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    Technology news - Apple Suppliers Show How Wall Street Helps Manage Expectations

    August 31, 2011, 11:48 PM EDT By Inyoung Hwang and Richard Davenport

    Sept. 1 (Bloomberg) -- Wall Street says Apple Inc. will post $28.9 billion in sales this quarter. Revenue estimates for the companies that build Apple’s parts suggest securities industry analysts are about $2 billion short.

    Sales at Apple’s largest suppliers are expected to rise eight times as much as the company’s, according to analyst estimates compiled by Bloomberg. Revenue for the makers of chips and other electronics may climb 9.3 percent this quarter from last, data on manufacturers accounting for about 75 percent of Apple’s cost of goods sold show. That compares with 1.1 percent growth predicted for Apple.

    Companies for decades have refrained from giving the most optimistic guidance so they can reward shareholders with results that exceed forecasts, and the Cupertino, California-based iPhone maker has few if any peers for managing expectations. Apple, which briefly surpassed Exxon Mobil Corp. this month as the world’s most valuable company, topped sales projections in 19 of the last 20 quarters, beating them by 6.5 percent on average.

    “What surprises me is that analysts continue to allow Apple to lowball their estimates,” Keith Goddard, president of Tulsa, Oklahoma-based Capital Advisors Inc., said in a telephone interview. His firm oversees $919 million including Apple shares. “Analysts accept Apple’s guidance and Wall Street’s consensus will usually drift a little bit higher, but then in earnings seasons, Apple blows it away every time.”

    Quarterly Earnings

    Applying the forecast sales growth among the suppliers to Apple would yield revenue in the September quarter of $31.2 billion, data compiled by Bloomberg show. Kristin Huguet, an Apple spokeswoman, declined to comment in a telephone interview on why the company almost always tops sales predictions. Apple’s own guidance calls for sales to slump 12 percent to $25 billion in the fourth quarter from the third.

    When Apple has reported quarterly results since 2006, it has exceeded the average earnings forecast given by analysts three months earlier by an average of 30 percent, according to data compiled by Bloomberg. Yet, analysts raise estimates by only 6 percent during the period, the data show.

    “Analysts are in a tricky position,” Alex Gauna, who covers Apple at JMP Securities LLC in San Francisco, said in a telephone interview. “In theory, the best information you’re going to get comes from the company. But in fact we know that information is not intended to be very helpful.”

    Gauna predicts sales in the fourth quarter will be $30 billion, 3.9 percent higher than the average estimate.

    Apple shares closed at $384.83 yesterday, up from $7.17 at the end of 2002. Steve Jobs, who quit as chief executive officer last week, presided over a 9,020 percent surge in the stock price between July 1997, when his appointment as interim CEO was reported by the San Francisco Chronicle, and his resignation.

    ‘Guiding Low’

    “I don’t believe they’re guiding low just so that they can beat, just so they can manipulate the Street,” Gauna said. “That would be the conspiracy theorist’s reason. I don’t suspect Apple is that calculative.”

    In the last 10 years, sales in Apple’s fourth quarter, which ends in September, increased at an average rate of 17 percent from the three months that ended in June. Should that rate of increase be repeated, Apple would post fourth-quarter revenue of about $33.4 billion, 16 percent higher than the average analyst estimate of $28.9 billion.

    Apple said on July 19 that sales in the period ended June 25 climbed 16 percent from the previous quarter to $28.6 billion. Analysts were expecting revenue of $25 billion, a 1.4 percent increase from the prior period and below the 10-year growth rate of 4.1 percent. The suppliers that account for 75 percent of its cost of goods sold reported revenue growth of 10 percent.

    No New iPhones

    Abhey Lamba, a New York-based analyst at ISI Group Inc., said the difference in 2011 from prior years may be that Apple didn’t sell a new version of the iPhone in the third quarter. He estimates sales in the fourth quarter will slip 2.5 percent to $27.9 billion. His third-quarter prediction called for revenue of $24.4 billion.

    “We go above their guidance for sure, but the question of how far above should we go is always a function on demand,” Lamba said in a telephone interview yesterday. “Given the uncertainty in the consumer market, we just tend to take a slightly more cautious stance.”

    The Standard & Poor’s 500 Index fell 5.7 percent in August, the biggest one-month decline since May 2010. A report on Aug. 30 showed U.S. consumer confidence sank to a 28-month low.

    Assembly Contractors

    Apple outsources the assembly of its products and computer chips to companies such as Hon Hai Precision Industry Co. and Samsung Electronics Co. Hon Hai, the Taipei-listed flagship of Foxconn Technology Group, is Apple’s largest supplier, accounting for about 37 percent of its cost of goods sold, according to data compiled by Bloomberg. Samsung is second, making up about 20 percent.

    While 21 percent of Hon Hai’s revenue comes from Apple, analysts estimate sales will rise 12 percent in the next quarter. This means revenue from the electronic maker’s other customers has to increase at a pace of about 15 percent to make up for Apple should its growth rate be 1.1 percent, according to data compiled by Bloomberg.

    The weighted average of sales growth estimates for Hon Hai’s customers, which include Hewlett-Packard Co. and Sony Corp., is 5.1 percent, the data show. Lamba and Gauna say the discrepancy may stem from Apple stocking up on inventory for the holiday season.

    “Apple might be building these products now but might sell them in Christmastime,” Gauna said. “Hon Hai might get the revenue this quarter but Apple might not get it ‘til Santa comes.’’

    Missing Estimates

    Hon Hai posted second-quarter net income this week that missed analysts’ estimates after costs increased. Apple’s profits reported in July beat projections for the 26th straight quarter, lifted by record sales of iPhones and iPad tablets.

    ‘‘When you have a really strong story, it often pays to downplay it a bit,” Peter Jankovskis, chief investment officer at Oakbrook Investments LLC in Lisle, Illinois, said in a telephone interview on Aug. 30. The firm manages about $2.6 billion including Apple shares. “If they downplay their numbers and they’re very confident they can achieve those numbers and maybe more, then they’re going to beat the Street’s expectations. That’s really what it’s all about -- having people always be surprised on the upside.”

    Quanta, Broadcom

    Revenue at Quanta Computer Inc., the Taoyuan, Taiwan-based laptop computer maker, is projected to increase about 10 percent, according to data compiled by Bloomberg. The company gets 11 percent of sales from Apple, the data show. Broadcom Corp., which supplies communication chips for Apple’s mobile devices, also gets 11 percent of its revenue from the company. Analysts estimate sales at the Irvine, California-based company will increase 8.9 percent.

    “Because they’re not Apple, other companies need to be a little more rigorous with their guidance,” JMP’s Gauna said. “They would alienate their investor base too much if they had the same type of methodology Apple does. They’re more beholden by their investors to give accurate forecasts. Apple gets a pass on so many things.”

    Gene Munster, an analyst at Piper Jaffray Cos. in Minneapolis, said Wall Street firms are doing the best they can.

    Analysts are “essentially trying to catch them and they keep beating us,” Munster said in a telephone interview yesterday. “Our goal is to get it right. We factor in how conservative they typically are and they still just blow it out of the water.”

    --With assistance from Nick Turner in San Francisco. Editors: Nick Baker, Joanna Ossinger

    To contact the reporters on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net; Richard Davenport in New York at rdavenport4@bloomberg.net.

    To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net





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