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…
|Total revs||$57.06B||YOY Mac||14.9%|
|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).
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)
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. 😉