Subtitle: “The Estimates Are Too Damn High?”
About $60B in revs and $14.97 EPS for fiscal Q1 2014.
$46B-49B rev guidance for fiscal Q2 2014.
I know, those numbers might look kinda high. I know Oppenheimer’s top-end revenue guidance is “only” $58B, that this would be an unprecedented “beat margin” under current guidance methodology, and that there’s a possibility I overestimated (and I’d prefer to be “too low” on my numbers).
More on all this after the jump.
The AAPL Tree Home Game Q1 2014 Estimates
Revenues: $59.996B (10% YOY growth)
EPS: $14.97 (Net Income: $13.44B) (about 2.8% YOY net income growth)
GM (gross margin) – 37.5%
OpEx (operating expenses) – $4.4B
Tax rate – 26.5% (same as Apple guidance)
Outstanding shares – 898M (assuming a net share reduction of about 11.1M)
iPhone – 57.3M sold @ $590 “ASP” (about 20% YOY unit growth)
iPad – 26M sold @ $480 ASP (about 14% YOY unit growth)
Mac – 4.55M sold @ $1300 ASP (about 12% YOY growth)
iPod – 8.85M sold @ $155 ASP (about -30% YOY growth)
iTunes/software/services – $4.33B (assumes ~ 17.5% YOY growth rate)
Accessories – $2.01B (assumes ~ 10% YOY growth rate)
First, the proverbial elephant in the room. “10% YOY rev growth, but not even 3% YOY net income growth, eh?”
Of course, you know why the numbers work out that way – it’s mostly because my estimated gross margin is 110 basis points lower YOY, and OpEx growth is projected to considerably outpace revenue growth on a percentage basis.
I guess there’s that other deal with me estimating a revenue beat of about $2B over top-end guidance too. 😛 I’ll get to my apparent throwing caution into the wind in the discussion just below, which covers iPhone, iPad, and Mac. (My “rationale” for iTunes/software, Accessories and iPod was already set out back in Part 2 and I don’t see any reason to change the numbers at this point.)
My ASP assumption remains the same as in Part 2. The 5S should be an ASP positive, but I’m not sure yet about the extent to which Apple can “fight back” against the recent YOY downtrend in ASP. I expect ASP to improve sequentially but I’m being conservative for now (actually, a bit more conservative, since I incorrectly thought iPhone/iPad deferrals were $10 instead of $5 as of Part 2).
The numbers just don’t make sense to me if I either increase ASP or reduce units, which I’ll get to right now.
Is 20% YOY unit growth in iPhone an aggressive estimate? I’ve only glanced at a few estimates for comparison here and there: Horace Dediu’s and Daniel Tello’s, for instance – and maybe it is, relatively speaking. (Yes, these home game numbers are strictly my own, ha ha, yes I know a little “inspiration” from them or many other folks could well improve my numbers. 😛 ) Why do I think 20% YOY growth is possible? Well, I’ve gone over why I think iPhone will do well this product cycle before, so I won’t retread too much here. Here’s my main points:
– iPhone units grew a normalized 39% YOY in the year-ago quarter, and 20% YOY throughout fiscal 2013 despite a “disappointing” iPhone 5 that iPhone 4 apparently “compensated” for on a unit basis.
– iPhone 5S, from what little data we have, was off to a terrific start, in large part (though not entirely) thanks to China Unicom and Telecom being new first-stage launch partners. And China Unicom and Telecom have been selling the current iPhone line not for two weeks, but the entire December quarter. NTT DoCoMo is also a significant incremental positive to growth.
– Basically, I can see Apple, with the appeal of the 5S alone, managing about half of fiscal Q1 2013’s iPhone normalized growth, or “merely” continuing the annual growth rate of fiscal 2013, take your pick. And as a quick note, if iPhone is the unit growth leader, I expect gross margin to be at least 37.5%, which is the top end of Oppenheimer’s guidance.
The ASP assumption is now $480, which I still think could turn out conservative, particularly if iPad Air gains in popularity relative to iPad 4. The “rationale” behind my ASP estimate is the same as in Part 2 and as I’ve discussed in earlier posts with respect to ASP trends. A better lineup with higher-ASP choices (and just plain higher prices in the case of the iPad mini retina) will be the main storyline.
Of course, with higher prices (iPad mini retina) and more competition there’s legitimate questions about the impact on unit growth. I’ve assumed quite the slowdown in this case. iPad YOY unit growth in fiscal Q1 2013 was 48% (so, it was even higher on a normalized basis on account of the 14-week vs. 13-week compare), and my home game estimate has a deceleration to about 14%. Even with this “low” growth rate I’m wondering if I haven’t adjusted quite enough, given Oppenheimer’s guidance as a “thought boundary” of sorts.
