considered modern (not a lot of history), but cost more than most peoples’ homes, but as one prominent collector once said, owning a Richard Mille is not just about having something really valuable…it’s about belonging to a club.

On the flipside, Audemars Piguet, a company with a very rich history and depth, is doing things that are equally dazzling - check out what they’ve done with their all-ceramic Royal Oak with integrated bracelet. Or, check out their new concept pieces - they are complex, hold an incredible amount of precision, but can still grab the guy who has been collecting for 25 years, or the guy who just won the lottery and wants the flashiest, most complicated watch he can find.

To me, part of the phenomenon that has re-elevated high horology to new heights is this commonality of audience with complete divergence of provenance.

Rolex and Patek Philippe

Rolex and Patek Philippe have a lot in common - they are both family-owned businesses who maintain a death-grip on distribution, but have a history behind them that tugs at the heartstrings that spans history. Consider this, Lyndon Baines Johnson wore a Rolex Day-Date, which is now known as the Rolex Presidential - it is a solid gold watch that was a status symbol then, and remains one today. But, that’s not the most interesting part. The Rolex Presidential has been unofficially known as the official watch of Hip Hop (Tupac always wore won) and the NBA - it is not uncommon for an NBA Draft Pick to walk out of the ‘green room’ wearing a flashy suit and a blinged-out Rolex Presidential. To think that a watch has maintained status for such a long period of time while remaining relatively unchanged in look is impressive, but to see the diversity of people that embrace that status symbol is even more impressive.

Patek Philippe is another beast of this asset class of timepieces. I want to point out something that happened last week with Patek that just speaks to how crazy the world of high-end timepieces have become.

On January-22, Patek Philippe announced it would be discontinuing its beloved Ref 5711 Nautilus. Ok, so what? The 5711A (stainless steel version) retailed for $30,600 - a high price for any watch let alone a stainless steel one, and it’s not like you could actually buy one for retail price as the demand was astronomical.

But…what if I told you that within 48 hours, pre-owned versions of that people were asking in upwards of $120,000 for that now-discontinued $30,600 5711A. Point being, prior to it being discontinued, these watches were trading on the grey market for around $60,000. If you had timed it right, you could have paid a massively inflated price and still doubled your money.

View fullsize

The Bottom Line:

This Patek 5711A phenomenon is not an isolated incident - there have been similar watches that have shot up in value in a short period of time, and there will be more. But keep in mind that we are talking about a watch, not a tech stock. But after the shenanigans of the stock market over the past week, which asset is more stable? - the one with tangible presence and complete transparency as to what it is, where it’s been, and who wants it….or the ticker floating across your screen with no transparency with billions on one side of the trade driving it to fail, only to be caught by the upward recoil of billions supported by the clever retail investor?

You tell me.

Lessons Learned: Business Travel During COVID-19

De-icing an Airbus A320 at Boston Logan Airport.

Since the beginning of October, I have been traveling again for business to assist a healthcare system through its bankruptcy filing and asset sales process. I think it is important to acknowledge that this travel was an ‘exception’ based on the needs of our client and the nature of our work - it required special permission from my employer’s leadership, and was done on a 100% voluntary basis. All that said, traveling again to serve clients in their darkest hours during our most vulnerable times has taught me many lessons that will hopefully live on after the COVID pandemic.

As a bit of background, I am a restructuring professional and my job is to lead teams to advise clients as they face financial hardship, structural issues with their businesses and potential insolvency. I would say that most of the executive teams of our clients have little-to-no experience facing this type of crisis. So unfortunately, they are facing an unknown crisis…within an unknown crisis and they are looking for quick guidance to navigate everything from day-to-day decisions, liquidity management, employee communication, and external stakeholder demands, to create a semblance of structure to enable prudent decision-making for the benefit of all involved.

1. Zoom is an enhancement, not a replacement: There has been much talk and speculation that collaboration tools like Zoom will be the ‘new normal’ and that remote work is here to stay. That may be true for some industries and some jobs, but for my job, Zoom enhances my work, but it will never replace the essence of what I do. Both from an internal teaming standpoint and a client advisory lens, Zoom tries to replicate in-person interaction, but ends up creating a false sense of presence, fails to capture critical body language, often distorts the messaging, and enables very robotic habits that dilute productivity. On the flipside, I will say that when trying to solve a defined problem, the ability to get on a platform like Zoom, share an analysis and discuss the very issue at-hand, Zoom is a phenomenal tool that fills a void, which drives efficiency and clarity.
   
   

2. Trust is earned in-person, not by-screen: Trust, that virtue by which all great intentions are gained or lost, is important in all types of work, but none more so than in work where the very livelihood of thousands of employees rests on each critical decision made (or not made). But, trust is also essential within teams - we are relying on people we’ve never met, never actually seen, nor sat and talked with face-to-face. The trust I speak of is not about deception, it is about truth, comfort and reliance. Being able to physically sit with your team (at least 6 feet apart) and discuss critical issues, key items to get done, and answer questions establishes and bridges that gap to establish trust far better than any high-def camera or 5G cellular connection could ever dream of.
   Physical presence enables you to see when people truly understand what you are saying, but it also allows you a window into situations that require more discussion. It is so easy to end a Zoom call because you have another one scheduled right after, or because you don’t want to hold everybody up. But, there is so much to be gained when someone can pull you aside and say, “you know what, I’m really not comfortable with what we just discussed” or “I really didn’t understand the implications of the decision we are contemplating here, can you explain it in further detail?”. It is those moments, as small or large as they may be, which creates trust and comfort during times of great stress. And we don’t ever acknowledge the tremendous value of those types of ‘little situations’ until we are no longer afforded them.

