Cracking the Oppenheimer Code, Part 2 of 5: A Second Small Leap of Logic

The post is on the long side, so if you’re interested in AAPL fundamentals and want to read on, just click or tap to expand the post.

Now we move from solving for EPS range to thinking about how Apple’s actual product sales could reasonably reflect top-end guidance.

For those more experienced than I at the AAPL estimation “game” (thanks for stopping by, by the way!), you’re free to leave at any time.

For those new or newer to AAPL estimates, I make no claim to the effectiveness of this process. But it is my opinion, for whatever it’s worth, that starting from “first principles” and slowly building in inferences is ONE potentially useful approach to understanding Apple’s revenue mix, albeit from very, very high up in the iCloud(s). Also, we’ll hit the ground running next quarter, relatively speaking, so this slapdash (and slapstick?) method will only be explained this quarter.

Anyway! All two of you still here. Let’s begin with Apple’s guided revenue range of $33.5-35.5B. Complicated sellthrough-to-sell-in comparisons, seasonality, no new iPad, Murphy’s Law (aka Apple’s statement of “Risk Factors”), and torpedoes be damned, we’ll be blind optimists and assume Apple will report revenues of $35.5B.

Fortunately for us Apple has a long track record of UPOD (under-promise, over-deliver) on guided revenues, which continues even under Apple’s “new” guidance methodology. You can look it up, but I’m pretty sure I’m right.

Apple’s top-line calculations are really quite simple. There’s now six revenue categories:¹

iPhone
iPad
Mac
iPod
iTunes/software/services
Accessories

For fiscal Q3 2012, the actual revenue, unit and “ASP” (avg. sales price) results were:

REVENUES revs units ASP (avg. sales price)
iPhone 16245000000 26028000 624.1355463
iPad 9171000000 17042000 538.1410633
Mac 4933000000 4020000 1227.114428
iPod 1060000000 6751000 157.0137757
iTunes/software 2951000000
Accessories 663000000
Total revs 35023000000

I should point out that “ASP” isn’t exactly ASP, since it’s inclusive of deferred revenue from the product category becoming “current” over a 24-month period, and exclusive of the “software upgrade rights” revenue from the reported quarter’s iPhone, iPad, Mac and iPod (mostly iPod touch) sales (which, you guessed it, gets deferred and recognized over a 24-month period). But whatever, deferral isn’t a huge chunk of product revenue, so close enough.

Now comes the fun part….trying to figure out Peter Oppenheimer’s thought process (he’s had a long track record of being infamously conservative with financial guidance, until the announced change in guidance methodology) and force-fit the revenue categories to guidance. For fiscal Q3 2013, I’m projecting (within guidance parameters) that they will be:

REVENUES revs units ASP
iPhone 15619940000 26252000 595
iPad 9292300000 21610000 430
Mac 5371000000 4100000 1310
iPod 880000000 5500000 160
iTunes/software 3541200000
Accessories 795600000
0 YOY iPhone 0.86%
YOY iPad 26.80%
Total revs 35500040000 YOY Mac 1.99%
YOY iPod -18.53%

Not bad, we got within about $40,000 of Oppenheimer’s $35.5B top-end guidance without having to get too fancy. Note the YOY growth percentages in the lower right of that mini-chart. In brief, the theories behind my “ASP” and unit sales projections are:

• iPhone “ASP” will continue to decline both as a megatrend (as Apple’s smartphones become more powerful and higher-featured, there’s less perceived market need for the very latest and greatest) and due to actual evidence here and there that the cheaper iPhones are selling better than expected, i.e., higher sales mix of lower-ASP iPhone 4s. Yes, iPhone YOY growth under the ASP assumption looks really dismal – and you know what, the higher ASP is, the worse it looks – but you’ll see why “it has to be this way” for this part of the exercise next paragraph.

• iPad “ASP” declined dramatically due to the advent of the highly popular iPad mini, as evidenced by iPad “ASP” coming in at around $449 in fiscal Q2 2013. Given that iPad mini was still constrained into fiscal Q2/Calendar Q1 2013, I’m assuming iPad mini sell-in and/or sell-through² will better reflect the clear popularity of iPad mini, so I’m projecting a slight ASP drop. (In case you were wondering, $430 is a back-of-the-napkin guess of blended “ASP” of all iPads sold, with 2 iPad minis sold for every bigger iPad sold.)

• Given that iPad YOY growth remains quite strong – 65% YOY unit growth in fiscal Q2 2013 – it seems somewhat unlikely that iPad growth would suddenly drop to around 25% YOY, even though 17M iPads were sold in the year-ago quarter. But if we project iPhone to do better…well, you get the picture.

• Mac “ASP” is projected as falling about 5% in part because of the anticipated popularity of those battery-boosted MacBook Airs, which are on the cheaper end of the Macs that Apple offers. There’s also that gentle trend of Mac ASP falling over time, though Apple’s surprisingly reversed that trend lately. Unit sales are projected to reflect Apple outperforming in the “truck” market, albeit in a market experiencing flat to slightly negative YOY growth thanks to the rise of tablets and other ultramobile computing devices.

• iPod is honestly “kinda whatever”, given its anticipated contribution of less than 3% and $1B to Apple’s revenues this quarter. Pick a growth rate between -10% and -20%, in my opinion.

• As far as iTunes/software and Accessories go, both categories have grown fairly steadily over the years. For simplicity’s sake I apply a 20% growth rate; obviously, you can do differently.

As I mentioned up top, this is just the approach I use when getting my quarterly estimates together. But since it is my blog, I figure I’ll just lay out my thought process and maybe it’ll lead to some useful discussion and debate.

Next up: Trying to make some sense of Apple’s operating expenses guidance. It’s actually more interesting than it sounds!

¹ There’s some footnotes to these categories, but I have neither the time nor expertise to go through them all, so for more information, use this link to Apple’s fiscal Q2 2013 unaudited summary data PDF and go from there, if you can put up with reading a Form 10-K that is.

² Ah, sell-in (in my limited understanding, that which was sold into the channel aka channel fill to meet a company’s target inventory levels – NOT to be confused with “channel stuffing”) vs. sell-through (which, AFAIK, is that which was actually sold…or something). Sell-in is the number reported under GAAP, apparently, while sell-through…well, we don’t hear enough of that, and analysts should make a point to get that data when it might be really important for a “true sales” comparison. It’s a MASSIVE headache when doing YOY compares. Maybe I’ll revisit this in a future post if I have the energy (big “if”, that).

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