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Apple Roundup: iPhone Still Drives Apple Shares

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Apple (AAPL - Free Report) is a very solid company although there remain concerns about possible problems with iPhone sales growth, a lack of innovation and problems in China. But the company has nearly doubled its cash over the past two years while continuing to spend heavily on R&D. Since it holds a lot of its cash overseas, Apple has been gradually leveraging the balance sheet to return cash to shareholders. As a result, its debt-cap ratio has gone from 22.8% two years ago to 39.8% in the last quarter, still at very acceptable levels.

Apple beat estimates nicely in the fourth quarter, in which it also regained its position as the number one smartphone vendor in the world according to both IDC and Gartner. It also continues to take home most of the profits in the smartphone business.

Apple is also building the hype for the next iPhone, creating the impression that it will be revolutionary. So Apple shares continue to appreciate steadily, much faster that the S&P 500.

All About the iPhone 8

What’s in a Name: Apple hasn’t said what it’s going to call the new $1,000 iPhone, which everyone thinks will contain highly innovative changes since this is the 10-year anniversary of the iPhone. But that hasn’t stopped people from trying to guess: the most common (and boring) reference is the iPhone 8 (since we’re currently on the 7 series) or iPhone 10, or iPhone X, but some are also calling it the iPhone Edition (from Watch Edition, which is its most expensive watch).

Getting Curvy: The WSJ reported earlier that some iPhone models may have a curved display (using OLED will allow this as opposed to earlier generation LCDs that couldn’t be bent), but subsequent reports from Nikkei and MacRumours indicate that the curvature will only be slight since it “compromises structural integrity, warps the user interface over the sides and leads to innumerable accidental touches - especially when holding a phone in one hand”. (Galaxy 8 leaks reportedly indicate a similar design for the same reasons.)

Size Matters: The high-end models are being rumored to have OLED screens of 5.1, 5.5, or 5.8-inches.

Dressed to Kill: Apple is experimenting with materials, so the next iPhone could have a glass front and back with aluminum chassis. But we also hear that Apple is experimenting with white ceramic because it is more scratch-resistant and durable than steel.

Home Sweet Home: In choosing the edge-to-edge OLED screen, Apple probably has to do away with the Home button, an indication that the touch ID will be replaced with facial or retinal scanning technology. Apple has been awarded a patent for "enhanced face detection using depth information" that may be used to enhance facial recognition or enable 3D selfies or AR in the iPhone.

Charging Up: Apple could be considering wireless or USB-C charging. Wireless is definitely more interesting and some people think that Apple’s wireless charging won’t require you to place the phone near a charging plate. Instead, Apple is testing Energous' "WattUp" technology, wherein a wireless charging transmitter broadcasts waveforms to receivers and then surrounds them with a radio frequency that charges up to 12 devices from up to 15 feet away.

Late to the Party: Apple usually launches its latest iPhone in September, but this year could be different because of component issues. French news site iGeneration says that the iPhone’s 3D image sensors being made by STMicroelectronics likely won’t be ready for a September launch.

There are also some OLED supply constraints, as Samsung wont make enough this year and Sharp/Hon Hai likely won’t be ready until next year. However, since the 7S and 7S Plus models won’t be using the 3D sensors they may make it within that timeframe.

Other News

Apple Takes Qualcomm Lawsuit to the UK

Apple’s relationship with a long-time supplier continues to sour with another case filed by the iPhone maker, this time in the UK. The case was apparently filed in January, when Apple also sued Qualcomm (QCOM - Free Report) in the U.S. for a billion dollars for withholding rebates in lieu of an agreement not to use chips from competitors. But it’s only just gone public.

Apple said at the time that Qualcomm’s decision not to pay the rebate was in the nature of a “punishment” for cooperating with Korean authorities in a case where Qualcomm was ultimately fined $853 million for its anti-competitive practices. Apple is also saying that Qualcomm overcharges for its standard essential patents and also charges for technology it hasn’t developed.

Apple Shareholders Meet

 At the annual shareholder meeting, Apple considered nine proposals, of which four were its own and five came from shareholders. Only Apple’s proposals were approved.

On the product front, Apple promised that Mac Pro customers wouldn’t be ignored in the push to launch better iPhones as the creative segment remained important to it. On the iPhone front, he expressed satisfaction that the current lineup of SE, 7 and 7 Plus generated sales that were above company expectations. Cook also said that that the airpods were a “cultural phenomenon.” As far as other products are concerned, Apple is fighting to meet demand for the Watch Series 2 and working to launch other new products (possibly an AR device).

Apple Pay adoption is slower in the U.S. than internationally, Apple Music subscribers are at 20 million and App Store subscribers (including those for services like Netflix [(NFLX - Free Report) ]) are now 150 million.

