Previewing Apple’s FQ2+FQ3 (Quickly) – Pick a(n) (iPhone) Number, Any Number (to a Point)

It’s All About iPhone

And this theme should continue clear into FQ3, absent a HUGE surprise from the soon-to-launch Apple Watch (which isn’t to say Watch won’t play an important role).

The AAPL Tree (read: your humble correspondent – c’mon, you know it’s just me, not some faux-plural “we” 😀 ) may be going very minimalist for FQ2 earnings. I know, I know, all none of you may be a bit dismayed by the implications. What, no not-exactly-scholarly-anyway OpEx/margin/FQ3 look-ahead “commentary” like the previous seven quarters? Well, I could always bring them back at some point, but let me lay out the case for my “iPhoning it in” this quarter.

It’s…all about iPhone for FQ2. 😛 And I’ll claim some “offsetting credit” against my relative lack of effort this eighth consecutive quarter of home game AAPL earnings “coverage” for having discussed this not-terribly-controversial idea in my early bird Apple earnings preview back in February.

To briefly recap:

— Apple is guiding as high as an astonishing $55B in revenues, despite fierce ForEx headwinds.

— Mac could well grow but nowhere near enough to keep pace with iPhone either in YOY unit growth or revenue.

— iPad, in my humble opinion, was essentially telegraphed by Tim Cook as a YOY decliner for this quarter and the next – so the revenue/unit growth takeaways seem pretty obvious.

— The decline of iPad YOY (if it happens the way Tim Cook indirectly hints it might), combined with potential Mac ASP YOY trending (note the very high prior-year ASP compare of $1334), could well mean Mac + iPad account for over a billion dollars less revenue YOY. Meaning – yes, if my fragile assumptions hold – that iPad + Mac are a collective revenue anchor, even though Mac line revenue could rise “modestly” (<10%) YOY.

— Services, based on recent past history, is “likely” (heavy air quotes) to continue YOY growth. A larger than normal iPhone unit sales number for FQ1 2015 (of which some significant portion are new to iPhone, meaning iOS had some significant installed base add in the quarter) will help quite a bit in this regard. New users, new apps, new media, new AppleCare contracts to amortize, the addition of UnionPay as payment method, and a light sprinkle of Apple Pay revenue, though it could be a matter of “mere” millions – a rounding error in a category at the ~$5B scale. Then again…~$5B scale. Inherently limited in terms of upside impact.

— “Other Products” – well, Apple Watch will do a terrible job hiding itself in this category revenue-wise, but it’s a no-show for FQ2. Add Beats hardware, subtract iPod continuing to fade away, it’s a “very small” revenue category at a little under $2B per quarter anyway.

Add that all up, and where’s the growth coming from? Now that the analyst consensus is $750M over top-end guidance as per Yahoo! Finance? Hmm.

I’ll use the same Mac, iPad, Services and Other Products assumptions from earlier, as well as my prior iPhone ASP assumption.

That leaves one question: How many iPhones was Apple able to sell in FQ2? Between 56.1M units and around 60.5M units, “parameters” I covered in the sneak preview, I’ll go with…

REVENUES revs units “ASP”
iPhone $38.71B 59.1M 655
iPad $5.60B 13.5M 415
Mac $5.82B 4.75M 1225
Services $5.213B
Other Products $1.7B
YOY iPhone 35.2%
YOY iPad -17.4%
Total revs $57.06B YOY Mac 14.9%
YOY Services 14%
YOY Other Products -9.6%

Now, yes, iPhone unit growth was a staggering 46% YOY just last quarter (which also involved very strong adverse ForEx effects). And what we might as well call “the base case” (given the expectations set by the FQ1 blowout numbers) represents unit growth of around 28% YOY.

So…why did I randomly go and pick about 35%? Oh me of little faith? I’ll first acknowledge some elements of the bull case real quick.

Yep! Tim Cook more or less said <15% of the “replacement cycle” had occurred in one heck of an epic iPhone quarter (FQ1 2015), which couldn’t possibly be beat by anything other than, well, FQ1 2016 (though skepticism about following up such an amazing number is already brewing, and honestly, fairly understandable considering how surprised everyone was).


