(UPDATED w/ iPhone Corrections 10/13/2014) The Maestri Code, Fiscal Q4 2014 Part 1/2 (Guidance/Revenue Mix): The Quarter Before “THE Quarter”

The “build up”, “pre-game” quarter’s in the history books. Does it bode well for the most highly anticipated (holiday) quarter ever for Apple?

My TL;DR home game AAPL earnings preview series begins anew for the sixth consecutive quarter. Time to remove some training wheels (though I remain as non-expert as ever) and see if I can’t be a little more concise – while keeping to the same general topics of management guidance, revenue mix, operating expenses, (Ex-Retail) operating income/gross margin, and Wall Street analyst expectations.

This quarter, I’ll be consolidating the guidance/net income preview section with the revenue mix section – let’s see how it goes.


Running the Ranges

Apple issued the following guidance for fiscal Q4:

  • revenue between $37 billion and $40 billion
  • gross margin between 37 percent and 38 percent
  • operating expenses between $4.75 billion and $4.85 billion
  • other income/(expense) of $250 million
  • tax rate of 26.1 percent

That results in a net income guidance range of about $6.7B-$7.9B, versus $7.5B actual net income in the year-ago quarter. Yep, leaving open the possibility of a fourth “consecutive” quarter of good old-fashioned profit growth year-over-year. (As noted last quarter, fiscal Q1 2014 rang in $6 million less in profit compared to Q1 2013 due to the impact of increased per-unit revenue/gross margin deferrals.)

As usual, we just have to solve for shares to get to EPS. Apple didn’t really utilize its buyback authorization “all that much” in fiscal Q3 – there was no new ASR reported (I was wrong on that prediction), “just” $5B in open-market purchases good for about 58.7M shares. (Which, per page 18 of Apple’s latest 10-Q, is Apple’s average for that type of share repurchase since the start of the program.) So my wild guess for Q4 is “nothing more” than another $5B in share repurchases, call it an average price of $95, leading to a shares outstanding estimate of just about 6 billion.

This translates to an “implied EPS” of around $1.20 – $1.32, give or take a few tenths of a cent. 😀 That compares to $1.24 in the year-ago quarter and current analyst expectations of $1.30 per Yahoo! Finance.


Revenue Mix Thought Exercise and “Bonus” Q4 Estimate (Very Emphatic Air Quotes, Unless I’m Right on Target that is)

For this quarter, I’ll be rolling the revenue mix section of my earnings preview into “Part 1”, so to save on TL;DR where possible :P, let’s get right to it. My basic thought process, though evolving over time, is right in the archives if you need the background – which you probably don’t.

What number have I picked out a hat this time, based some super-keen wild-guess-type analysis? Avert your eyes – I’m predicting a revenue beat against my better judgment. Yes, again. But hey – it’s “only” by around $600M!

First the actual results from the prior year, then my, er, “not recommended for pretty much any use” projections:

Actual results from fiscal Q4 2013 (NOTE:  I abbreviate “iTunes/Software/Services” as “iTunes/software” to save on space):

REVENUES revs units “ASP”
iPhone $19.51B 33.797M 577.27
iPad $6.186B 14.079M 439.38
Mac $5.624B 4.574M 1229.56
iPod $573M 3.498M 163.81
iTunes/software $4.26B
Accessories $1.319B
Total revs $37.472B

Now, the “fun part”. 😀

“If Apple reaches this revenue level, how did it get there?” Here’s my humble take on this, and yes, your opinion may vary – considerably:

Revenue “Estimate”:

REVENUES revs units “ASP”
iPhone $22.93B 39.2M 585
iPad $5.11B 11.75M 435
Mac $6.16B 5.05M 1220
iPod $262M 1.75M 150
iTunes/software $4.77B
Accessories $1.38B
YOY iPhone 15.99%
YOY iPad -16.54%
Total revs $40.62B YOY Mac 10.41%
YOY iPod -49.97%
YOY iTunes/SW 12%
YOY Accessories 5%

Now for some quick, exceedingly oversimplified humble home gamer commentary on each revenue category, starting with iPhone and working our way down the revenue categories to Accessories. Well, with one exception.


iPhoneSales Pause, Sales Surge, Net Effect = ?

At this point, most everyone knows the yearly iPhone update is due around September these days.

