A Lousy First Half, Eh? $AAPL FQ1 2016 Earnings “Estimate” + FQ2 Quick Look

Today, I’m takin’ it to 11.

Eleven consecutive home game AAPL quarterly earnings previews/estimates/whatevers, that is. Why? There must be some reason I keep this up. Clearly it’s not the fame. 😛

Anyway, for those of you who suffered through the “background” $77B revenue mix post (a thought exercise, but which included some genuine “estimates” on the non-iPhone revenue lines), this will (should) be shorter, and will include my for-entertainment-purposes only horseshoe toss (read: “estimate”) on FQ1 2016 results, plus a dash of comment on the upcoming Impossible Compare FQ2 2016. For both fiscal quarters, it’s still all about iPhone, with a side of Apple Watch and iPad Pro, until we see otherwise. So let’s get right to it.

(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”.)


Sorry, Analyst Expectations Chart This Quarter Out of Service

Oddly enough, I didn’t collect the Yahoo! Finance analyst consensus for my October post.

I wonder if that’s because the market has been rather relentlessly discounting AAPL for months now. I DO know Apple beat its guidance range, again, for the fifth quarter in a row, and “no one cared”.

Apple also beat the analyst consensus then, and again, it didn’t matter.

Coincidentally, Philip Elmer-DeWitt asks today, what does it matter?

So, I’ll just state what FQ1 2016 expectations (“quote unquote”) are currently, as a kind of formality. Per Yahoo! Finance’s 39 surveyed analysts, $76.61B in revs as of this weekend, and $3.23 in EPS. 2.7% rev growth, 5.6% EPS growth. In guidance terms, right around the midpoint. And let’s just get the EPS part out of the way – Apple’s buybacks over FY 2015 and likely FQ1 2016 will help ensure Apple meets EPS, no problem. Well, “as long as the revenues and margins are there.”


The AAPL Tree “Sometimes I Have One, Sometimes I Don’t” Horseshoe Toss for Apple’s Reported FQ1 2016 Numbers

With a bit of “commentary” to follow the “estimates”. Note: For Entertainment Purposes Only. It’s OK if you chuckle, the world could always use more humor.

Screen Shot 2016-01-24 at 11.04.02 AM


iPhone

I stuck with my $665 ASP from the last post, because while ForEx headwinds are worse than ever, they’ve been in existence for more than just this past quarter. 😛 And FQ4 2015 saw a $670 ASP for iPhone despite hardly any iPhone 6S/Plus units (which carry the highest ASP, of course) shipping in that quarter. We’ll see if that $5-10/unit reduction in iPhone revenue deferral provides me enough of a cushion heading into what should be the highest iPhone 6S/Plus-mix fiscal quarter of FY2016. Or will iPhone doom and ForEx gloom prove too much for our fruit company and its hedging programs?

Units are critically important, because under the current cadence, Apple sells far more, and “newer”, iPhones in the first half of a fiscal year than the second. It’s just the nature of the demand curve. If Apple has trouble growing iPhone in 1H FY2016, it won’t have any easier of a time for FQ3 and FQ4 2016 – and analysts will make sure the investing public knows it. (The exception, of course, would be if Apple introduces new/revised versions of iPhones before their “expected” refresh timeframe of sometime in September.)

As a very relevant “sidenote”, if Greater China doesn’t bring appreciable YOY growth in the boosted FQ1 (I’d say even 10-15% counts in Wall Street’s eyes), growth isn’t likely to suddenly accelerate in FQ2. Do note these FQ1-related observations from Mercel and Nathan Stevens on Twitter, though.