   But business travel during COVID also creates another need for trust that is not something many of us are used to - you rely on your colleagues to tell you that they were with someone that just tested positive for COVID and therefore, it is best that they not travel for the next 14 days. You rely on them to tell you that they were at a bachelor party and it is best not to put the team at-risk by coming back to the client site the next week. But when you build connections with people, it bridges the mindset of "better safe than sorry”, which has become so critical during COVID.
   
   

3. Business travel is an addiction: I am a business travel addict. Admitting the problem is the first step to recovery. As someone that averaged ~200 nights of business travel a year pre-COVID, I can tell you that going from that torrent pace to 0 nights was excruciating painful - that was not ‘tapering’ that was quitting ‘cold turkey’. Traveling for work is a ‘double-edge sword’ - one one hand, it creates this huge issue between balancing your work and personal life, but on the other hand, it creates a sense of energy and an elevated purpose that sitting in front of a camera all day never can replicate. As I have told many people, 200 nights per year on the road was not a good path, but neither is 0. I think business travel during COVID has created a better equilibrium for someone like myself that needs a healthy dose of ‘on-the-go’ work, but also needs to slow down a bit to find better balance. I know I am not the only addict out there and I hold great empathy for those who are struggling as I was, sitting at home in front of a camera every. single. day.
   
   

4. Personal accountability for your lifestyle habits, prioritization of well-being and acknowledgement of mental health disorders are more important than ever: Business travel during COVID has definitely created habits to enhance personal well-being - whether that’s being more vigilant when it comes to not putting yourself in situations where the chance of contracting COVID is unnecessarily high, or acknowledging that things like sleep, hydration, and exercise are important to establishing a stronger immune system. Business travel during COVID has created a greater sense of ownership and responsibility that my behaviors can have a real (negative) impact on others. And that is one aspect in all of this that I hope becomes a lasting focus of personal accountability…pandemic or no pandemic.
   
   People love to play ‘Monday Morning Quarterback’ now about all they would / could have done to curb the impact of COVID-19 in the United States, but one thing is indisputable - Americans that have pre-existing health conditions (most which are linked to obesity, high blood pressure, diabetes, etc.) are more pre-disposed to dying from COVID. No policy could have changed the fact that living unhealthy lives pre-COVID made the impact of COVID worse - we eat too much, we drink too much, we are very sedentary, we don’t exercise enough and we don’t get enough sleep. Additionally, mental illness has been treated as a ‘taboo’ subject with connotations that link it to words like “crazy”, “psychopath”, “psycho”, etc. - which does nothing but isolate those who suffer from mental disorders and pushes them to internalize the symptoms, which prevents them from getting the treatment they need. It’s sad to think that it would take a pandemic for us to recognize mental disorders like any other disease process, but I do think a byproduct of being ‘couped up’ with people is making it harder to disguise these diseases. It’s time we give permission for these people to seek the help they need without demonizing them as monsters.
   
   

5. Perspective is worthy of a reset every now-and-then: Business travel during COVID has been challenging, but it has enabled many good things, including a reset on perspective. As people around the world, and those within our own communities, continue to struggle with the realities of COVID - whether that be challenges related to health, job security, or all the unknowns that exist as to ‘what’s next?’, being able to take a hands-on role in helping a company (and more importantly, its employees) through the struggles of a financial crisis has brought more meaning to my work. I found it very easy to get caught up in financial analyses, powerpoint decks, and status updates (all of which have their place), but it is so easy to lose sight of what your work really means. I am not a frontline healthcare worker who risks his / her life on a daily basis trying to save the lives of those with COVID, and this should not be interpreted without an acknowledgement for that distinction. However, COVID has, and will continue to put financial burdens on companies and their employees long after everybody is vaccinated. Having the ability to collaborate in-person with our team and see firsthand the positive impact that your work can have, has been a rewarding experience that could never truly be obtained through a camera. We all seek to find a true purpose and positive meaning in what we do and it is so easy to get lost in all the distractions that cloud the results of what we do - if COVID has any positive lasting effect on our world, my hope is that it brings a greater sense of purpose and recognition of how our individual actions and contributions affect our communities, it drives a greater appreciation for those who sacrifice their well-being on a daily basis for the benefit of others, and it instills a greater appreciation for living holistic lifestyles with increased focus on physical and mental health.

The best way to stay safe is to stay at home. Traveling for business as I have described was due to some very unique circumstances and the perspectives provided should not be interpreted that working from home is not valuable, nor that it is a barrier to creating value through your work. I have simply provided a handful of lessons that traveling during these challenging times has taught me that will hopefully enhance my ability to lead teams and serve clients in a more effective way going-forward, regardless of whether it is in-person or through the lens of a camera.

Apple set to post first $100 Billion Quarter

AAPL will post its first $100 billion quarter to end the 2020 calendar year, which is its fiscal first quarter of 2021.

Apple is set to post its first $100 billion revenue quarter when it reports its calendar Q4 / fiscal Q1 earnings in late January. The company has been honing in on this milestone as it reported $91.8 billion in revenue during its last holiday quarter. Even in light of COVID-19, the company continues to grow top-line revenue in large part due to its continued growth in its Services and Wearables segments. Apple has been hovering around a $100 billion quarter with last year’s holiday quarter coming in at $91.8 billion.

Here are the tailwinds that I foresee driving Apple’s $100 billion 2020 Holiday Quarter:

• iPhone 12 launch deferral: Ever since the launch of the iPhone 4S in Sept-2011, Apple has maintained a cadence of launching its latest iPhone during the tail-end of September, which falls into calendar Q3, which is Apple’s fiscal Q1. This year, all of the iPhone 12 models were not launched until October, meaning that all iPhone 12 launch revenue will fall into the holiday quarter. Additionally, a number of analysts have commented on 5G driving a super-cycle for the iPhone installed base who have not had a great reason to upgrade in the past few years. It is also important to keep in mind that the launch weekend for an iPhone produces a disproportionate amount of unit sales and revenue, so pushing that launch into the December quarter is significant and cannot be analyzed on a linear sales cadence basis.

