The Oppenheimer Code, Fiscal Q4 2013, Part 2 – Thinking Inside the (Guidance) Box

NOTE:  In case you’d like to refer back, click here for Part 1 of the current, fiscal Q4 2013 edition of my Oppenheimer Code “earnings series”.

My Oppenheimer Code posts for the prior fiscal quarter are now collected in the Fundamentals Archive section.

Here at the AAPL Tree, the first two parts of the Oppenheimer Code series are generally the most straightforward, because they start with the relative “basics”:

(1) turning Apple’s quarterly guidance into a net income range, which is pretty easy since all of the data ranges are provided by Apple (you just need a semi-educated guess or two about shares outstanding to translate the guided net income range into an implied EPS range)

(2) taking Apple’s quarterly guidance and making hopefully reasonable assumptions about revenue mix, units and/or “average selling prices” (ASP)*** with the ideal result of getting a small amount of insight into Oppenheimer’s thought process behind the guidance.

That second part may well not be for everyone.  While the revenue constraint to fit guidance is absolute (once you pick a number within the range, anyway), the two biggest unknowns of iPhone and iPad have a considerable amount of room for ASP/unit growth interpretation (though there are of course reasonable limits).  Apple is more than capable of surprising despite the best of guesses at day’s end.  For example, last quarter iPhones outperformed most expectations, while iPads did the exact opposite.  So if this kind of thought exercise isn’t your cup of tea, you should probably look elsewhere.

But since I feel the exercise has value in forcing the home gamer to think about major product YOY trends (and it’s my blog, after all :D), time to “run the numbers” for the second time this series.  You know about my disclaimers, so if you’re still interested, feel free to read on.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Apple guided revenues of between $34-37B for fiscal Q4.

In what might be one of the most understated earnings revisions ever, Apple reiterated its prior quarterly range guidance with a comment to expect actual results to come in near the upper end of the range.

I expect that too, as a matter of fact! 😀  So let’s go with $36.5B in revenues just for purposes of this exercise.

But first, a recap of actual revenue, unit sales and ASP (where applicable) for fiscal Q4 2012:

REVENUES revs units ASP
iPhone 16645000000 26910000 618.54
iPad 7133000000 14036000 508.19
Mac 6617000000 4923000 1344.10
iPod 820000000 5344000 153.44
iTunes/software 3496000000
Accessories 1255000000
Total revs 35966000000

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Now, just like last time, we force-fit the revenue categories to guidance.  The point isn’t to be precise even by home gamer standards, just to think of a general framework of YOY product category revenue trends.  Here’s my humble take on this:

Projections Within Apple Guidance Parameters

REVENUES revs units ASP
iPhone 18712750000 30910000 605
iPad 5562500000 12500000 445
Mac 5850000000 4500000 1300
iPod 688000000 4300000 160
iTunes/software 4195200000
Accessories 1506000000
YOY iPhone 14.86%
YOY iPad -10.94%
Total revs 36502250000 YOY Mac -8.59%
YOY iPod -19.54%

$36.502B in revenues?  Close enough.  Note the YOY growth percentages in the lower right of that mini-chart.  Funny, only one of Apple’s hardware lines looks to be growing under this scenario.

Here’s the theories behind my ASP and unit sales “projections”:

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

iPhone:

– The iPhone “ASP” gradual decline megatrend (the theory being a smaller percentage of iPhone buyers won’t need the latest and greatest iPhone model over time as they become more powerful/useful across the line) may be slowed or even reversed short-term.  As you know, Apple announced sales of more than 9 million combined iPhone 5S and 5C units in its initial sales weekend – ranging in “price” from $549 (iPhone 5C) all the way up to $849 (iPhone 5S).  As you might have heard lately, iPhone 5C is reportedly selling much more slowly than the 5S (starts at $649).  So the more “beleaguered” the 5C is (we’ll see what Tim Cook has to say about that), the higher ASP will be.  Of course, since iPhone 5S/5C only sold in the final eight days of Apple’s fiscal quarter, the full ASP impact won’t be seen until fiscal Q1 2014.  So I’ve kept things semi-conservative and modeled a 2% drop in ASP YOY (which is still about 4% higher than the previous fiscal quarter).  ASP might end up being a few dollars too high, but it’s good for conservatism purposes since that lowers units sold.

