The Perfect Apple

Taking A Second Bite A Simple Methodology for Revenues Predictions

http://fronttowardsgamer.com/wp-content/uploads/Galaxy-Apple-Logo.jpg Apple Inc. sells millions of iPhone, iPads, Macs, and iPods each quarter. The quarterly earning releases also contain the number of units of each of these marquee items. It is shown here that a simple linear relation exists between the quarterly revenues R and the total number of units N, of these four items sold, regardless of the mix. The general relation is R = k (N N0) where k and N0 are constants which can be deduced from the quarterly sales data. The k is directly proportional to the revenues generated per unit and the constant N0 can be taken as a measure of the competitive pressures to generate the sales. Some finite sales must essentially be given up, sort of, to produce the observed revenues R. This is similar to the Einsteins work function W in Einsteins photoelectric law. It should be noted that there has been a slight increase in N0 since 1Q2011.

Page 1 of 13

 1. Introduction
I have recently discussed the financial performance of Apple, Inc. in at least three earlier articles, one called the Perfect Apple, and the other comparing Google with Apple, and third discussing Apple in the broader context of the universal law followed by all companies, see links given below. 1. http://www.scribd.com/doc/98825141/Google-A-Lovable-One-Trick-PonyAnother-Single-Product-Company-Analyzed-Using-the-New-Methodology Published July 1, 2012. 2. http://www.scribd.com/doc/96228131/The-Perfect-Apple-How-it-can-bedestroyed Published June 7, 2012. 3. http://www.scribd.com/doc/95906902/Simple-Mathematical-Laws-GovernCorporate-Financial-Behavior-A-Brief-Compilation-of-Profits-RevenuesData Published June 4. 2012. In these earlier articles, I had considered only the data for the most recent period (2007-2011) and the results were a near PERFECT agreement with the universal law y = hx + c relating revenues x to the profits y that has now been shown to to be followed by virtually every single company (see example in Ref. [3] above) that I have studied to date. This article is actually being prompted by the recent analysis of the financial performance of Kia, http://www.scribd.com/doc/99333764/Kia-ADisppearing-Brand, which the list of ten brands that are destined to disappear (see 24/7 Wall St. Ten Brands That Will Disappear in 2011 - 24/7 Wall St. http://247wallst.com/2010/06/15/247-wall-st-ten-brands-that-will-disappear-in2011/#ixzz1zqKeVGWe). Automotive companies like Kia Motor Company have always reported the number of units sold N for each quarter and each year, along the profits P and revenues R data for year. The analysis of the P-R (profits-revenues), P-N (profits-units sold) and R-N(revenues-units sold) for Kia shows perfect agreement with the classical breakeven model for the profitability of a company. Perfectly linear P-R, P-N, and R-N relations were observed (for 1999-2010, the period studied). Indeed, from
Page 2 of 13

these relations it is possible to deduce the numerical values of the three constants (a, b, p) that appear in the classical breakeven analysis for a company making and selling N units of a single produce. The total cost C is the sum of the fixed cost and the total variable cost. If a is the fixed cost and b the unit variable cost, the total cost C = a + bN where bN is the total variable cost which is directly proportional to the number of units sold. If p is the unit price, the revenues R generated by the sale of these N units is given by R = pN. Thus, the profits P = R C = pN bN a = (p b)N a. The graph of P verus N will therefore be a straight line with slope (p b) and the intercept a. Now eliminating N using N = R/p, we also get P = [1 (b/p)] R a = hR a which implies now a linear relation between profits P and revenues R. All the three linear relations observed with Kia therefore permit a determination of the (a, b, p) triplet unambigiously, from the numerical values of the three different slopes in the P-R, P-N and R-N graphs. Notice that although Kia is an automotive company and single brand there are actually many different vehicles being sold under this brand. Hence, the total unit N is really the sum of the sales for each of the vehicles in the Kia stable. It appears that the same logic can therefore be extended to company like Apple, which sells, iPhones, iPads, Macs, and iPods. The number of units sold in each quarter is given in the quarterly and annual filings with the United States Securities and Exchange Commission (SEC reports). Table 1 summarizes the data for units sold, along with profits and revenues data, since Apple started selling its iPads in second quarter of 2010. Let N denote the total number of units sold in each quarter, regardless of how the mix changes from quarter to quarter. We see a nice upward trend, see Figure 1, between quarterly revenues (second column of Table 1) and total number of units sold N (last column). Apples iPad was introduced in 3Q2010. This is the reason to consider this quarter as the starting point of this study. Between 3Q2010 and 4Q2010, when the total units N increased and revenues also increased. We see just the opposite between 1Q2012 and 2Q2012. A decrease in the units sold was also accompanied by a decrease in the revenues.
Page 3 of 13