Now, what is “iPhone growth” worldwide? To analysts, 76.5M or so iPhones in FQ1, perhaps 2M more than the year-ago quarter. To my tinfoil self 😀 , “growth” would actually be a number more like last year’s number (roughly 74.5M units), PLUS ALL iPhones “deferred” to FQ1 2016 due to Apple’s “late” release of iPhone 6S-series (which I’ve estimated to be at least 6M units, we’ll see if this assumption ever meets with real information), PLUS one iPhone. 😉

That number, in my own mind anyway, sounds like “greater than about 80.5M units”. Out of (1) an abundance of caution and (2) a pet theory that Apple will aggressively manage channel inventory at the borderline of conservatism and “the point of making it unnecessarily difficult to supply your 200,000+ points of sale”, I’m not crossing that 80M threshold (yes, I’m a chicken), and am instead going with 79.9M units sold. In other words, my wild guess is that Apple’s sellthrough will be better than the reported GAAP sell-in number (and if so, Maestri will certainly say so).

Why might Apple continue to be channel-conservative when they’ve given themselves up to 5-7 weeks as a target range? They may well not be, true. Then again, Apple knows Wall Street has expectations, they have a share price to defend for employee retention purposes. In this decidedly weird stock market climate, you can’t even count out a board shakeup (and the accompanying executive retention concern) if the share price gets out of hand…not completely, anyway.

Like any rational company performing at such a high level, Apple likely isn’t inclined to set a bar so high it can’t comfortably vault over it when the next fiscal year rolls around. The company that brought you the iPod is also really big on UPOD, after all. (Bad puns, always free, AAPL Tree.)

Apple grew units over 30% YOY in the iPhone 6 cycle. Apple management’s already pointed out that top-end rev guidance represents 11% YOY growth on a constant-currency basis. 11% for a company as big as Apple is pretty damn good. With global economic uncertainty all over the news, there’s no need to put the company at risk of unforced errors.

Besides, Maestri has his pride as Apple CFO (and the unbroken “never guided over actual” winning streak started by Oppenheimer) to protect. 😉

Is Apple going to have its iPhone annual growth tank from 35% to nil, or worse than nil, “overnight”? I have my opinion, but like everyone else, I have to wait for the facts.

iPad

I’ve adjusted ASP upwards a bit and my units WAG down a bit. Since iPad Air 2, for whatever reason, remains entirely unchanged in componentry and price point, sales will suffer correspondingly – and there won’t be nearly as much need to keep a bunch of iPad Air 2 in the channel, either. This may impact GAAP sell-in numbers; moreso if iPad Air 2 is due for a refresh or redesign sooner than fall 2016.

That, of course, means iPad Pro has to be a larger part of the iPad unit mix, which means higher ASP. There’s also that $5-10/unit iPad revenue deferral “un-impairment” starting from last September as a ASP tailwind.

iPad has been in YOY unit decline for what seems like ages (in actuality, about 2 years) – when does it stop? Before the 40M/yr unit sales run rate? Well, iPad mini 4 and iPad Pro + iOS 9 will do their level best to slow the decline until the next midrange iPad arrives, and/or actual unit sales growth returns.

Mac

Other than trying to discern whether iPad Pro’s introduction hurts Mac growth in any discernible way, I’ll just sit back and wait for Tuesday’s results and management comments. If iPad Pro and Mac, combined, are winning, it doesn’t matter how either are faring individually (as much as if they weren’t both general-purpose computing products). Though in the long term, Apple “shouldn’t” be content with Mac as a slightly-over-$25B/yr business – not if it doesn’t intend to give Mac a very long goodbye in favor of iOS or whatever succeeds it.

With all the “traditional” PCs still being sold, there’s room enough for Mac to possibly grow to at least $30B/yr at some point. Possibly.

Watch

5M units more or less, $550 ASP. The first number might be low; the second number might be high. In any case, safe to say the theme of Watch, as part of Other Products, IS “5” – $5 billion, for all of Other Products. Watch ASP estimates can’t really get any lower than the low $400s, when you consider the product pricing matrix along with accessories. The year-ago Other Products compare, minus Watch, was around $2.7B. Is there a Watch seasonality tailwind in play? We’ll know soon.

