I know, it’s a bit early to be talking FQ2 2015, especially for me, right?
Well, recent history prompted this post. To illustrate, let’s start with a chart.
(REMINDER: Please refer to the About + Disclaimer section. You won’t ever find actionable investing/trading advice here, just a humble home gamer in his little corner of the Web trying to understand Apple and tech a bit better. As you know, no one has any clue what AAPL stock will do from day to day, quarter to quarter, year to year, even if earnings “seem good enough”.)
A Recent History of Set and Reset Wall Street Analyst Expectations
Turns out, I’ve been tracking analyst consensus expectations for the fiscal quarter in progress since I started this humble blog back in mid-2013. While I don’t check them on anything close to a daily basis, I have recorded (within a few days of each earnings post)
• what the pre-guidance consensus for the following fiscal quarter was, and
• what the consensus for the now-soon-to-be-reported fiscal quarter was just before earnings, as influenced by management guidance all those weeks ago (see green, bolded lines).
In case that was a little jumbled, basically I’d taken snapshots of analysts’ “crystal ball” for the given fiscal quarter before and after guidance, about three months apart.
And for the five of the those past six tracked quarters, analysts “heeded” Apple’s guided revenue range. Which is to say, shortly before earnings, the consensus hovered close to, but did not exceed, top-end guidance (which, last I checked, still represents the upper bound of results Apple is “likely to report within”).
Back when Apple managed to “hold analyst expectations in check”, we also had an opportunity to observe analyst behavior when Apple guided above consensus on a pre-guidance-announcement basis. Apple guided top-end revenue to around $2.5B over the $55.5B or so FQ1 2014 consensus since iPhone 5S was leading the way in Apple’s growth “resurgence”.
Apple’s FQ1 “enthusiasm” had a spillover effect on FQ2 2014 analyst expectations which Apple took prompt action to mitigate, guiding top-end FQ2 2014 revenue about $2B below the $46B or so consensus expectation at the time. Which, in turn, probably played a major role in causing AAPL to dip below the low 80s and consolidate in the 70s until April earnings kicked off a strong multi-month rally.
Analysts adjusted accordingly to the FQ2 2014 “shock”. For FQ3 and FQ4 2014, “just before earnings” expectations were lower than they were “pre-guidance”, though analysts hewed quite closely to top-end revenue guidance (note the “Margin of Error” column).
Thus Far This Fiscal Year
Fast forward to mid-October. The iPhone 6/Plus launch delivered strong initial sales and clearly sustained demand. Analysts began revving up their estimates accordingly in advance of the FQ4 2014 report/FQ1 2015 guidance, which I thought to be very fair at the time given all that “best product pipeline in 25 years” and various other Apple-generated buzz. Shortly before earnings, analyst consensus had risen to an extraordinary-by-most-measures $63.5B, representing perfectly respectable YOY revenue growth of 10%, particularly for a company of Apple’s scale.
Apple then caused all kinds of excitement across Wall Street, and some of Main Street, by raising the “analyst ante” by a full $3B with its guidance.
As we now know, Apple “held back” about $8B in reserve…
On the one hand, if you’re Apple and you’re thinking, say, a $70B GAAP revenue quarter, you can’t sandbag too much or analysts will start thinking that “likely to report within” is just another name for the same, time-honored lowball guidance tradition. Well, more than they already do. On the other hand, especially if you’re Luca Maestri, you’re carrying on Oppenheimer’s never-guided-over-actual streak…which is another tradition that “must” be kept.
Out of that push-pull within Apple management ultimately emerged something familiar, yet somehow different. No change in policy – more like an attitudinal shift.
Guidance which is suddenly quickening the pace, even as Apple approaches annual revenue territory never reached by any technology company ever. Guidance which, by its very nature, induces Wall Street to do things like collectively exceed the top end of FQ2 2015 revenue guidance in the space of one week. Guidance which reflects what I can only term the supreme confidence of management, with zero hint of moderated expectations, simply an estimate of ForEx impact on a constant-currency basis.
Apple is the first consumer-focused technology company to break $150B, even $100B in annual revenues. As such, there simply isn’t any precedent for how a company of its type is “supposed” to grow at these dizzying levels.