• Apple Watch entry prices: Apple launched its latest flagship Apple Watch (Series 6) on time, but that’s not what I’m looking at in terms of tailwinds. The $199 and $279 entry price-points for the Apple Watch Series 3 and Apple Watch SE, respectively will provide an excellent price point for holiday gifting.

• Apple Silicon Macs: If there was ever skepticism about Apple’s ability to produce a quality Mac with true differentiation using its old silicon, it is gone. The new Macs with Apple’s own M1 SOC has produced universal positive reviews due to its speed, integration and efficiency with the MacBook Air’s getting an average of 15 hours of ‘real use’. Even with the Mac having a blowout quarter in the September quarter, the launch of these Apple Silicon Macs will drive another strong quarter for the Mac lineup.

• iPad Air 4: The iPad Air 4 specs are amazing and another product that has received universally positive reviews. The iPad has made a nice comeback after a number of stagnant years. I think the momentum that we have seen over the past few quarters will continue in the holiday quarter.

• AirPods and AirPods Max: I think AirPods will continue to sell extremely well even with no real change to the product over the past few years. Additionally, with today’s announcement of the AirPods Max, you are going to see another product driving accretive revenue. How that product will sell is anyone’s guess, but I am sure that at a $579 price point, it will generate decent revenue.

As seen below, Apple typically converts about one-third of its holiday quarter revenue to operating cash flow - given a $100+ billion revenue quarter, you can expect them to generate $35 - $40 billion of operating cash flow in this holiday quarter - I continue to argue that Apple’s ability to produce Free Cash Flow is the true undervalued part of its business - the products are great, but it’s the cash conversion that truly makes the fundamentals one-of-a-kind in a world that has places more emphasis on revenue than actual cash.

View fullsize

Source: AAPL SEC Filings

5 Things Every Non-Profit Must Have

The simplicity of philanthropy (take-in to give-back) actually undermines non-profit strategy because it discounts some of the core fundamentals needed to actually be effective, both in generating dollars and engagement, and efficiently channeling resources. Non-profits need the following 5 things to serve their underlying missions:

1) An Evolving Mission Statement (Problem and Solution)

It seems so simple, but so many non-profits lack a clear mission statement that defines the problems they're trying to solve, and how their organizations are trying solve them. A lot of non-profits do the first part very well - they define the problem. Many do a very poor job of connecting a tangible solution (or set of solutions) that they are using to solve the problem. The mission statement is likely one of the first things that a non-profit ever develops and they let it stay static. In reality, mission statements need to evolve as the understanding of the problem becomes more clear. I don't believe in annual updates to the mission statement, but I do believe a regular assessment of the mission statement is critical.

2) A Deep Desire to Experiment

In the corporate world, a deep desire to experiment results in innovation. But innovation doesn't just happen - it's based on a fundamental understanding within the executive team and the board that it needs to experiment (pilot, prototype, whatever) to stay ahead of the competition. Sometimes that means cannibalizing yourself (e.g., iPhone ate the iPod). For non-profits, this means not sitting around and waiting for the same checks to come in year-in and year-out. It means using vehicles (people, etc.) to go out and try new things. Experimentation is about failure, and failure is about learning. The more experimentation that non-profits engage in, the more they will learn about ways to create more effective engagement.

3) A Really Good Website

Statistics continue to show that non-profit websites are the main interface with the public when it comes to messaging and story-telling. Social media is a new channel for promotion, but websites are still the anchor to selling your cause. A really good website, in my opinion, has 3 components: 1) A simple User Experience (UX) - it shouldn't take somebody 5 clicks to figure out who you are, what you do, why you're doing it, why people should care, and how others can help. 2) Updated Content - there are too many non-profits out there that have websites that have stale content. In today's world of real-time everything, if the last time you updated content was 3 months ago, you're stale...and it is painfully obvious; and, 3) Rich Content - I define rich content as stories of how the work you're doing benefits people. Don't show me a half-narrative of just the problem - show me how what you're doing is helping the problem and if possible, put numbers to it. Show me your solution is working. If your website looks like it was from the 90's, what does that say about your organization?

4) A Relevant Brand Strategy

Non-profits are no different than for-profits when it comes to branding. Branding is not just one thing - it's more than just your logo. Branding is an amalgamation of both tangible and intangible things that come together to reinforce to the world who you are and what you stand for. And just like everything else, consistent evaluation of 'brand' is something that all non-profits need to be doing to understand areas that might need to be re-calibrated.

5) Multi-Channel Giving

I define 'multi-channel giving' as multiple pillars (or avenues) in which one can give to further your cause and help address the problem. I've seen too many non-profits out there that have very narrow mechanisms for giving - a donate button and maybe 2-3 fundraising events. That's not good enough today. Every non-profit needs to create mechanisms that all people (the young, the old, the rich, the poor) can give that provides true engagement with your cause and no, that doesn't mean helping with administrative tasks. It means having the opportunity to see the problem first-hand and have a channel to contribute. The best non-profits empower their donors and that's the only way to scale - create avenues that leverage the enthusiasm of others to get out there and channel their time to take action for your cause.
 

The Bottom Line

These things seem so simple - almost like a checklist. It's not a checklist and treating it as one only further deepens the problem in the philanthropic world - too much going in with too little coming out. The best non-profits create a multiplier effect where everything that comes in goes out at a bigger level....and that's the true power of philanthropy. In the for-profit world, they call it 'enhancing shareholder value'.

