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”.)

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The Great 2016 iPhone Crisis (of Confidence) + $AAPL FQ1 2016 Revenue Mix “First Look”

If you prefer to only focus on iPhone, I’ve re-posted that one section here as a separate post for additional clarity and brevity.

Everyone knows that it’s out there, so I’ll spare you all the novella…on this particular sub-topic. (New Readers/New Readers from Apple News: Big-time TL;DR warning. Sorry, earnings doesn’t lend itself well to bite-sized analysis.)

All that “iPhone unease” on Wall Street (or piling on by various other journos, bloggers, etc.) that’s out there? An apparent excuse for AAPL trading at such a…appreciable discount to…a few indexes you might know? That’s why I made the (unspeakably “gorgeous”) iPhone Wall of Worry some months back. And generally speaking I think it’s still holding up quite well.

It’s probably not too far off the mark to say the “over/under” on iPhone is quite literally…whether iPhone unit sales are over or under the FY2015 total of about 231.1 million.

There are many guesses, all of them…well, no more than guesses, even the most educated ones. Whether iPhone unit sales will grow for all of fiscal year/calendar 2016 isn’t something anyone can know, and it’s hardly something Apple of all companies will ever give insight into…except, indirectly, by necessity, in the context of FQ4 2016 guidance. 😀

Base speculation on “Peak Apple” has failed, badly, since the last time Apple actually posted a true decline in YOY revenues. Which was…well…probably a few years before the iPhone Era. The point is, just arguing about it really doesn’t advance understanding. Apple looks about 90 days ahead, when Tim and Co. aren’t talking megatrends or very broad topics on conference calls, and that’s that.

So, as is the wont of your humble correspondent, let’s start with the most knowable known out there – Apple’s own revenue guidance for the biggest, iPhone-heaviest fiscal quarter it will have in FY 2016 – and see if a little home gamer guesswork, involving actual dartboard-toss “educated guesses” typed in an actual blog post, can’t compare numbers to narratives.

…I know, an actual revenue mix preview. Last seen in February 2015? Well, since I’m newly on the Apple News RSS list (please do subscribe to the channel, I promise to update…quarterly? 😉 ), and since iPhone Worry is such a hot topic, and since I haven’t updated the blog in a while, why not.

(FIRST, A 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”.)

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$AAPL FQ3 2015 Earnings Preview + FQ4 Quick Look: Set Your Watch to “Tiebreaker”

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.)

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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. 😉

$AAPL FQ2 2015 Earnings Sneak Preview: Pace-Setting Guidance, Accelerated Expectations, Supreme Management Confidence

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”.)

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UPDATED 2/1/15: A Short-Lived Reconciliation: A Quick, Limited-Use/Timeframe, and Necessarily-High-Level Take on Worldwide Apple Retail Revs/Operating Margins

A Three-Hour Tour – I Mean, A Three-Year Window

As you probably know, Apple recently decided to make its reporting more accurate – and more inscrutable – by adding the results from its Retail operations directly into the revenue/operating margin results per revenue geography (which remains Americas, Europe, Greater China, Japan, and Rest of Asia Pacific). So each revenue geography’s results are now an actual reflection of the full results in that geography, with Apple’s benefit being that it will never again need to disclose on a SEC filing how Apple’s Retail Stores performed (sales/operating income) as their own segment.

The “tradeoff” for Apple was an apparently required reconciliation – and so Apple released three years’ worth of “before and after” quarterly summary data (fiscal year basis), including “corporate expense reallocation” and per-revenue-geography Retail revenue and operating income results.

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Recapping Apple’s Ionospheric Earnings

Of course you’re all familiar with Apple’s ridiculous, bona fide blowout-type numbers. Let’s see if my post can, albeit from a humble home gamer’s viewpoint, provide a somewhat different take on the quarter that was and the implied promise of those that follow.

“Seventy Four Point Six Billion Dollars”

Apple’s $11B more than analysts were expecting as of around three months ago result was impaired by ForEx, but also net deferrals.

Regarding ForEx – per Maestri (about 23:45 into the earnings podcast/call), “our revenue growth during Q1 would have been 4 percentage points higher on a constant currency basis”. As helpfully reminded by longtime amateur AAPL analyst Daniel Tello of deagol’s AAPL model, that means Apple’s massive, but inherently incomplete currency hedging program (due to economic feasibility considerations) was unable to mitigate roughly $2.3B ($57.594 x .04) of revenue impact.

