Welcome to the AAPL Tree’s ninth consecutive home game quarterly earnings preview.
Let’s get right to the two rather obvious storylines of FQ3 in order of importance: (1) iPhone “carryover momentum” and (2) searching for the first, albeit intentionally obfuscated clues of Apple Watch’s sales performance in its first 10 weeks of availability (give or take a day or two)…
…well, after the preliminaries of current analyst expectations, Mac, iPad, Services, and non-Watch Other Products. (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 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”. AAPL’s essentially been in a range for over five months – enough said.)
Revisiting Set and Reset Wall Street Analyst Expectations
Let’s start with a quick look at analyst revenue expectations. As a quick refresher, “pre-guidance” means what analysts were estimating in advance of guidance as of a few days before it was given. “Pre-release” (everything that’s not labeled pre-guidance, to save on clutter) is what analysts estimate for the recently-concluded fiscal quarter (in this case, FQ3 2015) with the benefit of management guidance, shortly before the earnings report. The primary focus for this chart is the orange text.
I’m rather fond of the phrase “earnings chicken”. 😀 Yet, with analysts having gone back to exceeding the high end of management guided revenue range (for the third straight quarter), I think you can see why. The key metric in this case is the “margin of error”, which the analyst consensus has exceeded by over a billion dollars – the highest I’ve seen for the eight fiscal quarters I’ve been tracking it. [UPDATE: And as of Jul. 17, 2015, the ante has been casually raised $140M, so consensus revs for FQ3 are now $49.22B. Whisper number of a round $50B? I wouldn’t doubt it.]
Our Updated Story
Thus Far This Fiscal Year
Around this time last year (thanks, Wayback Machine), analysts, as they are wont to do, rather cautiously projected Apple to ring in revenue of $195.06B for FY15.
Well, the first half of this fiscal year has seen about $132.6B in revenue (67% of that total), and with iPhone showing no signs of slowing down, analysts have adjusted FY15 revenue upward by a modest $37.5B and change.
Oh sure, upward revisions happen all the time, but considering the revenue base, this seems kind of ridiculous. What’s more ridiculous? $232.7B – yes, more than double what Hewlett-Packard is projected to ring up in revenues for their FY2015 – could be lower than Apple’s actual FY15 result.
But it’s no certain guarantee, considering how analysts are now daring Luca Maestri to be the first to blink on this game of accelerated earnings expectations encouraged by a $225B+ run-rate company. Let’s see what relatively little Mac, iPad, Services and non-Watch “Other Products” can do to “lessen the pressure” on iPhone to meet those expectations.
FQ3 2015 Guidance and Quick Non-iPhone/Non-Apple Watch Commentary
Apple’s FQ3 2015 guidance is as follows:
- revenue between $46 billion and $48 billion
- gross margin between 38.5 percent and 39.5 percent
- operating expenses between $5.65 billion and $5.75 billion
- other income/(expense) of $350 million
- tax rate of 26.3 percent
Running the ranges yields: About $9.07-10.07B in net income, implied EPS of about $1.57-$1.74 based on 5.79B shares outstanding.
By Apple’s reckoning (which, once again, “no one takes seriously”), revenues would grow by as much as 28% YOY, and net income by as much as 30% YOY.
Yet Wall Street expects – and Apple “has given no reason to change this perception” – more. Who expects these kinds of growth numbers out of a mature company at this ultra-heavyweight corporate class? Only with Apple, Inc., folks. This craziness will slow down at some point – I’ve blogged about it before, and it may not be pretty (or it might just get shrugged off) – but for now, we’ll just enjoy the ride and take things quarter by quarter.
We’ll skip a guidance-level look at revenue mix (since “everyone else” clearly has) and pick a number north of $48B to begin the year-ago comparison. My personal horseshoe toss is about $50.3B.
Here’s the results from FQ2 2014:
The current expectation is that Apple NEVER sees sub-$40B fiscal quarters ever again. Funny what a few years can do.
Here’s my humble take on FQ3 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):
|Other Products||$4.5B (Watch rev horseshoe toss: $2.85B, 4.75M units)|
|Total revs||$50.272B||YOY Mac||13.3%|
|YOY Other Products||N/A|
Let’s address the non-iPhone assumptions first, same as before, since they have far less sway over Apple’s results.
iPad – When Tim Cook advised, “I’m not projecting … something very different next quarter or the next” when “forecasting” iPad, he may have been a little optimistic…because iPad units fell 23% YOY in FQ2 2015, vs. the -17.7% YOY growth rate in FQ1 2015. At this point, ASP (which I assume to remain fairly stable) isn’t as “important” to get right as iPad’s near-term declining trajectory.