In the abstract, though? A company pushing 40, already at these heights, doesn’t tend to grow revenues 20% year over year, and Apple certainly isn’t the kind of corporate outfit that benefits AT ALL from rising commodity prices (as many energy companies in its “revenue peer group” have been able to leverage in the past). Personally, I saw nothing wrong with Apple settling into a single-digit growth “middle age” not so long ago.
So then what does Apple do to follow up its ionospheric December quarter earnings?
Early Visualization of FQ2 2015
Apple surprises to the upside a second consecutive time with the following guidance:
- revenue between $52 billion and $55 billion (as noted, the consensus was more like $53.6B)
- gross margin between 38.5 percent and 39.5 percent
- operating expenses between $5.4 billion and $5.5 billion
- other income/(expense) of $350 million
- tax rate of 26.3 percent
Running the ranges yields: About $10.96-12.29B in net income, implied EPS of about $1.88-$2.10 based on 5.84B shares outstanding.
So, $200B+ run-rate Apple sets the bar with revenue guidance “as high as” $55B, which represents 20.5% year-over-year growth from FQ2 2014.
Net income is guided to a similarly ridiculous “maximum” 20.2% year-over-year growth.
EPS? 26.5% growth. Wait, what year is this again?
Let’s run a quick “what if” scenario, which may not be that tricky a horseshoe toss given the exact same product lineup as last quarter. Which is to say, without the dark horse Apple Watch, iPhone must drive the earnings bus – I mean, growth for the March quarter.
Getting to $55B
Here’s the results from FQ2 2014:
What’s one potential path to $55B?
Here’s my humble, super-early take on this for FQ2 2015 (hopefully, the maths is right), and yes, your opinion may vary – considerably, and quite justifiably (YOY iPhone/iPad/Mac growth percentages in terms of units):
|Total revs||$55.1B||YOY Mac||14.9%|
|YOY Other Products||-9.6%|
Let’s address the non-iPhone assumptions first, since they have far less sway over Apple’s results.
iPad – Tim Cook gave the closest thing to a “warning” anyone may hear for a while, advising “I’m not projecting … something very different next quarter or the next” when talking about iPad over the longer-term. Well, if that’s the case, going from a -17.7% YOY growth rate for iPad in FQ1 2015 to -17.4% FQ2 2015 doesn’t sound that unreasonable. ASP was about $420 for the December quarter, so a modest drop to $415 also sounds logical enough for purposes of this quick exercise.
Mac – Mac units were up a solid 14% or so YOY in FQ1 2015. It’s quite possible that it could see continued momentum in the March quarter, though it would certainly help if either MacBook Air or Pro saw a refresh or redesign within the next month. Given product mix and “freshness” I decided to assume ASP remains basically flat sequentially.
Services – Apple Pay is still in very early days, so revenue contribution is likely nominal. I might be a bit too optimistic on Services, but Apple did recently add UnionPay as a payment method, and there were a significant number of new iPhone users in the December quarter (likely much less so for iPad), which might add a bit of growth to this recently-slowing revenue column (the slowing is logical, considering, say, App Store and media sales growth is closely tied to growth of the iOS installed base). There’s no data on AppleCare, so I won’t be hazarding a guess as to how amortization of revenue from in-progress/expiring AppleCare contracts would help the March quarter (though you’d think it to be a tailwind of some amount).
Other Products – Hard to tell at this point how much Beats’ HW division is “helping” Apple’s former-Accessories sales. Will seasonality take a toll now that the holiday season is over (except for, say, China)? Meanwhile, iPod continues to fade away. “Deduct” a few tens of millions for Beats, along with additional $160M or so for iPod negative YOY growth, add back the likely revenue growth of ex-Beats/iPod accessories – well, it could be that I’m off by over $100M on this, but that amount is a mere rounding error in the context of iPhone and $55B+ in revenue.
So – iPhone.
Assuming my thought-exercise projections are more-or-less in the ballpark, what might iPhone ASP be? Anyone’s guess, but the trend recently is lower after the new iPhone launches. The past two FQ1-to-FQ2 intervals have seen an ASP drop of $29 for FY 2013 and $41 in FY 2014 (thanks for the assist, Internet). So given both the recent data points (I know, all of two) plus iPhone demand being as strong as it is in Greater China, I decided to pick a number between those points and assume a $32 drop to $655 (from $687), blithely sidestepping net revenue deferral considerations.