And also:

And also:

Furthermore, as I noted in a prior blog post or two (“earnings chicken”, hehe):

Now, the “temperance” case. Is 35% iPhone unit growth from FQ2 2014 to FQ2 2015 really all that low? Maybe, maybe not? It’s a horseshoe toss, slightly akin to Apple Watch but on an entirely different scale. One thing I think I know: 35% YOY growth in ~CQ1 2015, “conservative” as it may seem (mind the supergiant unit scale from a single vendor not named Samsung, though), “should” represent outperformance relative to the rest of the smartphone market. No small feat, considering the you-would-think-somewhat-limited segments in which Apple plays (to hear the conventional wisdom tell it).

Basically, I’m “cautious” on iPhones (though quite bullish based on this yardstick) – despite Apple management ebullience, iPhone 6/Plus’s unquestionable success in key markets (BRIC, for instance), the double-favorable channel inventory situation (below target range look-forward plus the ability to increase channel inventory to avg. 6 weeks) – on account of a potential iPhone “sales nova” effect. Is “aggravated seasonality” in play with its implied eventual gravitational effects? Will it make itself known during the iPhone 6 generation, or more like the 6S generation, or not at all? I’m thinking the first option, though I have no clue as to the extent of the enhanced seasonality.

To wrap up, my “bonus” (heavy air quotes) home game estimates and a super-quick note on that ever-unpredictable Wall Street analyst expectations game.

$57.06B revs (25% YOY growth)

40.5% GM

$5.5B OpEx

26.3% tax rate

$13.24B net income (~23.2% net margin)

5.8B shares outstanding (share-weighted) (total wild guess)

$2.28 EPS (~37% EPS growth)

The Wall Street Expectations Game for FQ3/”The June Quarter”

Wall Street probably has two opportunities to glean some clue about Apple Watch from Apple directly, and the more likely one arrives maybe sometime late July, and in the form of a blended (yet sort of hiding in plain sight) Other Products revenue number. Will Apple announce any initial sales number on earnings day? Apple’s explicit statement to not give competitors any unnecessary clues about Watch sales aside, “quiet period” considerations (which I may incorrectly understand to be more guidelines and protocol than actual rule) and proximity to some pretty big Apple financials news would seem to militate against any Apple Watch specifics (platitudes, sure, why not). I could be wrong – we’ll find out in a few days.

Anyway, surprise of surprises, the FQ3 landscape as we see it now looks pretty darn similar to FQ2 with the exception of Apple Watch, the backordered unknown quantity. Not a bad time to launch, either, since FQ3 has been one of Apple’s slowest of late.

What are analysts currently expecting? Well, Luca Maestri isn’t backing down from the enthusiasm pedal, so they’re “holding Maestri to his implied word” – with consensus revenues of almost $47B, plus EPS of $1.68. 25.4% revenue growth (year-ago revs were “a mere” $37.4B) and about 31% EPS growth. Expected from a company this big. Wow.

Can Apple do it? Yes. Blithely, tremendously oversimplifying, were I to “project” a “repeat” of my FQ2 2015 wild guess, that’s 25% revenue growth. Every 1M Apple Watch sales, depending on who you ask, might contribute an additional $500-$600M in revenues – at FQ3 YOY growth scale, that’s about 1.33% YOY revenue growth per million Watch units at a $500 “ASP”. So Watch could be the meaningful tiebreaker I thought it had a faint chance of being in the recently-ended FQ2.

Of course, the big question is – is Apple Watch a million-plus-per-quarter-scale product.

I think it is, but it’s just another horseshoe toss, and not an expertly thrown one at that.

That’ll just about do it for the super-condensed, iPhoning-it-in version of my quarterly Apple earnings preview. Hope at least some of you found it at least somewhat entertaining. 😉


“Blue Heart to Cart” – The Favorite Button as Indirect Product Ramp Guide

Is Apple finally getting with the times with the recently introduced favorite button for Apple Watch in the online Apple Store?

Whichever angle you choose (social media or supply chain), it occurred to me (yes, probably late) that Apple just implemented a tool with a potentially significant, though impossible-to-quantify, situational effect on all future product ramp-ups.

Of course, it’s only at its most useful (and likely to be used) in a single, time-limited context – when a given item (say, Apple Watch) is available for viewing but not pre-ordering. And yes, it’s only as potentially useful as it’s actually used – we’re highly unlikely to ever hear from Apple about “how many favorites” Watch received.

Then again, in the case of Apple Watch, there was an interval of about one month between the Mar. 9 event and the Apr. 10 pre-orders. Plenty of time for prospective customers with Apple IDs to basically submit “product preference data”. Which is pretty handy, since there’s 38 models of Apple Watch to choose from between cases and bands.