The Non-profit Innovator's Dilemma

In 1997, Clayton Christensen published the "Innovator's Dilemma" that sought to explain the very reasons why successful companies eventually fall victim to their own successes. Christensen argues that successful companies often get very 'comfortable' by relying on the very products / services that created their success that they do not feel any urgency to think about what their customers today will want tomorrow.

Non-profits are faced with the same dilemma described by Christensen and in many ways, are more likely to fall victim to it. Non-profits typically have a disproportionate reliance on passive income streams (donors who just write checks year-after-year), which creates less of a desire to reach new donors through new channels that can create far more engagement and sustainability to the organization's enduring mission.

So how can non-profits avoid the 'Innovator's Dilemma'?

• Build a diverse board

Non-profit boards are often very homogeneous and un-engaged. A few members often drive a disproportionate amount of contribution. There is often very little accountability to attend critical meetings and provide strategic oversight to ensure the organization is developing the necessary channels to engage with both donors and recipients. Boards need to have diversity in every sense of the word - age, gender, professional trade, and economic standing (to name a few).

Boards often look for 'whales' who can generate huge fundraising leads through their personal connections and there is a lot of value to that. However, there is not only a place, but also a huge need to have board members who can bring insights on how to reach donors that have never been part of your funding base. This is not about 'millennials', it's about psycho-demographic targeting that seeks to reach donors based on contextual values such as lifestyle, personality and values - all things that are agnostic to traditional segmentation attributes.

• Experiment...fail...and experiment more

Non-profits need to be experimenting far more today than in previous generations. Why? Simply put, there is too much of the same in the world of non-profits. It's not good enough to connect with donors on pure mission alone. You need to create a two-part narrative - problem and solution. It's easy to define the problem, but creating solutions that truly resonate with people is the linkage needed to build sustainable support. I am a huge advocate of 'multi-channel giving' - enabling people to engage with your cause through multiple avenues besides simple financial donation. But, in order to create these channels, you need to experiment and fail.

Organizations that don't tolerate experimentation and failure will never unlock growth. Ideas come from everywhere and simply dismissing them because they don't fit perfectly into a strategy is like throwing out a whole carton of eggs because one is cracked. This is far easier than it sounds, but a diverse board who brings a deep breadth of different attributes will help facilitate into an experimentation-driven organization that is willing to invest in ideas, even at the expense of failure.

• Have the courage to change

It takes a lot for non-profit organizations to change course. Non-profits that have a long history often feel that changing course on mission or modality of solution will be undermining the founders of an organization. When the ailing Apple CEO, Steve Jobs, was transitioning out of the CEO role to Tim Cook, he gave him one piece of advice..."don't ever ask yourself what I would do?" It was probably the single most empowering thing for an incoming CEO of the most valuable company in the world to hear.

But, there are many lessons from that simple advice. Perhaps the most important is that times change and the way you empower others is by giving them the freedom to make the choices that are best for the organization as the world around it evolves. Far too many non-profits are paralyzed by their founders - it is not about fundamentally changing the underlying purpose of the organization; it is about creating better engagement and ultimately, sustainability, so that future generations can carry the torch of the cause.

Innovation is not some mythical leapfrog residual of thinking - it is iterative and it involves a lot of trying and failing.

“When you bring the right diversity of people together who are committed to the underlying cause, you will find evolutionary change in the form of an organizational culture shift based on new ideas and the initiative to actually try them. That will gradually dislodge the theory that ‘what worked yesterday will work into perpetuity’. The best answer to any dilemma is to analyze carefully, but act definitively.”

Lululemon and the Monopoly of 'Athleisure'

People say that Lululemon is nothing more than overpriced 'Athleisure' wear with a good brand and will be a fast-fad, much like many of the high-end fashion brands that have proceeded it.  I haven't done a deep dive into the financials of $LULU, but I do know what I see - that damn horseshoe is everywhere.  And its been around for a while...so what has it done that other high-flyer niche fashion companies have not?

There's a lot in Lululemon's marketing that strikes a chord with the consumer. Lululemon has really taken the idea of 'lifestyle marketing' to a whole new level. The company offers yoga classes and really promotes a lifestyle that people connect with. As this country goes through this whole 'health-and-wellness' phase, there is a lot of appeal for a company that promotes wellness and 'zen' as a part of everyday life - not a radical change to the way a person lives, but a perception of brand-promise.

The damn bags:

So you have to start with the damn red bags. Yes, they're bold and confusing - nobody could ever tell you what they say, but it's likely something very 'zen'. However, they're recognizable & reusable. In a day where most companies are still selling product in disposable bags, the idea of a reusable bag as a marketing tool is brilliant. And yes, you see the horseshoe, which has significant brand connotation now.

Wear it. Be it (sort of):

I'm not sure if most of the people walking around with that horseshoe logo on their clothes actually do any type of yoga or physical exercise. In fact, I'm quite certain that some of them don't. However, the logo provides a feeling of empowerment - an image of "I'm hip AND healthy". There is something very clever about how the company has spun its lifestyle image to empower people who have no clue what fitness is. I'm no branding expert, but when you can convince somebody that wearing a particular brand (at a premium price) will project an image of health and wellness - that's incredible.

Did I just see that?

So...you're in a mall and you happen to see a bunch of people huddling around a red banner and you get curious about what the heck is going on [ref: pic above]. You get a little closer and you see two people (a male and female) doing crazy yoga poses.You think to yourself, "wow, that's odd."  But then you look around and there are a whole bunch of people watching. What the heck are they watching? Well first, they're watching some crazy yoga poses. But second, they're watching a company market itself. It's bold; it's a bit odd; but, it gets peoples' attention. Is that not what marketing is all about? Creating initiatives that get people interested and eventually find their ways into your stores?