That leaves units – and at 56.1M sold, that represents unit growth of about 28%. iPhone revenue growth, by the way, is…get this…about 40% YOY. For an overall revenue number basically within management guidance parameters.
Considering the “laggards” of all other revenue categories – in my thought experiment, only Services would grow in double-digits, and iPad is a big headwind (probably is for most everyone else) – it’s actually quite understandable that iPhone anchors the March quarter, and the company in general. Which we’ve known for years now.
Getting Beyond $55B?
To wrap things up, it’s quite obvious management has confidence in iPhone’s ability to bring home the metaphorical bacon (er, overall growth) both now and for the foreseeable future. Apple could have employed a word of caution or two to temper expectations. Instead management let us in – perhaps “unnecessarily” – on their projected 5% growth headwind (FQ2 2014 revenue basis) based on fiercely adverse ForEx conditions. “Y’know, guidance could have been even better if not for that.”
Does Apple need to moderate expectations now, with Greater China sales up huge, BRIC countries snapping up iPhones like crazy, revenue up 30% YOY, iPhone growth of 46 frickin’ percent year-on-year versus FQ1 2014? Well, no, and there’s that extra week of channel inventory soon to boost “normal” results somewhat going forward – if only “temporarily”.
But doesn’t it “invite” a game of Wall Street analyst “estimates chicken”, with all that implies (at least in my mind 😀 )? It’s a rhetorical question, and I respect my few readers, so I’ll leave it at that. 😉
So, let’s say iPhone demand remains strong, to the tune of 10 additional percentage points – say, 38% YOY unit growth instead of “merely” 28%. (I would be quite surprised if Apple’s FQ2 2015 isn’t north of $55B.) That would add about $3.7B in additional revenue per my ASP assumptions. (Hey, it’s not a holiday quarter, and we’re…probably?…past the point of epic earnings blowouts for now, so let’s not get thinking Apple is underestimating revenues by $6-7B. Unless I’m totally wrong, which I am often.)
That 10 extra percentage points of iPhone growth would give Apple a “expectations cushion” up to around $58.7B, which incidentally would be Apple’s second-highest revenue total…ever.
If we were to assume analysts revving up consensus expectations the same amount as last quarter – basically, $3.75B in three months, which is pretty wild, moreso for a non-holiday quarter – $57.4B projected revenue would still leave Apple some room for upside surprise.
Of course, that assumes Apple is mega-sandbagging the quarter just like last time. There’s always that chance Apple will report an in-line revenue number. After all, close to 40% YOY unit growth from that unit base, in a not-holiday quarter, with those year-ago numbers, is no small feat.
Who “Flinches” First – Wall Street or Maestri?
It’s quite interesting that Apple has essentially allowed…encouraged?…analysts to get as bullish (or front-running) as they’ve been in at least some time. In the abstract, it seems a bit “reckless”. And not something the previous CFO (King of Sandbags Oppenheimer) would do.
But Maestri proved once again in FQ1 2015 (though doubtless mildly surprised himself) that he’s just as adept at managing expectations and “holding back” as his predecessors. That unbroken guidance conservatism streak continues.
Apple’s immensely powerful and rightly confident in its execution. Still, the (management guidance reputation) stakes are higher than they’ve ever been, and everyone is looking for the slightest hint that the 30% revenue growth “good times” will be more like 20%…15%…maybe 10% in quarters ahead. Growth slowdown has to happen sometime, and it will. Business physics, market saturation dynamics and total addressable markets (nothing really beats the good ol’ smartphone) demand it, you would think (as I do). The clue to curb analyst enthusiasm might be telegraphed a quarter or two in advance, or the change in expectations might be very sudden and catch many observers off-guard. My wild guess for that “eventuality” is the latter.
Now, is “even” 7-9% annual growth still good by any rational standard? You bet, especially at these revenue heights. But if you’re an AAPL long, particularly a trader or trader-investor, Wall Street’s valuation of the company hasn’t given cause for complacency lately.
For how long will Apple remain ahead of analysts’ imaginations, I mean financial models? Stay tuned.