Another important question addressed by the CEO was with respect to U.S. manufacturing. He said that two-thirds of Apple jobs were in the U.S. (Apple has created 2 million American jobs) and he would work to bring more. He also mentioned that Apple had paid out $50 billion to U.S. suppliers in 2016. In the meantime, favorable tax rules could see Apple bringing back more cash. While diversity remains a focus area, a proposal to make it more binding on management was shot down by shareholders.

Apple remains committed to green initiatives and said that it was already running 93% of its operations on clean energy.

Finally, on net neutrality, Cook said that while the company didn’t engage in politics, it would be involved in policy formation. To that end, it would engage on net neutrality issues. Note that new FCC Chairman Ajit Pai recently said that net neutrality was a mistake, while Apple’s position has always been that everyone’s content should be treated equal.

U.S. Manufacturing Update

Apple’s manufacturing partner Foxconn has said that while the U.S. may lack the supply chain and high-skilled labor required for iPhone manufacturing in the country, he was open to setting up operations there if the government offered suitable incentives. Foxconn reportedly gets billions of dollars in tax and other incentives in China where it has its factories.

A flat panel display factory has long been rumored in Pennsylvania, and the lack of incentives is likely the reason it hasn’t materialized yet. New York is also in the running at present, but CEO Terry Gou says that if the process isn’t speeded up, he might end up finalizing the deal with Pennsylvania after all.

Apple Continues to Woo China

Apple has announced that it will open two more R&D centers in Shanghai and Suzhou, in addition to the two R&D centers in Beijing and Shenzhen. The investment furthers Apple’s stated objective of spending at least 3.5 billion yuan ($507.1 million) on R&D in China. All four centers are expected to be operational this year.

The investment will help Apple please the Chinese authorities and tap into local talent to get closer to customers. Rising local competition has hurt Apple’s business in China. It’s also possible that some prospective iPhone buyers are waiting for the more revolutionary iPhone 8 (or whatever Apple calls it).

Apple in India

Apple is expected to start assembly of the iPhone SE in India at partner Wistron’s Bengaluru plant after the model did relatively well in the country and the government asked Apple to start Indian manufacturing if its showrooms are to be approved. Apple is going ahead with an initial production volume of 300K-400K units this month as it awaits the Indian government’s response to a request for tax concessions. Its argument is that India-made phones won’t be competitive without the tax waiver and Indian authorities have signaled that the demand is workable.

Apple Spaceship Complex Called Apple Park

Apple’s new 175-acre ring-shaped campus including the 1000-seat auditorium (Steve Jobs Theater) is being occupied this month. By summer-end, Apple expects to bring 12K people to the location. For employees, Apple will have two miles of walking and running paths, an orchard, a meadow and a pond. Places open to the public will include a visitor’s center, an Apple Store and a café. It will be powered by 17MW rooftop solar panels.

Apple Hires Fire TV Head

Timothy D. Twerdahl, former director and GM of Amazon's (AMZN - Free Report) Fire TV unit is joining Apple as its Apple TV product marketing chief. Twerdahl, who has also worked at Hulu and Netflix, will replace Pete Distad who is moving over to content.

SAP-Apple Software Kit

The two companies have released a software development kit that will help the 2.5 million developers customizing SAP’s (SAP - Free Report) financial and logistics software to make use of Apple’s software stacks, especially with respect to iOS, fingerprint sign-on and location awareness. For instance, the iPhone fingerprint sensor could be all that’s needed for employees to log in to SAP systems.

Apple Pay Scores Important Win in Australia

In response to Apple’s contention that the Commonwealth Bank of Australia, National Australia Bank Ltd., Westpac Banking Corp. and Bendigo & Adelaide Bank Ltd were looking for a free ride, they have told the Australian Competition & Consumer Commission (ACCC) that on the contrary, Apple’s policies attempted to prevent competition in wallets. Because if Apple allowed them access to its NFC antenna, they would pledge their participation in the Apple Pay rollout.

The Australian Retailers Association has backed the banks, making their own submission that the collective negotiations would be beneficial for “all banks, merchants, app developers and ultimately customers in Australia and overseas.”

Australian law allows such collective bargaining, provided it is approved by the government. In its draft ruling, the ACCC denied the banks’ request. In the final ruling, which is now available, the ACCC denied the banks’ request to bargain collectively for inclusion in Apple Pay.

ACCC competition regulator Chairman Rod Sims said that Apple Pay would in fact increase choice for consumers and promote competition between the banks. Moreover, this seemed a better choice because rapid change in the emerging payments landscape made it “uncertain how competition may develop.”

Smartphone Data Favors Apple

Following a report from IDC that put Apple in the position of top smartphone vendor worldwide in the fourth quarter and Canaccord Genuity’s estimate that it also took 92% of smartphone profits, Gartner issued a report that was much in agreement with IDC’s findings. According to Gartner, Apple was the top vendor with 17.9% share, edging past Samsung, which was hurt by the Note 7 recall that only allowed it a 17.8% share (it had a 20.7% share in the fourth quarter of 2015). Huawei, Oppo and BBK followed with 9.5%, 6.2% and 5.6%, respectively.

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