I'm quite amazed. I'm quite confused. I'm quite impressed.

AAPL's Wearables and Services Juggernaut

In Walter Isaacson’s biography of Steve Jobs launched shortly after his death, there was apparently some concern from Jobs that Tim Cook wasn’t exactly a “product guy”. That may be true, but Cook has proven to be a "money guy”. The way that Cook has strategically guided the company to focus on developing other products and services that complement the company’s most lucrative product and further ‘trap’ people within the AAPL ecosystem has been nothing short of amazing. This was no more apparent than commentary that the company provided on its Fiscal Q3 (June-2019) earnings call in July highlighting the growth and scale of its Services and Wearables businesses. Key commentary:

Services: $11.5B (+13% / +15% if excluding one-time item from FY18)

• Geographic diversity: Double-digit services revenue growth in all 5 geographic segments

• Paid subscriptions: >420 million paid subscriptions

• Apple TV: Apple TV App Viewership (+40% YOY)

• Apple Pay: ~1 billion transactions per month (2x a year ago) – 47 markets

  • Apple Pay v. PayPal: Apple Pay is adding more users on a monthly basis than PayPal and monthly transaction volume is growing at 4x the rate of PayPal.

Wearables: Accelerating growth exceeding well over 50% YOY (now bigger than 60% of companies in Fortune 500)

• Apple Watch: new June revenue record

• New to Apple Watch: >75% of Apple Watch buyers in June quarter were buying their first Apple Watch.

• AirPods: Continued phenomenal demand - “cultural phenomenon”.

“If you step back [and] consider Wearables and Services together, two areas where we have strategically invested in the last several years, they now approach the size of a Fortune 50 company.”

Just to put that in perspective, based on Fortune’s 2019 ‘Fortune 500’ rankings, the 50th ranked company was Prudential Financial with annual revenue of ~$63 billion. A few other notable companies that AAPL’s Wearables + Services business now outrank in annual revenue:

• Walt Disney (#53)

• HP (#55)

• Facebook (#57)

• Goldman Sachs Group (#62)

• Cisco Systems (#64)

iPhone 11 Pro Max - It is all about the Camera!

When Apple sold its newest iteration of its flagship iPhone as a huge upgrade on the camera, they weren’t lying. I am not a professional photographer, nor a photographer in-general, however, I have seen a noticeable improvement in my otherwise amateur-ish photo escapades. Shot on iPhone 11 Pro Max…

“To find peace, sometimes you have to be willing to lose your connection with the people, places, and things that create all the noise if your life.”

View fullsize

View from my balcony during day using Telephoto (wide-angle) camera and ‘burst’ mode. Unobstructed views of Diamond Head to the left and the Pacific Ocean to the front.

View fullsize

Panoramic shot from my balcony….

Here are the specs of the camera system on both the iPhone 11 Pro and the iPhone 11 Pro Max:

• Triple 12MP Ultra Wide, Wide, and Telephoto cameras

• Ultra Wide: ƒ/2.4 aperture and 120° field of view

• Wide: ƒ/1.8 aperture

• Telephoto: ƒ/2.0 aperture

• 2x optical zoom in, 2x optical zoom out; digital zoom up to 10x

• Portrait mode with advanced bokeh and Depth Control

• Portrait Lighting with six effects (Natural, Studio, Contour, Stage, Stage Mono, High-Key Mono)

• Dual optical image stabilization (Wide and Telephoto)

• Five‑element lens (Ultra Wide); six-element lens (Wide and Telephoto)

• Brighter True Tone flash with Slow Sync

• Panorama (up to 63MP)

• 100% Focus Pixels (Wide)

• Night mode

• Auto Adjustments

• Next‑generation Smart HDR for photos

• Wide color capture for photos and Live Photos

• Advanced red‑eye correction

• Photo geotagging

• Auto image stabilization

• Burst mode

• Image formats captured: HEIF and JPEG

Source: Apple.com

Rolex's Baselworld 2019 - "Don't Hate the Player, Hate the Game"

Source: Rolex.com - GMT-Master II (Reference: 126710BLNR)

So the biggest headliner at the biggest watch show in the world gave what most have considered a ‘less-than-stellar’ performance with its new releases for 2019. Rolex released a number of new SKUs, with the main focus on the following three models:

1. An Updated ‘Batman’ (Ref: 126710BLNR): A stainless steel “Black and Blue” (aka the “Batman”) GMT-Master II with an upgraded 3285 movement and jubilee (as opposed to the traditional oyster) bracelet;

2. A new Yacht-Master (Ref: 226659): A Yacht-Master in 42mm for the first time in white gold with an updated 3235 movement, matte black Cerachrom bezel, on an Oysterflex bracelet with Glidelock extension clasp (btw, once they release this in SS, it is going to be one hard find); and,

3. A Two-Tone Sea-Dweller (Ref: 126603): A Sea-Dweller in two-tone for the first time ever with stainless steel and 18 carat yellow gold.

It should be noted that Rolex also introduced updates to its Datejust lineup and can’t forget about the completely ridiculous new Daytona with an elaborate intertwining of diamonds throughout the dial and an iced-out bezel.

Rolex Strives to Exert Absolute Control Over the Primary Market

As I’ve said many times, Rolex is a family-owned business that does not have shareholders to appease that controls its business (including production, model proliferation, and distribution) with the same precision as its newest mechanical movements. The fact of the matter is, while many want all of these new models, would it really make them any more accessible to the general public? The answer is “no” - you still cannot go into any Rolex Authorized Dealer (AD) and find any Rolex stainless steel sport watch - that goes for models such as the No-Date Submariner to the Cerachrom Daytona. And…models introduced last year (such as the highly-popular GMT-Master II "Pepsi”) remain both inaccessible through the primary market and still fetching near double retail price on the secondary market. I have no doubt that the ‘new’ Batman, will sell for thousands over retail price when it finally hits retailers (likely in the summer) and all of them will already be ‘allocated’ to preferred customers.

