(UPDATED) The Oppenheimer Code, Fiscal Q2 2014, Part 1: Net Income Preview – Apple’s “House of Pancakes” March Quarter (But With $14B Worth of Earnings Sweetener)

Why pancakes? Because revenue growth was just guided to be…y’know…flat, for the first time in I don’t even know who long.  (If Apple’s actual results come in near the top of the range, that is.)

This could turn out to be that “anomalous” quarter where gross margin and EPS stabilize YOY, but revenue and unit growth become the new worries for Wall Street. It’s early, but the guidance is what it is.  Is Oppenheimer being cautious about the China Mobile deal, or will China Mobile actually “prop up” an otherwise lousy March quarter?  One of many storylines to consider.

But it’s not all bad for AAPL bulls, all of a sudden. $14B in opportunistic share repurchases reminded us all of a lever Apple will use to help stabilize sentiment/share price, at least until the next new product category or refreshed existing product line rolls around.  Having a bunch of cash (even if $120B or so is “trapped” outside the US) helps that way.

With the post-earnings AAPL panic of January 2014 over almost as quickly as it happened (at least for now), here’s how the net income and EPS numbers look based on guidance and the latest buyback information.

Oppenheimer’s range guidance for fiscal Q2 2014 was:

  • revenue between $42 billion and $44 billion
  • gross margin between 37 percent and 38 percent
  • operating expenses between $4.3 billion and $4.4 billion
  • other income/(expense) of $200 million
  • tax rate of 26.2 percent

March 2013 actual results were:  $43.6B revs, $10.09 EPS, 37.5% GM, $3.79B OpEx, $9.547B net income, with 946M shares outstanding.

Running the ranges yields a net income range of about $8.37 – $9.31B.

Assuming Apple’s $14B in share repurchases is more or less it for fiscal Q2, that’s about 27.7M shares repurchased assuming an average share price of $505.

I’m estimating Apple will reduce share count by around 17M when accounting for share-weighted averages (for example, if Apple buys shares towards the end of a fiscal quarter, the net share reduction from that one repurchase event won’t be fully reflected in the financials until the next quarter).

That brings implied EPS range to $9.46 – $10.54 (based on 884M shares outstanding).  The buyback, by my back-of-the-napkin calculations, could boost EPS by around 12-15 cents, assuming a “baseline” repurchase of 5M shares reflected in the March quarter.  That’s a non-trivial amount.

For reference, Yahoo! Finance currently has the analyst consensus EPS at $10.16.

Quick note: Notice “static” OpEx spending, which I’ve posted about before? We’ll see if it remains that level for the second half of FY ’14.  Yep, that projected YOY OpEx increase of at least 13% will dent the profitability metrics by $380 million or so – and the increased net deferrals (which might be close to that amount, actually) won’t help any, either.  Call it the new “innovation through the downturn”, except the “downturn”, according to some, is of Apple’s own making.

A pre-tax profitability impact in the neighborhood of $750M based on OpEx and higher net deferrals alone (it doesn’t look like the add-in of previously-deferred revenue will help much)…pinched on both the top and bottom lines, with warnings/excuses (take your pick) of channel inventory compares (among other things)…uncertainty as to whether Wall Street will start adjusting/accounting for non-GAAP sell-through revenues and units, given management’s increasing emphasis on it…looks like another rough YOY compare ahead.

There’s two silver linings, though:

(1) Gross margin is projected to stabilize or even improve YOY (granted, it’s been lost in the shuffle so far).

(2) Apple’s aggressive buyback strategy, which, given Tim Cook’s recent remarks, seems likely to incorporate an expansion of the current $60B program within a month or two.  A total wild guess on my part, but an increase from $60B to $100B$150B, if the program is extended a calendar year or two?  Who knows.

I’ll continue my fiscal Q2 earnings preview around early April.

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