Now, is iPad the next iPod? I don’t think so at all, but it’s hard to prove otherwise until units start stabilizing. iOS 9 and whatever new iPads Apple has finishing up in the labs for the Fall/Winter 2015 launch should help, but both aren’t in play until around FQ1 2016 most likely. So, I’ve assumed a continuation of iPad’s current weakness, with a growth rate of almost -25%. Sure, it may be “short term” in the long arc of time, but did you ever think you’d see iPad units hovering this close to the 10M line? I sure didn’t. Though iPad could always turn out “better than feared” – we’ll see.
Mac – Mac, the new (distant) second-place revenue line? Unlike a certain other general-purpose-capable computing product that isn’t very pocketable, Mac is continuing along its mostly unbroken string of YOY unit growth. Plus, it was boosted by some timely updates to MacBook Air and the 13″ MacBook Retina, not to mention a certain new USB-C MacBook. Even the 15″ MacBook Retina joined in the fun with a Force Touch trackpad and faster NAND storage in mid-May, along with one cheaper and one price-dropped iMac 5K configuration.
Would those updates combine to at least stabilize ASP sequentially and lead to 10% or so unit growth as was the case in FQ2 2015? My wild guess is yes, which is why I estimated 13.3% YOY unit growth. Not nearly enough to “counteract” iPad, however.
Services – I was somewhat over-optimistic on Services category growth last quarter – guessing around 14% YOY growth vs. actual growth of around 9%. Luckily, I was directionally correct. So, with nothing new in Services-land over the past quarter (aside from HBO Now, which I’m sure is great but hardly a primary revenue driver), I just decided to guess a similar, 10.3% growth rate for FQ3 2015, bringing quarterly revenue that much closer to the $5B mark. I think it’s decently reasonable considering Luca’s recent report on the continued success of the much-maligned-and-yes-could-always-improve App Store, particularly in Greater China, where Apple is really hitting its stride. Quick Link: Transcript of FQ2 2015 earnings call, TheStreet.
Other Products EXCEPT Apple Watch – My “rationale” (heavy air quotes) for Other Products ex-Watch having YOY revenue growth of -6.6% is more or less explained in my previous post about semi-solving for Apple Watch revenue in FQ3 2015.
But there’s a mild-to-moderate future twist in the story as of today, with thoroughly refreshed, A8-packing iPod touch units now on sale for the same price as their 16/32/64GB predecessors. Processor and all-but-screen-resolution parity that we haven’t seen with iPhone, even if it’s temporary, since almost five years ago with the Apple A4. Convenient timing – the better the new-lease-on-life iPod touch does, the harder it is to solve for Apple Watch revenue. 😉
I know, I know, but it’s iPod touch, and iPod’s been in free-fall. I’d point out that iPod touch (the only one that really matters now) hadn’t seen an update in over 1,000 days, which certainly was no help for the unloved product line. Now, it’s far too early to proclaim that iPod touch is capturing any substantial fraction of iPod’s former glory. But Apple wouldn’t put in an A8 SoC into iPod touch without a reason. Which is to say Apple’s decided, even if recently, to keep investing in iPod. And “just to run interference on Apple Watch reverse-maths-engineering” doesn’t sound quite as convincing a business rationale as “maintaining a decent-size million-unit-plus-scale product line with iconic heritage”. Heck, call once-great iPod Apple’s newest hobby. And expect iPod touch, if history is any guide, to have a FQ1 2016/CQ4 2015 holiday season bounce.
So – iPhone and the possible “earnings tiebreaker” of Apple Watch.
Let’s start with ASP.
Starting from the iPhone 4S era, since that’s when Apple shifted iPhone releases to the fall:
FQ2-FQ3 2012 sequential ASP drop: About $23
FQ2-FQ3 2013 sequential drop: About $32
FQ2-FQ3 2014 sequential drop: About $35
Is that really much of anything to go on? Nope. 😀 But at least it’s something. I chose a sequential ASP drop of about $28 (from ~$658.50 in FQ2 2015 to ~$630). iPhone 6 is doing amazing business for Apple, and who knows – maybe the ASP drop will end up lower than $23. But never hurts to guesstimate within an established mini-range.
Then there’s the matter of units. This one’s a doozy.
Since I’m a home gamer here, I’ll keep it simple, starting with two percentages: 46% and 40%. These are the absolutely insane YOY unit growth rates for FQ1 and FQ2, in which the all-conquering iPhone 6/Plus played a massive part. To recap: Apple sold 74.48M iPhones in FQ1 2015 (GAAP sell-in basis), vs. 51.02M in FQ1 2014. It followed that up with the second highest number of iPhones sold, 61.17M for FQ2 2015, vs. 43.72M in FQ2 2014.