Everybody knew iPhone 6 was due out this year. And that it finally, finally, was gonna have that “bigger screen” – since iPhone 5 and 5S, nice as they were, paled in comparison to, well, pretty much every other smartphone in terms of screen size (and increasingly, pixel count).

Now, it’s not like iPhone 5S and 5C didn’t have a nice run. “History” has shown both to be capable as well as popular. But in unit growth terms? iPhone’s YOY growth in GAAP sell-in terms has been: 7% (Q1 2014), 17% (Q2), 13% (Q3). Compare that to iPhone’s 20% overall GAAP sell-in unit growth for FY 2013 vs. FY 2012. There was continued strength in iPhone, to be sure, and business physics do make it increasingly difficult to grow the same amount in percentage terms as the year-ago base increases. But iPhone 6 sales pause is an undeniable factor.

And then, just when a few people fretted about iPhone 6 being an October proposition, and iPhone 6 Plus maybe even later (as I once said: follow the guidance) – iPhone 6 and its bigger, higher-res version hit the market right around the same time in the year as the 5S and the 5 before it. True, China’s iPhone launch is roughly one month “delayed” – on the other hand, Apple isn’t exactly possessed of adequate supply to fill the worldwide sales channel to its target inventory range right know, y’know?

“More than 10 million” iPhone 5S and 5C units sold in three days. “More than 12 million” iPhone 6 and 6 Plus units sold in three days. Despite iPhone 6 and 6 Plus being new-gen products, they collectively sold more than 10 million units in 3 days, versus more than 9 million for iPhone 5S, which included an unknown number of not-exactly-new iPhone 5C units.

Add in discounted 5S and 5C models which value-conscious shoppers might have been waiting for, and it would seem Apple had a nice running start before Q4 ended on the 27th, eight days after the launch.

So…16% YOY growth? Is it possible? Quite possible, I think, provided Apple had enough initial supply, the strongest product ramp yet, and maybe a little help from continued iPhone 5S/5C/4S momentum, especially in markets that typically receive new iPhones a bit later. Big “ifs”, to be sure. On the other hand, iPhone 5S and 5C, neither of which counted as new form factors, still led Apple to 26% YOY unit growth last fiscal Q4. The 10M9M+ initial launch sales weekend for iPhone 5S and 5C combined plus five additional sales days led to Apple selling about 7 million more iPhones than the year before.

I’m guessing Apple sold “only” 5.4 million more iPhones than in the year-ago quarter, a lower unit delta. Overall, I think there’s a case for my 39.2M iPhone unit sales guess to have upside potential. But we’ll see. The “stop-and-go” effect of iPhone sales may have been the most unpredictable ever.

iPad – It’s Quiet. Too Quiet.

Not much to say, because the unknowns are many, and iPad’s relative “silence” (before the October-event refresh) has been “deafening”.

iPad unit sales grew at just about the same clip as iPhone in FY 2013 (20% YOY) – but it was undergoing a much quicker rate of sales deceleration than the more-mature iPhone line. A condensed history of GAAP sell-in unit growth numbers: 65% YOY (Q2 2013), -14% (Q3 2013), 0% (Q4 2013), 14% (Q1 2014), -16% (Q2 2014), -9% (Q3 2014).

The “good news”? 0% growth in the year-ago quarter makes a pretty decent bar as compares go. The “bad news” is self-explanatory – there’s nothing resembling a 20% YOY growth trend in the past five fiscal quarters. The iPad 4 + iPad mini pivot boosted the first half of 2013, but the current lineup of iPads have been relative laggards lately.

My personal opinion on iPad, for what it’s worth, sort of aligns with Tim Cook – he knows better, obviously, but I’m not particularly concerned about iPad’s long-term future. The world went gaga for tablets for a while, but that also meant sales hypergrowth eclipsing even the iPhone. At some point, and with the total addressable market…probably not anywhere near the size of the smartphone market, there was bound to be a sales pause of some sort. Particularly with worldwide PC unit sales still hanging around safely above 200M units per year at present, meaning competition for “bigger screen” computing products remains robust.

Who knows if I’m even close to the “root cause(s)”, but a steep sales curve combined with a PC-esque replacement cycle and less-essential-than-smartphone use case (for most, anyway) could be pressuring iPad for the time being. It also doesn’t help that iPad, despite being the most powerful iOS product, lacks Touch ID.