So as Rolex watches other high-end watch brands see their watches discounted by their own distribution channel and selling for huge discounts on the secondary market, the company sits in a highly enviable position of knowing that it can sell every watch it makes at retail price, and still leave demand on-the-table. Rolex has been playing the same game for the last four or five years, and if you don’t believe me, do two things

• Take a look at what you could buy for retail price from a Rolex AD in 2014 vs. what you can buy from that same AD today; and,

• Look at what a pre-owned stainless steel Submariner was selling for on eBay in 2014 (likely a discount) vs. what a similar watch is selling for today (likely a heavy premium).

Aspire for Desire

Rolex is an aspirational brand that sells aspirational products, and the best way to maintain that type of brand is to leave the public…desiring to aspire. And it certainly isn’t going to make people happy, but in an industry where everybody else is struggling, by not giving the public what it truly wants only strengthens Rolex’s market position by creating an insatiable level of demand. After all, the allure of Rolex watches are in ‘stories’ (not precious metals) and the story of the day is….”I always want what I can’t have.”

Out of Thin Air - Apple Figures that will Blow Your Mind

View fullsize

Image Source: Apple.com

Apple reported a “disappointing” holiday quarter (Dec-18) in January, with a slump in iPhone sales attributed to lower-than-expected sales in Greater China, foreign currency weakness , and a weaker upgrade cycle due to further pullback of carrier subsidies and the iPhone battery replacement cycle. Apple CEO, Tim Cook, had already issued a letter to investors warning that the company would fall short of its Fiscal Q1 guidance that it provided in October, which sent its shares tumbling in an overall horrid quarter for tech stocks.

But beyond all of the ‘noise’ and obsession around iPhone sales, Apple reported a number of other stunning statistics that ‘should’ alleviate concerns around the company’s continued influence in the world as the undisputed leader in the amalgamation of hardware, software and services. Here are a few:

Installed Base

• Active Installed Base (Measure of Users for all of its Devices): 1.4 Billion (up ~100 million over past 12 months)

• iPhone Active Installed Base: 900 Million (up ~75 million over past 12 months)

Services

• All-Time Record Revenue in Dec-2018 Quarter: $10.9 Billion

• Growth of Services Revenue: <$10 Billion in Calendar 2010 to $41 Billion in Calendar 2018

• Apple Music: 50 Million paid subscribers

• Apple Pay Transactions in Dec-2018 Quarter: $1.8 Billion

• App Store Transactions: Largest single day ever with >$322 Million of purchases on New Year’s Day

• Largest News App in the World

Wearables

• Wearables (Apple Watch + AirPods), Home, and Accessories: 33% y-o-y growth in Dec-18 Quarter

• Wearables (Apple Watch + AirPods): 50% y-o-y growth in Dec-18 Quarter [Both Apple Watch and AirPods were supply-constrained exiting the quarter]

• 2018 AirPods Sales: Apple does not disclose these numbers but Centerpoint Research estimates Apple sold 35 million AirPods in 2018 - at $159 per pair, that equates to $5.6 billion

• 2018 Apple Watch Sales: Apple does not disclose these numbers but Strategy Analytics estimates Apple sold 22.5 million Apple Watches in 2018 - at a conservative $375 per watch, that equates to $8.4 billion [Note that Rolex, which is a private company, is estimated to have $4.6 - $5.0 billion of annual revenue, so Apple is by-far the largest watch ‘brand’ in the world, as measured by revenue.]

• Apple’s Wearable Business Size: Assuming $5.6 billion of AirPods revenue and $8.4 billion of Apple Watch revenue, Apple’s Wearable Business is likely over $14 billion now, making it a Fortune 200 company.

Apple’s Wearables statistics are especially astonishing because that business did not even exist four years ago, and now it generates the revenue of a Fortune 200 company. Further, it went from $0 to the largest watch brand (as measured by revenue) in the world in a span of less than 5 years. The Apple Watch was decried as a “why would I need one of those?” devices when Cook unveiled it in September-2014 and yet, the company has sold more watches in each successive year after launch. Many are on their 2nd or 3rd version now. We are just beginning to understand the power of this device and its implications for the future of active health monitoring - Apple just completed its heart research study in collaboration with Stanford Medicine and had over 400,000 participants.

So while the iPhone continues to be Apple’s ‘bread and butter’ it is no-less-than staggering how interconnected its products and services are in the world. No other company has the ability to drive an industry and its user base forward like Apple - Steve Jobs has been gone for over 7 years now, yet his vision of creating products that leverage technology to elevate the human aspiration is as strong as ever.

5 Watches I Hope to See Unveiled at Baselworld 2019

View fullsize

The world of ‘haute horology’ will once again convene in Switzerland for Baselworld 2019 from March 21st through March 26th for some of the most prominent watchmakers in the world to show off their latest-and-greatest updates to their collections for the upcoming year. There will be some notable absentees this year including the Swatch Group (Omega, Blancpain, Breguet, etc.) who announced that it will no longer be participating in Basel in late-July. In any case, the focus (as it usually is) will be on the most prominent watch brand in the world - Rolex. Last year’s unveils from Rolex and its ‘sister brand’ Tudor were some of the most widely coveted timepieces of the year that still cannot be found in any Authorized Dealer (“AD”) and therefore, continue to command significant premiums on the secondary market, which includes:

• The “Pepsi” Stainless GMT Master II with jubilee bracelet (Ref: 126710BLRO), which is holding around $18,000 on the secondary market (about double the retail price of $9,250).