Yes, false positives, people changing their minds, spam, and so forth. But hey, analytics and the experts driving the state of analytics are supposed to account for that. Comb and filter for early indicators, maybe even patterns over time. And, given enough and enough useful data, all kinds of potentially useful metrics such as regional preferences can be teased out.

The cynically optimistic take? Hey, Apple always screws up product launches anyway. They NEVER make enough of X. So, heck, why not use that glaring flaw as cloud cover for testing assumptions from a few hundred thousand or million blue hearts?

Of course, “blue heart to cart” wouldn’t have saved the unicorn white iPhone 4 from delays – but it may have given an important clue or two to Apple about adjusting supply levels for launch. Which, at Apple’s for-the-moment-still-climbing revenue levels, is more important than ever. Even though iPhone 6S, iPad Air 3, and Apple Watch 2 likely won’t have anywhere near one month’s worth of “fav” data before pre-ordering – if the Blue Heart Experiment continues, that is – every hour, every minute of supply chain/product ramp intel counts.

Now is this novel? Maybe not. I don’t know enough to say, just enough to guess that it could be quite helpful for a company of Apple’s massive scale. Hey, they were late to the party with bigger-screened smartphones. Apple somehow made it through OK.

Maybe it’s just me, but a blue heart as a supplemental in-house competitive advantage (best-fitting initial and ongoing demand; not only getting intel on what people want, but just a bit more intel over time about how many to make) is a pretty darn useful spin on what some consider an afterthought-level gesture.

The Subtle Seismic Shift of the Apple Watch Specialty Store?

[NOTE: This post is essentially a 2-parter. Part 2 is even more of a thought exercise, so don’t click the above link/read “after the jump” if you’re not a fan of “wild speculation”.]

Galeries Lafayette. Isetan Shinjuku. Selfridges London.

We know what they are, at least I do now. (Storied retailers in France, Japan and the UK.) We know which company they’ll soon be hosting. We have some pretty solid, though not complete, information/intel of what they’ll be (the stores won’t open until April 10, after all, and they may “change their stripes” over time, you never know). And since they went through the trouble of establishing retail presences, and actual websites, I’m gonna take a wild guess and say these stores are meant to be permanent, not “pop-up” (which Apple has done at least once before).

I understand why, from my little listening post on the Web, there just hasn’t been much discussion about those “three little stores” (operated and staffed by Apple) dedicated to Apple Watch. I mean, they literally could be three of Apple’s smallest Retail outposts by square footage. And, to some degree, they may simply be the Apple-owned “counterpart” to Apple Watch’s retail partnerships at other fine department stores around the world.

On the other hand, what some might see a one-off or too insignificant to spill much digital ink over? Well, it could be the biggest thing to happen to Apple Retail since the first store at Tyson’s Corner, Virginia. And I’m actually not talking about sales per square foot at all. (An additional Fun Maybe-Fact: The Layafette/Isetan/Selfridge stores may be the first Apple retail stores ever to not bring in a single yen/franc/shilling of revenue on Day 1…through 13.)

It could also just be me, of course. I’m often wrong. So, read on if you like, and then we’ll see about the next one, two, five years.

“Obscurity Through (Relative) Obscurity”

Nope, I’m not talking about the “low share, unattractive malware target” or whatever “security-through-obscurity model” that Mac OS was said to benefit from for some years. Rather it’s my pet theory as to why no one seems to care much about the new Apple Watch specialty shops. After all, we’re talking a mere 3 out of over 450 Apple Stores.

As mentioned earlier, some think these three stores are ephemeral (perhaps in part because they don’t fit the long-established norm – more on that later). Plus, while they’ll be very high-profile, they’ll still only sell the “unproven” Apple Watch, which is essentially an accessory; probably some core accessories for the accessory; and as of now, do nothing else (yep, you’ll have to go to a regular Apple Store for Genius Bar service). That also lends some “relevance obscurity” in the minds of many, I suspect – and that’s before the “sounds nice and all, but I won’t be visiting a luxury department store in France/Japan/UK anytime soon” element.

Amusingly, Retail itself is mildly “obscure”. While an enterprise operating at an over-$20B annual revenue run rate since FY 2014 (all the Retail-specific data we’re ever likely to have moving forward, thanks to the accounting change), that’s still a “mere” 11.7% of Apple’s FY2014 revenues. So to oversimplify, Apple Watch stores are a bit less than 0.7% of 11.7% – meaning there is an objective basis for deeming these three Apple Watch shops as having “negligible” impact, even if they significantly outperform the “average” Apple Store. To do that at the present run-rate (assuming a “Watch ASP” of around $600 inclusive of extra bands, other accessories and AppleCare+), each Apple Watch-only store would have to sell more than 19,000 or so units per quarter per Watch store, or about 210+ units per day.