Apple + IBM could help in the enterprise, but it won’t kick in just yet. Will Touch ID, maybe Apple Pay and some form factor/functionality innovations get iPad back on the path of consistent growth soon? We’ll see. In the meantime, I’ve guessed a unit decline of about 16% YOY in iPad’s weakest quarter – and I’m not sure if that’s actually optimistic.

Fortunately, iPad’s spiritual predecessor is there to potentially pick up the sales slack.

Mac – The Tortoise to the iPad Hare (At Least, For Now)

The venerable “old” Mac outlasted iPod, which was ultimately “faddish” in the context of the phone/camera/media/app/and-now-payment converged ultrapocketable of the moment (and it’s not done quite yet).

And while iPad is cooling off – Mac is now performing better, growing unit sales three quarters in a row this fiscal year: 19% (Q1), 5% (Q2), and 18% (Q3).

Given the back-to-school season, refreshed MacBook Pros and MacBook Airs more affordable than ever (though maybe in “need” of a Retina form factor), I’m guessing that Mac units will grow about 10% YOY. Macs keep improving (well, maybe not Mac mini just yet) and they increasingly integrate with iOS devices (iOS 8/Yosemite/Continuity) while Microsoft, perhaps in an attempt to get extra distance from Windows 8, is skipping straight to 10. Though Mac ASP could be down from the $1300 level (I’m guessing ASP to be flat year-to-year), its higher-than-iPad ASP means Mac has a chance of achieving iPad-Q4 2013-level revenues in Q4 2014.

With continued investment, might Mac be a more consistent entry in the quarterly Top 5 worldwide unit sales leaders?

Quick sidenote – if there’s one thing I wish I knew about the Mac line, it’d be what Mac Pro’s been up to lately. It seems all-but-invisible in ASP terms at least. If the pros don’t take to it, is this the beginning of the last hurrah?

iPod is Irrelevant, Let’s Move On

Where is that iPod shuffle I used to have? I’m sure I didn’t accidentally eat it – Apple made it pretty clear you’re not supposed to. Anyway, later, former cash cow. It’s Apple Watch’s time now. Hey, a pun.

iTunes/Software/ServicesThe Value of Intangibles

Apple’s had a fairly steady, if lower-margin (?), business in the sale of apps, media, and (high-margin) AppleCare. Recent YOY growth rates from Q4 2013 to to Q3 2014: 22%, 19%, 11%, 12%. It’s true that Apple’s YOY growth rates have been in the low 10s lately, which is why my current YOY growth guess is 12%. Giving OS X, iLife and iWork away for free has had some impact on the growth numbers. As has pressured digital music sales. Will Apple’s new push into corporate with Apple + IBM (adding new corporate users with service contracts) have a noticeable impact? (As an aside, will iCloud Drive/storage revenue even be noticed?)

It’ll be interesting to see if Apple Pay gets added to this revenue category starting fiscal Q1 (my guess is yes, since it’s obviously a service). While 15 basis points per Apple Pay transaction isn’t much to a $180B or so company each year, it could eventually contribute meaningfully to a business line currently on a $18B/year run rate – particularly if other international card issuers like China UnionPay sign on.

AccessoriesBeats Me

The bad puns are always free at The AAPL Tree. 😀

Accessories generally doesn’t see anything close to 10% YOY growth lately – it’s been single-digit and sometimes single-digit-negative – which makes Q3 2014’s 12% YOY growth an exception.

Apple formally acquired Beats in August – at some point, its integration into Apple’s financials (the company’s annual revenues were reportedly north of $1 billion) will be explained. I just guessed a 5% growth rate, which assumes some degree of revenue contribution from Beats in the quarter. Luckily, with quarterly revenues far below iPad and Mac, there’s relatively modest effect in the event of overestimation.


 

“Bonus”: My Home Game Estimates for Fiscal Q4 2014

Finally, my estimates for the quarter:

$40.62B revs (~8.4% YOY growth)

39.2M iPhones
11.75M iPads
5.05M Macs
1.75M iPods

$4.77B iTunes/software/services revenue
$1.38B Accessories revenue

38.7% GM
$4.8B OpEx
26.2% tax rate
$8.24B net income (~9.7% YOY growth)

$1.37 EPS based on estimated 6B shares outstanding (share-weighted basis, 16.4% EPS growth)

 

Next up, should I get to all of it – a checkup on OpEx, an update on gross margin/operating margin, and a look at analyst expectations for the fiscal Q4 and in-progress fiscal Q1.

 

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