Table 1: Apple Inc., Financial Data and Units sold

Quarter Revenues R iPhones iPads Macs iPods Total units N $, billions millions millions millions millions Millions 15.700 8.4 3.27 3.47 9.41 24.55 3Q2010 20.343 14.1 4.19 3.89 9.05 31.23 4Q2010 26.741 16.24 7.33 4.13 19.45 47.15 1Q2011 24.667 18.65 4.69 3.76 9.02 36.12 2Q2011 28.571 20.34 9.25 3.95 7.54 41.08 3Q2011 28.270 17.07 11.12 4.89 6.62 39.7 4Q2011 46.33 37.04 15.43 5.2 15.4 73.07 1Q2012 39.2 35.1 11.8 4 7.7 58.6 2Q2012 $228.82 351.5 Total Average R = 28.73, Average N = 54.94 R/N = 2228.82/351.5 = 28.73/43.94 = 0.654

Overall average: Revenue per unit = Rj / Nj = Total revenue/Total units. Simply sum all the revenues Rj and all the units Nj and find the average revenue per unit sold, where the subscript j refers to the jth quarter in our list. This yields R = 654 N where the numerical factor is revenues in $ per unit sold. Or, R = 0.654 N if R is revenues in $ billions and N is units sold in millions. This yields one estimate, see dashed line on the R-N graph, Figure 1. Average of averages: We determine the average revenue per unit for all the quarters, see fourth column of Table 2 and then determine the average of these averages summing the values for quarters. Obviously the average of the ratios is not the same as Rj / Nj. This yields R = 0.656 N where again R is in $ billions and N in millions, see blue line Figure 1. This provides a much description of the overall trend, which is a linear R-N relation.

Page 4 of 13

50.0 45.0

Revenues, R [$, billions]

40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

1Q2012

1Q2011

20

40

60

80

Units sold, N [millions]

Figure 1: Graphical representation of the revenues-units data in Table 1. A number of different approaches can now be used to determine the mathematical relation between R and N. Some subtle features of Figure 1 will be discussed later. While there is a nice linear trend the data points for the most recent quarters seem to deviate from the initial operating line.

Table 2: Apple Inc., Financial Data and Units sold

Quarter 3Q2010 4Q2010 1Q2011 2Q2011 3Q2011 4Q2011 1Q2012 2Q2012 Revenues R Total units N $, billions millions 15.700 24.55 20.343 31.23 26.741 47.15 24.667 36.12 28.571 41.08 28.270 39.7 46.33 73.07 39.2 58.6 Average R/N 0.640 0.651 0.683 0.712 0.695 0.567 0.669 0.634 Average All averages Averaging all these 5.252/8 = 0.656 Many more averages can be deduced by considering pairs of (R, N), finding difference and taking ratios again.
Page 5 of 13

Least squares regression: We perform a linear regression analysis and determine the equation of the best-fit line through the data points. It is obvious that the data for 1Q2011 is an outlier and revenues for somewhat lower for this single quarter compared to all the others. The best-fit equation R = 0.620N + 1.484 with the linear regression coefficient r2 = 0.9601. The best-fit passes through the (Rm, Nm) where Rm and Nm denote the average or mean values of R and N. The other two straight lines do not obey this restriction but pass through (0, 0). Hence, the best-fit line also makes a finite intercept on either the R or the N axis (in this case on the R-axis) depending on the scatter in the graph. The high value of r2 means that R-N relation deduced here is statistically quite significant and can be used to predict quarterly revenues units sold data, almost even on a weekly, if not daily basis as sales data are accumulated.
60.00

Revenues, R [$, billions]

50.00

R = 0.656 N
40.00

30.00

R = 0.654 N

20.00

10.00

0.00 0 10 20 30 40 50 60 70 80

Units sold, N [millions]

Figure 2: Two slightly different R-N relations with the slope of the lines being fixed by two different methods of averaging. The general equation is y = k (x x0),
Page 6 of 13

where x is units sold y is revenues and k is constant which determines the increase in revenues per additional unit and x0 is another cost. When x = x0, y = 0. If x0 = 0, the graph will pass through the origin (0, 0). The best-fit line through the same data does not pass through the origin.

70.00

Revenues, R [$, billions]

60.00

50.00
40.00 30.00 20.00 10.00 0.00 0 20 40 60 80 100

Units sold, N [millions]

Figure 3: Best-fit line through the R-N data points for Apple Inc. (3Q2010 to 2Q2012), reveals a small positive intercept on the revenues-axis. The general relation is R = k (N - N0) = 0.6201N + 1.484 = 0.6201(N + 2.393). The linear regression coefficient is very high, r2 = 0.9601 and would be even higher if the 1Q2011 data point (obviously an outlier were eliminated from the regression analysis).