– As far as iPhone YOY unit growth, 15% growth seems quite conservative.  The math couldn’t be simpler.  Take the delta between the “more than 9 million” sold in iPhone 5C/5S initial launch weekend and “subtract” the “more than 5 million” iPhone 5 units sold during its initial weekend launch, and add 4 million to last year’s iPhone actual sales.  Yes, it’s oversimplifying – and if you want to get technical, “more than 9 million” minus “more than 5 million” could be a number as low as 3.2 million or so.  But it’s very difficult to see Apple not selling at least 4 million more iPhones compared to last year, given that (1) iPhone is still growing each quarter on a YOY basis (unit sales grew 20% on a GAAP basis just last quarter) and (2) the iPhone 5C and 5S have proven early popularity and a presumably easier product ramp-up than the then-new-form-factor iPhone 5 (not to mention Apple’s assumed increase in production capacity and expertise relative to last year – note also that the 5S is not a full redesign).

iPad:

– I’m not expecting much of a change in iPad ASP, since the same mix of products has been available for about the same amount of time.

– If anything, the big questions are whether (a) iPad unit sales will suffer due to their being at the “end” of their product cycle and (b) whether iPads are closer to iPods than iPhones in terms of product seasonality (translation: whether iPads sell best in the holiday season).  An additional unknown is whether iPad mini, the hottest seller, will suffer further-reduced sales given anticipation/consumer desire for a Retina Display version.  The analysis is further complicated by iPads actually being the oldest at this time of year that they’ve ever been (it’s been nearly a year since a new iPad was introduced – and no, I don’t think the 128GB iPad 4 counts).

– I happen to think a YOY sales drop of 11% in iPad would be concerning despite the skewed compares, since Apple now has two iPad product lines instead of one (really, three, if you count the holdover iPad 2).  The last time iPad unit sales were anywhere near 12M was fiscal Q2 2012 (Jan-Mar 2012).  Granted, iPad 3 sales made up a significant chunk of that 12M number – with over 3 million units sold three days after the March 16, 2012 launch alone.  But isn’t the overall tablet market supposed to be in high-growth mode?  Ah, the questions raised by Apple’s still-fairly-new guidance methodology.

Mac:

– Not much to say here, because there’s only been one Mac refresh of note – MacBook Airs, which also haven’t been redesigned.  Though MacBook Airs may well be the top-selling Mac (pretty amazing, considering the former niche status of ultraportables), it still seems pretty reasonable to expect a dip of close to 10% in unit sales without new iMacs, MacBook Pros, Mac minis, and maybe even that niche-workstation Mac Pro that’s on the way.  There’s that PC negative growth trend underway, after all.  Trucks and all that.

iPod:

– Still relatively irrelevant, if important to Apple for branding and having entrants in the portable media/music player space.  Like last quarter, pick a growth rate between -10% and -20%, in my opinion.

iTunes/software and Accessories:

– Both categories continue to show steady growth.  For simplicity’s sake I apply a 20% growth rate; obviously, you can do differently.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

If Apple reports revenues of around $36.5B, that was my wild guess as to how it got there and what the general trends were for the quarter.  My upcoming, actual estimate is a home gamer’s humble take on whether Oppenheimer might be “right”, or just sandbagging as he’s done so many times in the past – until recently, that is.

Next up in the Oppenheimer Code series, if I get there:  A quick check-up on Apple’s OpEx and gross margin.

***ASP isn’t quite true average selling price due to deferred revenue.  But since the vast majority of the product’s price is recognized at the time of sale (and refining ASP to account for deferrals and adjustments is basically impossible), the simple division of revs by units is “good enough” for home gamer purposes.  If you want full details, you can check out Oppenheimer’s iCloud revenue deferral here (pages 4-5 of the presentation section) and any Apple 10-Q filing.  Note that AppleCare revenue is part of iTunes/software category revenues (note c, page 27 of the Apple Q3 2013 10-Q filing).

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s