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Apple Inc. (NASDAQ:AAPL) is hosting a big shareholder meeting today. Many have raised the question regarding what Apple should do with its cash. Jefferies is out with a new report today about Apple’s gigantic cash hoard, which they opine may not be enough.

The analysts believe Apple is potentially facing a very rough two-year period due to “capex requirements, new subsidy models, slowing international sales, and whitebox smartphones.”

They believe, Apple’s need for cash on hand is larger than many believe, and they see an acceleration of traditional dividends/buybacks as providing greater strategic flexibility for Apple and value to shareholders than preferred shares over the intermediate to long term.

We detail the key points from Jefferies below:

Component cost analysis indicates rising capital intensity.

The analysts believe Capex is likely to double in the next two years (additional $10B/year) due to a variety of factors. Notably, capex for apps processor as TSMC does not have the balance sheet to finance a fab for 200M to 300M chips a year, LCD/ OLED facility, and iCloud and online service data centers.

Jefferies believes that the iTV would largely leverage the content deals of carriers and possibly MSOs; however, they think Apple Inc. (NASDAQ:AAPL) could also pay for some premium content. The analysts believe premium content would require greater than expected capital commitment as the cost of content continues to rise.

Apple providing financing for iPhone would significantly impact cash flows.

There is pressure in certain international markets to remove subsidies and this could possibly force Apple Inc. (NASDAQ:AAPL) to provide financing directly for customers. While their previous analysis shows little negative impact to EPS the analysts believe the impact to cash flows would require greater cash on hand. In the hypothetical scenario where all international iPhones were financed by Apple, they believe Apple’s cash balance would take a hit of ~$10B due to the company having to cover upfront manufacturing costs and ~$40B of cash collections would be deferred over the next two years. This could affect international markets where pre-paid is more popular and installment plans are being tested.

Apple addressing India with distribution partners and installment plans.

On the FQ3 earnings call, regarding India, Apple Inc. (NASDAQ:AAPL)’s CEO Tim Cook said, “That business is growing. But the sort of multi-layer distribution there really adds to the cost of getting products to market.” Apple recently added distribution and bank partners to offer installment plans for India customers. International iPhone sales are slowing dramatically, particularly in lower GDP per capita markets. Alternative distribution models like those in India can improve growth and the financing receivables will largely be securitizable; however, increased capital commitments would make a quick change more difficult should sales fall.

The rise of whitebox smartphones continues.

Gionee and Konka are two of the more prevalent China whitebox smartphone makers. Both are offering handsets that are similar to the Galaxy S3 but for a fraction of the price. Also, both are launching nice-looking 4.7″-5.3″ phones that accentuate Apple’s product gap. These high-end white box phones are forcing Apple Inc. (NASDAQ:AAPL) to invest in next-gen screen technology in order to differentiate.

Gionee: launched a 5.3″ IPS LCD screen phone for $130 in January and plans to launch a 4.7″ IPS quad-core (MTK) version for $145 in April in China. Later this year, they will have a 5″ FHD version for $200. Gionee has phones at all three China carriers and is ODM’d by carriers in South America and Europe. Konka: The Expose 980 has a 4.8″ OLED screen from Samsung and a quad-core 1.2GHz MKT SoC for $200. The Expose 976 has a 4.7″ LCD screen, is quadcore (MTK), and costs $170. Konka supplies China Mobile and has own-brand and ODM distribution in SE Asia and South America.

Increase or accelerate traditional dividends/repurchases over preferreds.

Apple Inc. (NASDAQ:AAPL)’s current plan is to return $45B to shareholders in the next three years (starting in CQ4:12) in the form of dividends and buybacks. Jefferies sees Apple doubling the commitment to $90B over an extended period of time, or decreasing return of capital schedule to 18 months.

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