Page 7 of 13

70 60

Revenues, R [$, billions]

50 40 30 20 10 0 -10 -20 0 10 20 30 40 50 60 70 80 90 100

N0

Units sold, N [millions]

Figure 4: A careful examination of the revenues and units sold data, see Figure 1, shows that revenues were lower in 1Q2011 and then returned to the original level. However, there is a subtle shift with the more recent data points following a line with a reduced slope. The 3Q2010 to 3Q2011, with the exception of 1Q2011, fall on or very close to the straight line joining 3Q2010 to 3Q2011, with the equation R = 0.779 N 3.416 = 0.779 ( N 4.39). Unlike the best-fit, this line has a higher slope and makes a small positive intercept N = N0 = 4.39 (million) on the units sold axis. The 1Q2012, 2Q2012 and 1Q2011 data show a negative deviation from this line, indicating lower revenues than if the original trend had continued. It is also of interest to note that the 1Q2011 and 1Q2012 data points lie on a line that is roughly parallel (dashed line) to this original operating line. The dashed line joining these two data points has the equation R = 0.756 N 8.89 = 0.756 (N 11.767). While the slope is roughly the same, the intercept N = N0 has increased. Exactly similar observations were also made earlier with Kia when we plot revenues R versus the units sold N. The finite intercept N0 may be thought of as a measure of the competitive pressure faced by Apple to sell its products. It is as if a
Page 8 of 13

certain minimum number of units N0 must essentially be given away (for FREE or discounted wit price cuts, rebates, etc.) in order to attract customers to buy Apples products. The intercept N0 is similar to the work function W in Einsteins photoelectric law. The reader is referred to the articles on Google and also RIM for a more complete discussion of this point. http://www.scribd.com/doc/99181402/Research-in-Motion-RIM-Limited-WillDisappear-in-2013 http://www.scribd.com/doc/98825141/Google-A-Lovable-One-Trick-PonyAnother-Single-Product-Company-Analyzed-Using-the-New-Methodology Just as it is important to determine the maximum kinetic energy K of an electron (as in the photoelectricity experiments of Millikan, reported in 1916; Einsteins law was proposed in 1905 and Planck proposed the idea of an elementary energy quantum E = hf in December 1900), when confronted with data revealing either a lot, or some, scatter (the latter is the case here), it is important to establish the operating R-N line with the highest slope. This would produce the highest revenues R for a given number of units sold N. The intercept N0 is like the work function. Some of the energy E of the photon must be given up to produce the electron with the maximum kinetic energy K. In the same way, some units N0 must be given up to produce the revenues R. This is what the intercept means. The scatter in the data, such as the deviation of the other data points from this Line of Excellence (LOE, see Google Inc. article for a more complete discussion of LOE). A family of parallel lines with various values of the intercept N0 can always be envisioned as sweeping through the data set. The higher the N0, the higher the work function and the lower the revenues for a given N. This is the significance of Einsteins photoelectric law (and Plancks radiation law) as we extend it beyond realm of physics, where it was first conceived, to economics, business, finance, and, perhaps, even the social sciences. Money in economics behaves just like energy in physics. These points have been discussed more completely in the articles listed in the bibliography.
Page 9 of 13

 Appendix 1: Bibliography
Related Internet articles posted at this website Since the Facebook IPO on May 18, 2012
1. http://www.scribd.com/doc/95906902/Simple-Mathematical-Laws-GovernCorporate-Financial-Behavior-A-Brief-Compilation-of-Profits-RevenuesData Current article with all others above cited for completeness, Published June 4, 2012 with several revisions incorporating more examples. 2. http://www.scribd.com/doc/94647467/Three-Types-of-Companies-FromQuantum-Physics-to-Economics Basic discussion of three types of companies, Published May 24, 2012. Examples of Google, Facebook, ExxonMobil, Best Buy, Ford, Universal Insurance Holdings 3. http://www.scribd.com/doc/96228131/The-Perfect-Apple-How-it-can-bedestroyed Detailed discussion of Apple Inc. data. Published June 7, 2012. 4. http://www.scribd.com/doc/95140101/Ford-Motor-Company-Data-RevealsMount-Profit Ford Motor Company graph illustrating pronounced maximum point, Published May 29, 2012. 5. http://www.scribd.com/doc/95329905/Planck-s-Blackbody-Radiation-LawRederived-for-more-General-Case Generalization of Plancks law, Published May 30, 2012. 6. http://www.scribd.com/doc/94325593/The-Future-of-Facebook-I Facebook and Google data are compared here. Published May 21, 2012. 7. http://www.scribd.com/doc/94103265/The-FaceBook-Future Published May 19, 2012 (the day after IPO launch on Friday May 18, 2012). 8. http://www.scribd.com/doc/95728457/What-is-Entropy Discussion of the meaning of entropy (using example given by Boltzmann in 1877, later also used by Planck to develop quantum physics in 1900). The example here shows the concepts of entropy S and energy U (and the derivative T = dU/dS) can be extended beyond physics with energy = money, or any property of interest. Published June 3, 2012. 9. The Future of Southwest Airlines, Completed June 14, 2012 (to be published).
Page 10 of 13