Net ESP deferral (the only source of deferred revenue/gross margin that can be roughly estimated) played a significantly larger role than anticipated. With nearly 74.47M iPhones, 21.4M iPads, and 5.52M Macs sold, there was, at minimum, about $1.65B in gross deferred revenue based on software upgrade rights alone. Given that ESP per-unit deferral range is actually “between $15-25” for iPhones and iPads alike (the logical average being $20 deferred per unit), however, that number may be closer to $2.1B. In other words, nearly equal to ForEx impact. Account for estimated amortization, and Apple’s perhaps-Sarbanes-Oxley-driven deferral “probably” ended up reducing revenue – and GAAP-reported gross margin – by an additional one billion dollars.

Meaning that Apple, in non-GAAP (read: more accurate) measures, actually crested $75 billion in revenue this holiday quarter, even if you give Apple zero credit for ForEx factors and discount my estimated net deferral by half. If you’re an optimist? Then Apple could have rung up about $78 billion in sales. I lack the words to describe that kind of quarter by a tech company.

“39.9%” Gross Margin

Apple did not quantify the impact of foreign exchange on FQ1 gross margin – probably quite intentionally. 39.9% is a consensus-beating number, and there’s little need or desire by Maestri and the Finance team to give additional information to competitors. However, in my humble opinion, it’s more than reasonable to assume that ForEx reduced gross margin by at least 50 basis points, considering that the 5% estimated revenue growth impact due to ForEx in FQ2 2015 is said to result in 100 basis points of gross margin impact. If you accept my assumption that $1B in combined revenue/gross margin was net-deferred due to software upgrade rights alone, that’s an additional 80 basis points worth of gross margin impact in the December quarter.

In other words, “true” gross margin was around 40.7%, and if not for ForEx headwinds, was “actually” north of 41%, perhaps as high as 41.5%. The significance of this is more subtle, but worth keeping in the back of one’s mind as we progress from FQ2 2015 through FY 2016.

Why? Let’s go back to the first full quarter of iPhone 5 availability – which is not far from the time Apple’s gross margins “hit rock bottom”:


Being a redesign, iPhone 5 had a higher cost structure than the 4S before it, and it showed. Additionally, the newly-launched iPad mini, the smallest (and lowest-margin?) of the iPads, was proving quite popular and corporate-average-margin-dilutive. iPhone 4 remained popular, also “pressuring” gross margins. These were among the factors that saw Apple’s gross margin continue its multi-quarter drop, from 38.63% in FQ1 2013 to a 5-or-so-year low of 36.5%.

FY 2015 is shaping up to be quite different. iPad ASP continues to fall (slightly), but so do unit sales year over year. iPhone is dominating revenue mix, and, due to iPhone 6/Plus’s massive sales, is driving down the cost curve at record velocity. iPhone 6/Plus momentum, as easily seen in record average selling prices, strongly hints at higher average “new iPhone mix” throughout FY 2015.

Not only that, Maestri guided gross margin on the high end to 39.5% for FQ2 – fully aware that actual quarterly gross margin has matched or exceeded guidance since FQ4 2013. That’s a strong hint that gross margins will not have a “bottoming phase” as seen in FY 2013 and FY 2010, when the iPhone 4 launched. Given the 130+ basis point gross margin beat in FQ1 2015, it’s possible that FQ2 2015 will bring a sequential increase.

In other words, gross margin trends, particularly if ForEx headwinds weaken, are looking quite positive in iPhone’s redesign year – before the historically gross-margin-friendly S generation cycle.

The “Resurgent” iPhone

No one doubted that “the iPhone everyone really wanted” would sell “well” given enough supply. It’s just the extent that shocked most everyone. Record ASP, not far from $700. 46% YOY unit growth from an already-lofty 51M units in year-ago quarter, with strong interest in the US (44% unit growth), and massive interest from Greater China (read: China Mobile subscribers) driving segment revenue growth of 70% year-on-year.

Speaking of growth markets, Apple cited BRIC countries iPhone growth of 97% – a not-so-subtle hint that India is also a strong performer, relatively modest revenue contribution notwithstanding.

But it can’t last, right? Not this growth pace. Well, one would think that Apple’s iPhone 6 cycle will follow iPhone 5 and 5S in a general sense – a surge of initial interest, then slowing YOY growth rates through the third full quarter of availability as seasonality and “new iPhone anticipation” kick in. The 46% unit growth rate has a “one-time” feel to it. And there’s a “common sense” in thinking “stronger-than-average” interest in iPhone 6/Plus will come at the expense of the presumptive iPhone 6S.

There’s just one thing. Tim Cook did absolutely nothing to dampen expectations for iPhone 6. Instead, he cited record numbers of new-to-iPhone customers and Android switchers, while pointing out the 15% or less upgrade rate amongst the iPhone installed base. He also noted that supply/demand balance was only reached in January, meaning channel fill will be a tailwind for iPhone sales. And only a small fraction of China Mobile’s 806M customers (330M+ of whom are 3G/4G customers) have iPhones, with 4G coverage continuing to expand.