Services

App Store’s doing well. iPhone 6 drove a really nice upgrade cycle that isn’t over yet, and new users, as they always do, snap up some paid apps and the odd AppleCare plan and iCloud subscription. Then there’s Apple Music – good for a nice, recurring $120-180 or so per subscriber per year. 10 million paying customers nets a noticeable $1.2B+ per year, much of that incremental, and meaningful in the context of a roughly $20B/yr revenue category. The new Apple TV should drive a decent amount of incremental app and media buys/rentals, as well.

Given all this, a 10% YOY boost seems quite reasonable, maybe even too low.

Other Products Minus Watch

iPod touch finally got the shock paddles and a fairly modern A8 SoC platform, which…should? help slow iPod’s long downward spiral. More importantly, any drop-off in Beats hardware sales could be countered by Apple TV, which seems to have been well-received, and is certainly fairly priced for its feature set. (Remember, the first, Pentium-based model sold for $299.) I’ll wager it was a hot-selling-enough holiday gift that Tim and Co. will provide some amount of detail on sales.

I hope it’s not overexuberant to guess a 1.3%-ish increase in revenues year-on-year. 😀

Gross Margin

Maestri ALWAYS sandbags on gross margin (please correct me if I’m wrong). So, I’m taking the over on top-end-guided GM by about 70 basis points.

Buybacks

Apple’s buying. I can’t see how they wouldn’t be, as fast as they possibly can. Assuming around $8B or 80M shares in net share-weighted buybacks in the space of 13 weeks seems quite conservative, when you consider that Apple’s been far more opportunistic in the past.


That “Impossible” March Quarter (FQ2) Compare

Analysts polled by Yahoo! Finance, as of this weekend, expect Apple to ring in sales of “only” $55.71B, about 4% lower than $58.01B in FQ2 2015. There’s a hilarious variance in the range, though – from $49.51B all the way up to $64.67B (so, take the outliers, which do show up often, with a hefty dose of salt so to speak).

It wouldn’t surprise me if the generally common theme is “what Greater China gaveth in FQ2 2015, it taketh away in FQ2 2016”.

Say what?

Well, even someone as AAPL-jaded as I am can’t mimic the at-times comically bearish Wall Street bear perfectly – or at least, it’s bad for my health when done in excess. But if I had to guess, it mainly has to do with “iPhone 6 being a victim of its own success”, to the point where China (Mobile) is somehow “tired of iPhone”. (And yes, Toni Sacconaghi’s point that demand is being satisfied for iPhone 6S/Plus around 3 or so weeks sooner than iPhone 6/Plus the same time last year, meaning that “sales were pulled forward”, has merit to some degree.)

Look, I get it. The hypergrowth we saw is probably never happening again. But exactly NO ONE is calling for Greater China to grow YOY in the 90%+ and 70%+ rates that it did throughout FY 2015, because, well, it’s now the second biggest revenue geography, with Europe in a possibly permanent third place.

Really, you should consider the nearly 70% of current iPhone installed base that hasn’t upgraded past iPhone 5S yet. Some of that base is in China. And you might want to look at China Mobile STILL gaining 4G users at a record clip. And certainly consider Tim Cook mentioning last conference call that he didn’t perceive any economic slowdown in China from an Apple perspective. (See also: Avoiding unforced errors.)

Sure, there’s some feeling of economic unease in China, but is that, plus a perception of “iPhone fatigue” (as questionably “supported” by the usual supply chain chatter), going to bring about a drop in iPhone units from the 80% range straight on down to…

…5% year-on-year growth?

…no growth?

…negative growth?

As the revenue geography most responsible for Apple’s success in FY 2015, this is the principal focus for FY 2016…or at least the first half of it. Guidance will shine a lot of light on this mystery, favorable or otherwise. And we shall see whether the bears had it right, or if, as some are fond of saying, they “were just early”.


Thanks for reading the latest AAPL Tree home game earnings preview. Stay tuned – maybe I can run the streak to 12 in a row, when the next “most important quarter in Apple’s entire history” draws nigh. 😛

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