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Apple Has Commitment Issues

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Considering how much Apple (NASDAQ: AAPL  ) has fallen over the past seven months, it might seem that investors are having commitment issues. Instead of sticking with the Mac maker for the long term, shareholders are moving on and looking for the next hot growth story. Well, Apple has some commitment issues of its own.

It's not you, it's me
As part of managing a massive global supply chain, Apple has numerous off-balance sheet commitments related to third-party manufacturing and component purchases. This is an aggregate figure that I keep an eye on for hints as to what Apple is expecting in the near-term, since the metric is related to Apple's projected "demand information."

Third-party manufacturing and component commitments soared in September to $21.1 billion and declined modestly in December to $18.9 billion. In the March quarter, this total just dropped precipitously back to previously seen levels.

Source: SEC filings.

These commitments now total $13.8 billion. In conjunction with these commitments, Apple also uses hefty inventory prepayments to secure components. These prepayments currently add up to $3.6 billion.

On top of these commitments, Apple is also on the hook for an additional $1.4 billion to acquire manufacturing gear. This is in line with its projected capital expenditures this year, most of which is dedicated toward manufacturing equipment.

There are a couple ways to interpret the drop in third-party commitments.

The component commitments are composed of "purchase orders, supplier contracts, and open orders." Many company's frequently double order components in the face of low manufacturing yields for certain newer ingredients. Better to have it and not need it than need it and not have it, so they say.

As yields improve, companies will cancel or reduce these duplicate orders that are no longer necessary. Presumably, "open orders" can be modified or cancelled. This is the most likely explanation of the display order reductions reported months ago, especially since the quoted figure of 65 million was astronomical.

Apple launched an unprecedented number of new products late last year, many of which faced manufacturing challenges and supply constraints. It was potentially double-ordering some components, and improving yields are bringing down its orders.

Additionally, Apple's orders usually cover periods of up to 150 days, or five months. Tim Cook just implied that new products aren't due out until this fall, which is about five months from now. The reduced commitment activity may be more evidence that Apple's not ready to enter a production ramp for new devices quite yet.

There is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 28, 2013, at 11:57 PM, ReturnPrivacyNow wrote:

    Apple is making a fatal mistake by turning on it's loyal customers. Apple thinks we are all stupid. We saved Apple, and now they do this? Apple is forcing customers to buy "throw away" computers. Apple has taken away the basic features that we need. Apple's newest Macbook Pro laptop has a screen that can not be repaired, memory that can't be repaired, replaced or upgraded, hard drive that can not be repaired, replaced or upgraded, a battery that can not be repaired, replaced or upgraded. This was done for pure greed, nothing more. The newest iMac, Mac Mini, and Macbook Pro laptop have NO CD/DVD burner, so you can't even backup files? These computers are now more expensive than the last model, and yet have MUCH less usability? Really? Apple is really making a huge mistake with it's loyal fans with these moves. We want to USE our computers. The ipad doesn't even have a way to put files on it, or copy them off of it. There is NO usb port, no CD/DVD drive, so it can't be used as a real computer. Apple is now forcing you to buy software from them online, and you get NO physical copy of it on a CD or a usb stick. That is INSANE! Apple is locking out third party software developers with this idiocy. Remember when Microsoft was the "no you can't/we won't let you do that" company? And Apple was always the "yes you can do that/we'll show you how" company? Well now, Apple is the "we are taking away all of the features and usability of our computers and we are going to charge you even more to buy them". $2,000. for a throw away macbook pro laptop? I don't think so. This very loyal Apple and Mac computer user has bought his last Apple product, and there are a whole bunch of people who are doing the same. THAT is why Apple's stock is plummeting.

  • Report this Comment On April 29, 2013, at 12:07 AM, pwkrp wrote:

    @return, you ever hear of flash drive. You don't need a cd burner to back up files. If you need one that bad buy one for $30 or less. Apple is no different than a lot of companies selling software you don't get a hard copy. If it crashes you go the the Apple store and download it again for free, and does not take any longer than loading from a CD. People are doing things differently on computers now, not just Apple.

  • Report this Comment On April 29, 2013, at 12:09 AM, yahoouser4529 wrote:

    The only apple product I use is the safari browser on windows 8 computer. There isn't much else for me with apple company

  • Report this Comment On April 29, 2013, at 12:25 AM, lakawak wrote:

    ReturnPrivacyNow...the loyal customers are now what saved Apple. There are not enough loyal Apple customers to have done that. If there was, then Macs' marketshare wouldn't still be hovering around an insignificant 5%. The VAST majority of iPhone and iPad users still use a Windows PC.

    THAT is Apple's problem. Most of their custoemrs couldn't care less about Apple. They bought iPods, iPhones and iPads because there was no alternative at the time. Now that there are plenty of alternatives, these people are not going to pay the Apple Stupidity Tax ,so they are swtiching to the cheaper Android devices that are cheaper, and do everything the Apple devices do. Or...with Surface getting 7.5% of the market in just a few months, they are switching to the company that they know from their REAL computers.

    I know a lot of delusional fanboys want to call the Surface a failure...but in just a few months, it has a 50% higher market share in tablets than Macs do in computers. So if Surface is a failre, then what are Macs?

  • Report this Comment On April 29, 2013, at 1:00 AM, kevins71 wrote:

    Blah, Blah, Blah. Yet another article dissing Apple for no apparent reason.

    Apple is still the number two most valuable company in the world, next to Exxon who sell a commodity everyone in the world needs, while Apple sells products that you really don't need but want. They still sell the number one (iPhone 5) and number two (iPhone 4S) selling smartphones globally, they still sell the number one tablet. Their market share in computers is going up while competitors are declining. And they are still the company everyone looks to for innovation and design and to copy from.

    So Shhhhh please.

  • Report this Comment On April 29, 2013, at 1:04 AM, kevins71 wrote:

    @ lakawak I haven't seen on MS Surface in the wild yet, not one. I know no one who bought one. I do know a lot of people according to researcha articles, people are returning them in droves because it sucks.

    So while you people names, the truth is your a fanboy on the other side of the rope and your even more delusional. There is no Apple tax moron. Apple is in the business to make money, while their competitors can't compete on a level playing field, they price their products below cost or free and they don't make money. So just shut up.

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