10.The Air Tran Story: An Important Link to the Future of Southwest Airlines, Completed June 27, 2012 (to be published). 11.Annies Inc. A Single-Product Company Analyzed using a New Methodology, http://www.scribd.com/doc/98652561/Annie-s-Inc-A-SingleProduct-Company-Analyzed-Using-a-New-Methodology Published June 29, 2012 12.Google Inc. A Lovable One-Trick Pony Another Single-product Company Analyzed using the New Methodology. http://www.scribd.com/doc/98825141/Google-A-Lovable-One-Trick-PonyAnother-Single-Product-Company-Analyzed-Using-the-New-Methodology, Published July 1, 2012. 13.GT Advanced Technologies, Inc. Analysis of Recent Financial Data, Completed on July 4, 2012. (To be published). 14.Disappearing Brands: Research in Motion Limited. An Interesting type of Maximum Point on the Profits-Revenues Graph http://www.scribd.com/doc/99181402/Research-in-Motion-RIM-Limited-WillDisappear-in-2013 Published July 5, 2012. 15.Kia Motor Company: A Disappearing Brand http://www.scribd.com/doc/99333764/Kia-Motor-Company-A-DisppearingBrand, Published July 6, 2012. 16.The Perfect Apple: Taking A Second Bite: A Simple Methodology for Revenues Predictions (Completed July 8, 2012, To be Published) 17.http://www.scribd.com/doc/101062823/A-Fresh-Look-at-Microsoft-After-itsHistoric-Quarterly-Loss, Microsoft after the quarterly loss, Published July 25, 2012.

Page 11 of 13

About the author V. Laxmanan, Sc. D.

The author obtained his Bachelors degree (B. E.) in Mechanical Engineering from the University of Poona and his Masters degree (M. E.), also in Mechanical Engineering, from the Indian Institute of Science, Bangalore, followed by a Masters (S. M.) and Doctoral (Sc. D.) degrees in Materials Engineering from the Massachusetts Institute of Technology, Cambridge, MA, USA. He then spent his entire professional career at leading US research institutions (MIT, Allied Chemical Corporate R & D, now part of Honeywell, NASA, Case Western Reserve University (CWRU), and General Motors Research and Development Center in Warren, MI). He holds four patents in materials processing, has co-authored two books and published several scientific papers in leading peer-reviewed international journals. His expertise includes developing simple mathematical models to explain the behavior of complex systems. While at NASA and CWRU, he was responsible for developing material processing experiments to be performed aboard the space shuttle and developed a simple mathematical model to explain the growth Christmas-tree, or snowflake, like structures (called dendrites) widely observed in many types of liquid-to-solid phase transformations (e.g., freezing of all commercial metals and alloys, freezing of water, and, yes, production of snowflakes!). This led to a simple model to explain the growth of dendritic structures in both the ground-based experiments and in the space shuttle experiments. More recently, he has been interested in the analysis of the large volumes of data from financial and economic systems and has developed what may be called the Quantum Business Model (QBM). This extends (to financial and economic systems) the mathematical arguments used by Max Planck to develop quantum physics using the analogy Energy = Money, i.e., energy in physics is like money in economics. Einstein applied Plancks ideas to describe the photoelectric effect (by treating light as being composed of particles called photons, each with the fixed quantum of energy conceived by Planck). The mathematical law deduced by
Page 12 of 13

Planck, referred to here as the generalized power-exponential law, might actually have many applications far beyond blackbody radiation studies where it was first conceived. Einsteins photoelectric law is a simple linear law, as we see here, and was deduced from Plancks non-linear law for describing blackbody radiation. It appears that financial and economic systems can be modeled using a similar approach. Finance, business, economics and management sciences now essentially seem to operate like astronomy and physics before the advent of Kepler and Newton.

Cover page of AirTran 2000 Annual Report

Page 13 of 13