Source: Rolex.com

Not to be outdone by ‘big brother’, Tudor surprised the world by introducing two new models, which also remain highly coveted and in short-supply:

• The Black Bay GMT (Ref: 79830RB), with a similar ‘Pepsi' bezel (albeit with a burgundy and navy bezel) and an upgraded in-house MT5652 movement (70 hour power reserve).

• The Black Bay 58 (Ref: 79030N) - a big hit with the new-vintage crowd with its 39mm size, 11.9mm thickness, and its new customized in-house MT5402 movement (also a 70 hour power reserve).

Source: Hodinkee.com

So with that being said, there is no lack of curiosity or interest as to what the ‘House of Rolex’ will bring to Baselworld 2019. The irony in all of this is no matter what they unveil, nobody without a significant connection to an Authorized Dealer (“AD”) is going to get access to these watches at anywhere near retail price. In any case, I can still hope for these 5:

1. A Revitalization of the Tudor Submariner: Tudor is using its Instagram feed to tease what it will unveil at Basel, and from some of the pictures, it would be hard not to believe it will revitalize its legendary submariner line, which was a standard issue used by a number of country’s Navy divers, including the United States. The only questions with the rebirth of the Submariner is the overlap with Rolex (which appears to be no issue given the simultaneous “Pepsi” launches last year and the standing of the Heritage Black Bay series, which is effectively a diver’s watch.
   

2. A ‘Modern 6541 Rolex Milgauss’: Always a sucker for a rotating bezel, I would love to see Rolex resurrect a new Milgauss model in the spirit of Ref. 6541, black rotating bezel with the Milgauss name in red font and a black honeycomb dial. Rolex, like Tudor, has also been foreshadowing a change to the Milgauss with 11 straight posts centered on the watch. One thing that would be a shame to lose is the green domed sapphire - a manufacturing marvel that makes the current iteration really stand out from the crowd.
   

3. A Money Green Tudor Pelagos with a GMT Hand for ‘Good Measure’: The Pelagos is one of the most underrated watches in the entire Rolex / Tudor portfolio - a 42mm titanium diver with an in-house movement and one helluva auto-adjustable clasp, which honestly is on-par with, if not better than Rolex’s own Oyster Glide Lock bracelet. So what the heck, why not give us a “money green” Pelagos a la the very popular (and now very expensive) Rolex Submariner Hulk. And while they’re at it, would it hurt to throw in a GMT hand with a full 24-hour hour bezel to match?
   

4. Rolex Submariner with Oysterflex Bracelet: Ok, we know that the Submariner needs an updated movement - it’s using the 3135 COSC-certified movement - a very reliable movement, but lacks the 70-hour power reserve that seems to be standard fare for all new Rolex models. But here’s a thought, what about pairing the legendary dive watch with its amazing Oysterflex Bracelet? I know Rolex has limited the Oysterflex Bracelet to its precious metal watches (e.g., the platinum and gold Daytona’s among others), but it wouldn’t hurt to give the most recognizable Rolex of modern times a new look.
   

5. Black Bay 58 with New Colors: So the Black Bay 58 has turned out to be a wild success for Tudor. It’s slim profile (as compared to the normal Black Bay) and 39mm size is exactly what the market wanted. So, why not bring some colors to the model just like what Tudor did with the Heritage Black Bay - perhaps we’ll see a burgundy and / or navy bezel to align with the Heritage Black Bay line? Whether they do this or not, I’m sure the 58 will remain colorfully ‘out-of-stock’ at your local AD.

I am convinced we will not see the following: A stainless steel “Coke” GMT Master II; A new stainless steel Daytona; or, a new Stainless Steel Submariner with a new color bezel (a la “the Smurf”).

Why Being the Uber of ____ Failed.

Over the last 20 years, there have been signature companies that have completely transformed paradigms and platforms that redefine the way we consume products and services - three examples would be AAPL, AMZN and Uber. As other companies rise up and look to gain prominence, the natural tendency is to call themselves the AAPL of ____ or the AMZN of ____, and most recently, the Uber of ____ [Insert industry or geography]. An example of this 'phenomenon' would be the consumer electronics company, Xiaomi, which has effectively branded itself as the AAPL of China. Companies that have branded themselves as the "Uber of ____" have, in most cases, found that replicating the business model does not equate to replicating the success.

The business model can be replicated.

A company that calls itself the "Uber of ____" is effectively saying it is replicating Uber's labor-driven marketplace business that matches a very large supply base of drivers with a healthy demand of riders in an on-demand way and at a low price-point. This business model can certainly be replicated in other sectors beyond transportation such as food and product delivery (DoorDash, Postmates, Instacart, etc.), assistance with everyday tasks (TaskRabbit), and house cleaning. These companies ("market-makers") all fundamentally rely on the ability to connect independent contractors, who can flip on their availability and desire to work at-will, to satisfy consumer demand for their services. Like any marketplace, the transaction price fluctuates based on the balance of supply and demand. The market-maker, for the most part, scrapes a small percentage fee off every transaction.

Scale:

Marketplace businesses require a huge amount of scale as each transaction yields a small % of the actual price paid by a customer. Most companies account for this on a net revenue basis where, for example, $100 million of transactions (volume) may only yield $15 - $20 million of net revenue and that's before accounting for any G&A costs.