So when you step back, let’s be honest. Apple’s bread-and-butter, Mac-and-iPad-and-iPhone-and-all-that-other-stuff-selling retail store push in China is the biggest news for that segment.

…or is it?

Sea Changes in Apple Retail

When you think about it (or, overthink about it?), Apple Watch specialty stores at Galeries Lafayette/Isetan/Selfridges (if that isn’t an Ahrendts signature, what is?) are the most exciting, daringly different Retail operations Apple’s done in years. Even as they’re pretty much destined to be the most “architecturally unimpressive”. Even if, at present, they look like nothing more than “tiny experiments” at the most.

The following observations may well be highly unoriginal. But since I haven’t really seen them elsewhere, I think they’re worth pointing out. In no particular order:

Addition by Subtraction

With the exception of the Apple Company Stores and one-off(s) like the purpose-built, temporary SXSW “iPad 2 launch store”, there has never been an Apple Store that wasn’t full-service in my recollection. Which is to say, regardless of size, Apple Retail Stores have always offered core products plus a Genius Bar. Galeries Lafayette, Isetan and Selfridges will be the first, stark exceptions to this rule. Meaning Apple Watch locations’ stock-in-trade will (have to) be sales experience – translating, ideally, into the “highest-touch” Apple retail establishments ever.

You might not be able to eliminate all of the distractions of “popularity”, but by dedication to a particular subset of Apple product and eliminating formal post-purchase support, a “pure Apple Watch [Edition] customer” should have a much more pleasant (ahem) time than braving the supposedly overcrowded-yet-admittedly-less-“personal” full-scale Retail stores. It may not seem like much now, but in my exceedingly humble opinion, Apple’s laying the foundation for future specialty store concepts centered around product categories which we outsiders know nothing about.

The Next Generation of Retail Partnerships

To those still thinking that Apple doesn’t partner well, this should serve as a powerful counterargument on the retail side. Apple may be a tough negotiator, but it’s got itself some prime retail space within three high-end department stores. According to Wikipedia, Galaries Lafayette was founded in 1912. Isetan, 1886. Selfridges, 1909. You don’t just bully your way into retail kiosks at those establishments, and even if you could, it wouldn’t escape notice.

If these particular department stores are happy to host Apple-operated store-in-stores (a bit different than Best Buy, etc.), well, there’s plenty more, and the Watch Store concept can be replicated at any number of malls around the world.

Apple also mentioned Apple Watch being available “at boutiques in major cities across the world including colette in Paris, Dover Street Market in London and Tokyo, Maxfield in Los Angeles and The Corner in Berlin.” While it’s important for Apple Watch to make a “fashion statement” at launch, Apple really doesn’t need these boutiques to help Watch succeed – you can have it shipped-to-door just like always. Sure, it’s a savvy move to increase Apple Watch’s visibility and street cred, but really, who benefits more from these partnerships, Apple or the boutiques?

New Retail Spokes and the Possibility of Other Apple Specialty Stores

Apple’s now comfortably at the point where it can refer post-purchase support to nearby Genius Bars (included with each “full Retail” store), rather than having a discrete in-Watch Store repair center (though that isn’t necessarily a bad idea, or something that Apple won’t roll out in the future). In other words, it’s ready to create a system of retail spokes.

The Mac was imagined by Steve Jobs as the digital hub in 2001 (the iPod being Apple’s first self-designed “spoke” product), and now the full-service Apple Retail Store has taken its place as the center of Apple’s brick-and-mortar world. Unlike Mac, as long as iPhones, iPads, Apple Watch, Macs :D, and similarly-sized key hardware products are sold in increasing numbers, this will continue to be the case for Apple’s original do-it-all retail concept. Apple Retail Store expansion should continue, basically as long as Apple Inc. continues to grow. But it’s no longer the one-size-fits-all solution to a given retail problem.

Apple’s next product may be best-served by a custom retail solution (well, let’s leave TVs and cars aside for the moment). And why not a custom service?

[NOTE: Part 2 is even more of a thought exercise, so don’t click or read on if you’re not a fan of “wild speculation”.]

Continue reading