At the end of the day, I decided that Tim Cook wouldn’t declare an iPad Christmas without decent supply to back it up. Because if ship times were anything to go by, demand really wasn’t much of an issue. There is a question about iPad mini retina popularity, but whether that gets answered depends on analyst questions and/or Tim’s willingness to clarify, now that the quarter’s done, what he meant (during last quarter’s conference call) by knowing how many iPad mini retinas Apple would have, but not knowing what demand would be. There was something about the wording and inflection (could just be me) that made me wonder if Tim expressed genuine uncertainty of the relative popularity of the now “more premium” iPad mini retina.
Given product trends and cycles, if fiscal Q1 2014 iPad sales are “low”, you’d expect Q2 2014 YOY growth to be “better” if management cites lack of iPad supply (which is no longer an issue) as a problem in the December quarter. Right? I guess we’ll have to wait about 10 more days to get some clues on this. In the meantime, I figure an iPad growth rate of less than a third of the “uncorrected” year-ago growth rate isn’t too out there in the grand scheme of things.
Not much to add from before, since the assumptions are unchanged from Part 2, with the exception of my lowering ASP by $25 for conservatism purposes (impact of close to $115M).
So, why 12% YOY growth? That seems like too much growth for a post-PC world, right? Two major reasons, which may well be flawed but we’ll see. First, the core MacBook lineup is more capable and overall more attractive to consumers, from hardware (MacBook Air’s pretty-darn-awesome battery life, more affordable retina MacBook Pros) to software (Mavericks, the promise of free OS updates, and iWork newly included for free as well).
Second, iMac is actually making its presence known – it was recently refreshed and shipping with ample supply for the full quarter, versus having hardly any shipments (of redesigned product) in the year-ago quarter due to production ramping issues. Also, 12% “growth” isn’t actually net growth on account of Mac units tanking over 20% YOY in that same December 2013 quarter. Basically, I’m making a “bold call” that iMac, despite being a desktop and a premium-type all-in-one at that, commands a larger share of Mac units (basically, be a more important Mac for the lineup) than we may think.
AAPL Tree Out on a Limb™ Guidance Prediction for Fiscal Q2 2014
Now to go even farther out on a limb, just like last quarter, and guess Oppenheimer’s issued guidance for the March quarter ¹(except for OI&E, which is anyone’s guess, and tax rate – pick a rate between 24% and 28%):
OpEx of $4.4B
The big question is Oppenheimer’s “confidence” in the range. I think he will have confidence to guide to a top end of $49B, partly because it’s very, very hard not to see that revenue result given what I believe to be quite reasonable assumptions. Here’s my basic reasoning:
iPhone: Take SAME anemic YOY unit growth rate from fiscal Q2, add 3 million incremental iPhone unit sales from China Mobile for the entire quarter (y’know, because of those “multi-millions” reports), assume static sequential ASP. That’s still about 15% YOY growth. (Caveat: Oppenheimer may try to find that last bit of cover to unleash the torrent of sandbags by saying that he expects Greater China iPhone growth to be moderated by demand that was already addressed in the December quarter. Well, we’ll see what Greater China results look like for the December quarter soon enough.)
iPad: A supply-constrained iPad Christmas gets followed up by a post-Christmas humbug? In just one quarter’s time? I’m skeptical. Considering iPad units grew 22% in all of fiscal 2013, it should be able to grow close to 15% with a much better line-up in the new iPad line’s first full quarter of availability. Otherwise, since iPads “wane” in popularity due to seasonality and “age” before the next product cycle, it’ll be more like the Cratchit family situation of Christmas Present – all fiscal year long. (Another Oppenheimer Sandbag warning – he could minimize the impact of TD-LTE iPads, since they don’t exist at this point, so I’m not “automatically assuming” a China Mobile factor in the iPad portion of this guidance discussion.)
Mac: 50,000 incremental Mac Pros = 150,000 regular Macs. At least. And you’d think Apple is still focused on growing Mac if it can (hey, the product’s pretty good). Oppenheimer can’t really minimize Macs when the lineup is the most complete it’s been in a while.
Add all that together, with the same iTunes/software and Accessories revenue growth assumptions I’ve previously made for the December quarter, and what I consider to be a conservative revenue result is right around $49B.
So, sounds like a good top end of the range for Oppenheimer.
That’s it for my “regularly scheduled” Q1 2014 earnings preview posts! Good luck to all!
(As a just-for-fun bonus – I’m assuming 893M shares in the March 2014 quarter, top-end GM range of 37%, tax rate of 26.5%, and an implied top-end EPS of about $11.40.)
1 As I acknowledged last quarter: Yes, I’m guessing what’s essentially another guess. Except Oppenheimer knows full well what Apple’s expectations are, and Wall Street relies heavily on guidance as part of its reaction to earnings (at least in my humble opinion). So there you go.