So hey, 46%, 40%, why not be “linearly conservative” and WAG a YOY unit growth rate of 34% or so (from year-ago FQ3 base of 35.02M iPhones sold) for iPhone’s currently-weakest fiscal quarter, right? Well, that’s what I’d been doing in my alpha-stage etch-a-sketch FQ3 earnings numbers. It seems quite sensible, considering iPhone demand has taken on a “seasonality” of its own as everyone begins anticipating the newest iPhone just around the corner. In my case, though, I’ll adjust that iPhone YOY growth rate arbitrarily 😀 to 37%, given iPhone’s obvious popularity in Greater China (additionally, FQ3 2014 may be a “soft(er)” compare with some slowdown in iPhone 5S/5C sales due to massive iPhone 6 anticipation), and an impressive mini-string of YOY revenue growth from the Rest of Asia Pacific geography (33% and 48% in FQ1 2015 and FQ2 2015, respectively).
Inaugural Apple Watch Horseshoe Toss
There’s no rhyme or reason to my initial units estimate of 4.75M units, I freely admit.
It’s some Mental Blender™ combination of Apple hype + ever-stronger production ramp/capacity + sellouts + no supply/demand balance by FQ-end + Jeff Williams order fulfillment remarks + launching in only “16 out of 110+ countries” thus far. And maybe some other things. 😀
But by sheer dumb luck, the 4.75M unit horseshoe toss falls within the scatterplot of at least two analysts who estimate this stuff for a living. So, there you go, saved a bunch of words in the process as a bonus.
Now, ASP. Why am I at $600?
Well, here’s what happens when you assume the following product mix, seemingly reasonably:
-70% Sport @ $370 ASP
-25% Watch @ $749 ASP
-5% Edition @ $12,500 (LOL) ASP
Blended ASP: $1,071
Uh…over…a…thousand? Let’s try that again.
-75% Sport @ $370 ASP
-22% Watch @ $700 ASP (remember, prices range from $549-$1099, and factoring in extra bands is more than fair game in my humble opinion)
-3% Edition @ $11,500 (still LOL) ASP (prices range from $10,000 to Honda Fit subcompact with an option or two, er, I mean $17,000, NO COMMENT on the distorting effect of an extra Edition band purchase)
Result: …$807 ASP.
Only by further marginalizing (heh) Apple Watch Edition to be only ONE out of every hundred Watch models sold (note: luxury market, Asia, Greater China) with that second set of per-case-type ASP assumptions do you get an ASP around $600. Which is to say, dare I say it, that Watch ASP may have significant upside from $600 if (1) Sport buyers get extra bands, (2) Watch sales mix is slightly better than 22%, and (3) Apple’s Edition unit mix is even a few tens of basis points over 1%. I therefore presumptously declare my $600 “ASP” (spare-band-inclusive) Watch estimate sober. 😀
Finally, a “bonus” home game estimate and a quick look at FQ4 expectations to wrap things up.
“Bonus” (heavy air quotes) AAPL Tree Home Game Estimates
$50.27B revs (34.3% YOY growth, which is astronomical for a company this size)
26.3% tax rate
$11.04B net income (42.5% net income growth (!?!), ~22% net margin)
5.79B shares outstanding (share-weighted)
$1.91 EPS (~49% EPS growth…I lack the words to reconcile this kind of EPS growth with AAPL’s oft-somewhat-reasonable-looking valuation, heh)
Quick Look at FQ4 Expectations – Will Apple Find Continued 6S?
(I mean, another cycle of YOY iPhone unit growth?)
Continued 6S? Get it? The bad puns are always free at the
…wow, tough crowd.
Anyway, we’ll breeze through this final section fairly quickly because the storyline will remain strikingly similar to FQ3’s, with a dash of new product introduction. iPhone continues to drive the “earnings bus” (for the foreseeable future), with Apple Watch chipping in some number of (presumably) billions between, say, $2-4B to be reasonable (in the absence of management guidance). iPod touch will help a little, but you need millions to move the needle much when analysts are (as of today) expecting about $51B in revenues – a mere 21.2% YOY growth compared to the fairly ridiculous 31.5% growth they’re “expecting” for the June quarter. (As Tim Cook says in a totally different context – “Only Apple”.)
Looks doable? Well, it would sure help if iPad unit sales didn’t keep tanking, but…Apple’s already turned in YOY growth of 30% (FQ1) and 27% (FQ2) on larger revenue bases without the benefit of Watch. And, to be even more presumptuous, this is an iPhone S cycle as far as we know. Translation: Apple’s better able to crank out semi-similar-design iPhones in monumental quantities for the initial production ramp. Interestingly, “iPhone inertia” can also prove to be a tailwind, not that Apple needs it. The world’s in love with iPhone, and yet the percentage of “replacement sales” (20% upgraded from active installed base as of March quarter, which will increase for June quarter, but not to anything like 40%) is still quite low. So, the stronger an offering iPhone 6S + whatever the n-1 iPhones turn out to be are, the more organic demand there is for FQ4. And yet…for FQ4 at least…it’s sounding a lot like a question of supply.
Sure, it assumes iPhone 6S will launch around the same time this year as iPhone 6/Plus last year. We’re not taking that for granted just yet – we’ll see about management guidance and conference call remarks.