Labor-driven marketplace businesses are unique in the sense that in order to build scale, they rely on BOTH healthy supply and demand, neither of which can be directly controlled by the market-maker. However, the market-maker can indirectly control supply and demand with incentives and promotions (e.g., incentive fees to the labor supply-side with higher % payouts and discount promotions to the demand side). This sounds great, but the reality is that these types of promotions that are required to get both sides of the market hooked to the service create a hugely unprofitable business initially, even at the net revenue level - essentially, you pay out more to your labor supply than you collect from the customer demand side. However, once you establish a healthy market, you can essentially 'flip-on' profitability by reducing subsidies to your labor and eliminating discounts to your customers. It doesn't happen overnight and both sides of your market tend to be fickle, especially if competing market-makers exist.

Capital:

Given the costs associated with investing in markets (through subsidies and discounts) to build scale, companies need an enormous amount of capital to stay afloat. Even those that can generate positive net revenue (customer collections minus labor payouts), still have to cover a lot of other costs (marketing, corporate salaries, servers, investments in new technology), etc.). These below-the-line costs inevitably create companies that blow through capital faster than it can be raised.

Understanding FitBit's Missteps

On February 22nd, the wearable health and fitness-tracking device maker, Fitbit ($FIT) reported EPS of $0.35 on $712 million of revenue - easily topping consensus that expected EPS of $0.25 on $648 million of revenue.  However, the company's shares plunged 15% in after-hours trading after its Q1-2016 revenue guidance range of $420 million to $440 million fell short of the Street, which expected $484 million.  It now trades at just 20% above its all-time low, and 72% under its all-time high.

Fitbit - Defying the odds?

The popularity of $FIT's wearable trackers is a phenomenon in-and-of-itself.  At first glance, it appeared that $FIT was doomed when Apple ($AAPL) began shipping its new Watch wearable last April.  After all, $AAPL has grown to dominate profit-share in nearly every hardware category that it plays in, including smartphones, tablets, computers (both laptops and desktops) and now smartwatches.  The mistake that might have been made is assuming that $FIT's products would be subsumed by these more expensive smartwatches.  As the category continues to mature, smartwatches are proving to be much less focused on fitness, and much more focused on everything else (email / text / social media notifications, payments, airline boarding passes, etc.).

As the smartwatch category has begun to see the end of its infancy, there have been very few surprises.  Although $AAPL is not reporting unit sales of its watch, it is safe to say that it's by-far the most popular smartwatch on the planet.  But, what's interesting in the growth of this category is that $FIT has remained relevant and continues to be a very popular accessory even for people that are wearing an Apple Watch.  In the holiday quarter, $FIT shipped 8.2 million of its health and fitness wearables, up from 5.3 million in the year ago period (+55%).  That inherently creates an interesting dynamic as the company attempts to maintain its stellar growth trajectory.

What's Maintaining Fitbit's Pace?

If you actually talk to people that wear these $FIT devices, most of them will tell you something very interesting, and something I find truly unique in this wearable 'frenzy'.  They say that their $FIT bands are "motivators of activity" rather than just being "trackers of activity".  Meaning, $FIT wearers will actually adjust their behavior based on the number of steps that they've accrued throughout the day.  If wearers are lagging in steps, they might take the stairs instead of the elevator, or they might walk somewhere where they normally would have driven or 'hailed' a ride.  The fact that $FIT devices are able to dictate behavior (as opposed to just measuring it) is something that very few wearable trackers have been able to achieve.  I would argue it might be the only wearable that actually drives user behavior when it comes to physical activity.  Sure, the Apple Watch may give you a tap to stand-up every 50-minutes, but I have found very few people who see it as a fitness device.

Additionally, $FIT has incorporated 'gamification' into its companion app where wearers can join groups of friends, colleagues, or the-like to compete on overall physical activity (as measured in steps).  Gamification is not a new concept in wearables, the now-defunct Nike ($NKE) Fuelband and Jawbone Up all had / have some form of gamification embedded in their products. But unlike $NKE and Jawbone, $FIT has succeeded in making gamification a core part of the experience, which is also part of its unique behavior-driving appeal.

So What's the Problem?

Based on Fitbit's full-year 2016 outlook, which includes a mid-point revenue guide of $2.45B, it appears that the company is running into a similar problem as $GPRO - once you have one, there's little need to buy another as the functionality is not improving enough to warrant a replacement purchase.  The decelerating revenue is dramatic, going from nearly 150% growth in 2015, to a projected 32% for 2016:

View fullsize

So while Fitbit might be succeeding with its low-end trackers and associated user-engagement, its revenue growth strategy is akin to restaurants - "menu expansion" (as shown in the picture below).  In its 8-K filing for its FY15 results, the company said it would be incurring additional expenses as it continues the roll out of two of its new products in Q1-2016: 1) Alta - a Fitbit tracker with a more fashion-focused appearance ($129.99) and, 2) Blaze - a smartwatch with additional functionality such as a heart rate tracker and connected GPS ($199.99):

View fullsize

Source: Fitbit.com

The problem that $FIT will likely run into with these new products is two-fold.  With regards to Alta, the fashion appeal falls short of the critical standard of, "is this reason-enough to buy another Fitbit tracker at a $30 premium?". As for the Blaze, it is now attempting to compete with the dominant player in the space - Apple Watch, especially as $AAPL lowered the entry-level price for its Sport Watch to $299 (38mm) and $349 (42mm) on March 21st.  Unfortunately for $FIT, while the Blaze may carry the novel step-tracker of its predecessors, it falls well short of the Apple Watch when it comes to overall functionality which is enabled by $AAPL's phenomenal app ecosystem - it's the very reason you see many people wearing an Apple Watch on one wrist and a $FIT band (likely the Flex) on the other.

$FIT would likely be well-served by focusing on improving the functionality by expanding the capabilities of the very product that made the company (its Flex bands).  That focus would enable the company to help answer the one question that nearly every company in niche technology hardware is struggling with ($GPRO, Nest, etc.) - how can I get my user base to upgrade their devices?