(NOTE: This post runs a bit long for an “introductory” section.)
And thus begins my third (!) go-round for The Oppenheimer Code, my home gamer’s AAPL earnings preview series named after the person who is quite possibly the world’s cagiest megacap CFO. This quarter’s always the most interesting (I’d even say “fun”) – the December/holiday quarter sets the tone for the rest of the fiscal year, and, well, it’s always the highest revenue and profit quarter for Apple. As long as new iPhones and iPads continue to ship near the final 2-4 months of any given year, it’s difficult to see that ever changing.
All five to ten of you who follow my Oppenheimer Code posts have your own net income range calculators and early EPS estimators all optimized and ready to go, right? 😀 We’ll be underway very shortly.
But just in case you’re both new to the blog (welcome!) and would like a little “cheat sheet” on quickly translating Oppenheimer’s range guidance into bottom line numbers, though, you should be able to find what you’re looking for here and here.
Working with the range guidance provided by Oppenheimer, guided revenues of $55B-$58B yields a net income range of about $11.63B – $12.94B.
Results from fiscal Q1 2013? Revs of $54.5B, net income of $13.1B, EPS of $13.81 (diluted basis).
So yes, management is once again guiding to a YOY decline in net income.
However, there’s more to the story than the typical year-ago tough compare, which:
• saw gross margin about 110 basis points higher than top-end guidance,
• and had OpEx of $3.85B, which is at least $550 million lower than Oppenheimer’s OpEx $4.4-4.5B OpEx guidance for fiscal Q1 2014. In other words, OpEx is guided to increase around 14%-17% YOY on a guided revenue increase of around 0.9%-6.4%. Curious, that. (I have a theory about OpEx trending linked here, by the way, in case you missed it before.)
I know, those two factors are big enough deals already. Together they account for over $1B in pretax expense impact (read: they combine to lower net income by around $750M or more despite a YOY revenue increase). But there actually are (at least) two more points worth considering. In no particular order:
• “First”, gross margin compares are the least daunting they’ve been in a year. Should Apple return to YOY revenue growth in the 10%+ range (with stabilizing or, dare I say it, improving gross margin), Apple’s financials will finally approach a linear or “better” growth trend. By which I mean that one percent of revenue growth, provided gross margin cooperates, will translate to around one percent of net income growth or better. Seems so “logical” for a lean, mean cost-curve-bending machine like Apple, and yet it hasn’t been that way for a while, thanks in large part to the margin monster known as iPhone 4S and the “margin-dilutive” iPad and iPad mini. (Don’t forget about potential ASP trends this fiscal year!)
• “Second”, there’s that new wrinkle many of you are already aware of – increased revenue deferrals for iPhone, iPad and Mac. The bad news is, these revenue deferrals cut 100% against gross margin dollars. (My fuzzy understanding on this one is that Apple is able to account for a certain portion of product revenue as “pure profit dollars” – so a dollar of revenue deferred is a dollar of gross margin amortized over 8 quarters (iPad/iPhone) or 16 quarters (Mac).) I estimate that the new deferral program will, by itself, decrease gross margin by around 80 additional basis points for fiscal Q1 2014, which “isn’t helpful” (your math may vary). The good news is, Wall Street should be very-well-educated in the increased deferral scheme and take it into account, thanks to Oppenheimer taking the time to explain it and answer an analyst question about it during the fiscal Q4 2013 conference call. Not only that, the effect of increased deferrals should be mitigated over time as an increasing amount of deferred revenues/gross margin are recognized.
(Sure would be helpful if Oppenheimer could offer some “non-GAAP” insights on the revised deferral scheme in the next conference call, though! Also of note, had Oppenheimer not increased deferrals, net income would of course be higher. So on a “non-GAAP” basis, there’s a chance net income net of increased deferrals did increase year over year – though we may never know for sure.)
Last but not least, an early guesstimate on the denominator for earnings – number of diluted shares. Well, Apple had 909M shares outstanding as of the end of fiscal Q4 2013, though with some net share settlements that had already occurred but not applied to share count for…GAAP reasons I haven’t the expertise to fully explain. Anyway, I’ll (again) guess a diluted share count of 900M at December quarter-end, yielding implied EPS guidance of around $12.93 – $14.38, give or take a penny. (UPDATE: Based on Apple’s most recent Preliminary Proxy Statement and some overly simplistic comparisons of basic v. diluted shares trends, I’m now projecting diluted share count to be around 898M – which makes about 0.2% worth of difference.)
I know, I know. China Mobile doesn’t look to be a factor until fiscal Q2 2014, making guidance more weighty in Wall Street’s earnings day judgment than maybe ever. All the same, as “less important” as Q1 2014 results will be, I see WS still paying plenty of attention to the numbers. It’ll be the final chance to assess how well Apple can grow its business without a new product line or the considerable help of the world’s largest celco.
Next in the probable 5-part series: My thought exercise (not my actual home game estimate) on a potential revenue mix scenario deliberately constrained by Oppenheimer’s revenue range guidance, just as I’ve done in the previous two quarters. See you then.