Granted, there’s no need to preemptively lower expectations for an unannounced product – so the question of whether the iPhone 6 generation represents a “sales nova” will probably have to wait until around late January next year. But returning to the present, given the strong FQ1 start, is 30-35% really that unrealistic a FY 2015 unit growth rate?

A quick sidenote on the “Apple is too dependent on iPhone” storyline. Apple was once an Apple II-dominated company. Then, a Mac-dominated company. And later, an iPod-dominated company. In each case, Apple moved on to the next big thing, which is currently far larger than MP3 players and PCs ever were. (Never mind wearables for now.)

Of course, Boeing’s revenue derives chiefly from aerospace (mostly, commercial aircraft). BMW, from automobiles. Costco, from “buy in bulk” sales to members. Are we suddenly to believe that a company’s core competence is now its worst liability by virtue of it being a core competence? Maybe if the world moves on. But it hasn’t yet, and the smartphone market continues to grow – subsidy or otherwise.

iPad in “Decline”

Tim Cook made it very clear to Wall Street not to expect anything “different” out of iPad this year. Meaning, growth rates between -10% and -20% sound quite reasonable.

On the other hand, Tim remains bullish on iPad “in the long arc of time”, and according to Francisco Jeronimo of IDC, Samsung Electronics (which sells at least 10 distinct models of tablets in the US) shipped 11 million tablets in CQ4 2014 – essentially 10M less than Apple in the same time period.

Also worth noting – Apple had multiple ways of enhancing the iPad lineup for Fall 2014. Higher entry-level capacities, an A8 chip in the iPad mini 3, reducing the $130 cellular radio premium after all these years or even dropping Wi-Fi only. It deliberately chose not to. In other words, Apple seems perfectly content to think of iPad in multi-year terms and remain patient, because it still leads the field in general-purpose tablet computing.

The AAPL “Discount”

After growing EPS by 48%, reducing ttm EPS by around 15%, and increasing net cash reserves by $22B in a single quarter, Apple shareholders were rewarded with a one-day stock price increase of…5.6%.

Surely options play a role, but the reaction in the wake of this massive earnings surprise was relatively muted (if typical in terms of post-earnings percentage upside). AAPL is the market-cap leader, which automatically makes it something of a special case. Nevertheless, its current (ttm) multiple in the mid-15s comfortably trails the S&P 500 (close to 19), the NASDAQ (26) and the $480B+ revenue, not-exactly-growth stock known as Wal-Mart (close to 18).

On the other hand, ex-AAPL S&P 500 technology earnings growth rate has never exceeded 10% since at least CQ1 2012, according to Factset. And while Apple’s domestic cash reserves are “somewhat low” (at $20B vs. $158B internationally), Apple remains more than willing to grow dividend payouts and buyback shares indefinitely (having repurchased $45B in stock in FY 2014 alone).

It’s also hard to find anything particularly troublesome on the weekly chart other than a relatively controlled consolidation/downtrend phase from last November.

The bullish investor might say that all things considered, it seems that Apple’s forecasted diminished future is baked into the stock much more than the reality of the present and the strong guidance of the near-term. Assuming that Apple continues to show solid growth throughout the remainder of FY 2015, and the markets don’t go to heck in a handbasket, do bears have the consensus – or contrarian – view that AAPL has already met its market cap ceiling? I’m not qualified to render investment/trading advice of any kind – but that doesn’t mean I lack an opinion on the matter.

The World’s #1 Technology Company

Samsung just reported revenues of 52.73 trillion won for the December quarter. Earlier in the year that would have been around $52B USD. Today, just over $48.1B USD. In either case, Apple’s seasonality-fueled quarter bested Samsung’s by well over $20B – and unless Samsung manages to reverse its current downtrend, Apple looks poised to out-revenue Samsung for two quarters in a row. It now appears likely that Apple will out-revenue Samsung for calendar year 2015 and take over as the world’s largest technology company by sales.

And with a first-half FY 2015 revenue total of $129B based on the top-end of management guidance, it’s quite clear that Apple is well on the way past $200B in total FY 2015 revenues. Wall Street now expects $220B in sales (22% YOY growth) just as iPhone 6S presumably launches.

It’s understandable if you think Apple is in the middle of an outlier fiscal year, with considerably less growth a distinct possibility for FY 2016. And yet, management has made little attempt to manage expectations (other than for iPad), and ForEx-impaired top-end revenue guidance of $55B (ahead of analysts’ pre-earnings expectations) is already setting the Wall Street consensus on a path to once again exceed guidance before late April rolls around. There is no way Maestri has failed to account for this, or the continued spillover effects. Words of caution should be easy to detect and must be watched for – but around the corner they are not.

Sure, Apple is playing in a world marketplace filled with the keenest competition yet, with companies like Xiaomi or Lenovo “threatening” Apple as they grow smartphone shipment volumes from lower price points. But this isn’t the Apple of 1996, or 2007, or 2010. It’s now pushing into territory never before reached by any technology company in history, never mind that new all-time quarterly net income record. It’s playing in a space large enough for multiple winners, while bringing in customers who have never owned Apple products before. Competitors are still scrambling to fit 64-bit, biometric security and an integrated payment platform together, while Apple took care of the first two over a year ago, and has already signed up more financial institutions and card networks onto its industry-standard-compatible NFC platform than any other competitor – before any international expansion of Apple Pay.

Oh, and it’ll soon start selling multi-thousand dollar gold watches to an installed base of iPhone 5+ users numbering in the many tens of millions.

Back in December 2012, Tim Cook advised Brian Williams – and the world – “don’t bet against us”.

Does anyone care to take that bet now?

Fuzzy (iPhone/iPad/Mac) ESP, Jan. 2015 Update – A Seriously Puzzling Part of Apple’s Deferred Revenue Puzzle in 5 Charts


Now’s the time on Sprockets where we dance my home game AAPL earnings preview “coverage” where things get even more out there than usual.

Yep, all two of you guessed it – and so we briefly take a second visit into the realm of ESP. No, not that ESP. ESP as in “estimated selling price”. Specifically, that partial, but huge, portion of Apple’s “deferred revenue base”, comprising deferred revenue from iPhone, iPad and Macs unit sold (though not all of it). Which, if I understand correctly, consists of 100% gross margin dollars for GAAP reporting purposes.

One immediate takeaway: Because of this, Apple is (if it continues growing, anyway), permanently “depressing” its gross margin every single year (but not “that much” – maybe 50-60 basis points or so as of FY 14). As far as tax implications and all that other stuff, don’t ask me. And really, don’t be thinking Apple’s automatically doing funny tax business or whatever. I’m sure the IRS has a satellite office at One Infinite Loop, just in case.

For a refresher on what I think Apple’s deferred revenue scheme is all about, you can read here (as I said last time, beware – this is highly “experimental” to say the least, and there’s no way for me to know if my assumptions are generally correct, “accurate” data entry in my Excel spreadsheet notwithstanding)

But to recap the very “basics”, Apple, among other deferrals, defers a certain amount of revenue per unit on a product line basis (so an iPhone 5C and iPhone 6 Plus get the same-dollar deferral as far as I know). It then amortizes (“adds back”, I believe) the deferred revenue each quarter – an 8-quarter schedule for iPhones and iPads, and a 16-quarter schedule for Macs. The “why” escapes me, though there’s certainly a few potential theories (one with some real-world-validation promise – expected time between user replacement).

For quick reference, here’s the ESP assumptions underlying the charts, some of which are known, some of which are estimated, none of which can be tracked precisely – probably according to Apple’s design.


Now for the five charts, in no particular order. If you’re not too perplexed/otherwise still reading at the end, feel free to tweet or comment. Click to see full-size.

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The Maestri Code, Fiscal Q1 2015 Part 1/2 (Guidance/Revenue Mix): The Main Event

The recently-ended December quarter (fiscal Q1 2015) was probably a good one for Apple Inc.

Just how good?

My not-quite-as-TL;DR-as-before AAPL earnings preview series begins for the seventh (!!) consecutive quarter. If you’ve been following along here or there, we’ll be off to a running start – er, by home gamer standards. If you need some background on my thought process, just refer to last quarter’s Part 1 or the archives.

As with last quarter, let’s begin the somewhat abridged Maestri Code with management guidance, revenue mix commentary, and my “just for fun” home game estimate.

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(UPDATED w/ iPhone Corrections 10/13/2014) The Maestri Code, Fiscal Q4 2014 Part 1/2 (Guidance/Revenue Mix): The Quarter Before “THE Quarter”

The “build up”, “pre-game” quarter’s in the history books. Does it bode well for the most highly anticipated (holiday) quarter ever for Apple?

My TL;DR home game AAPL earnings preview series begins anew for the sixth consecutive quarter. Time to remove some training wheels (though I remain as non-expert as ever) and see if I can’t be a little more concise – while keeping to the same general topics of management guidance, revenue mix, operating expenses, (Ex-Retail) operating income/gross margin, and Wall Street analyst expectations.

This quarter, I’ll be consolidating the guidance/net income preview section with the revenue mix section – let’s see how it goes.

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