December 27, 2012 (5:00 pm)
I took the excerpt below directly from my trading notes. I’ve been creating my own earnings estimates for Apple (I plan on posting my current estimates, which have not been updated since October, shortly) for some time. I wanted to provide a reference for how I look at and estimate earnings from the past before providing my estimate for a future quarter. The rest of this post comes directly from my trading notes on the day after October earnings.
“I’ve completed my estimates for 4Q 2012. Apple’s fiscal year ends 9/30, so the fiscal fourth quarter takes place from July – September.
iPads: We expect 15 million iPad sales, a slight decrease over last quarter’s 17 million. We modeled the average sales price (ASP) as remaining fairly constant quarter-over-quarter at $540 per unit. When the new iPad mini is released, we’ll be decreasing our ASP estimates to reflect highers sales of the lower priced products. But we’ll also be increasing our estimates for gross units sold.
iPhones: We expect 28.5 million iPhones to be sold this quarter, an increase over last quarter’s 26 million. Verizon reported 3.1 million iPhone sales in its September 2012 quarter, including 650,000 iPhone 5’s. That leaves 2.45 million “other” iPhone’s (iPhone 3GS, iPhone 4 and iPhone 4s) sold during the quarter. That 2.45 million, which excludes the iPhone 5, is down roughly 10% from the previous quarter, during which Verizon sold 2.7 million iPhones. Applying that 10% drop to Apple’s July quarter iPhone sales of 26 million represents 23.5 million iPhones sold during the September quarter. We then add the 5 million iPhone 5’s that were sold over the first weekend of sales to reach our 28.5 million phones sold. Note that we are not incorporating any additional iPhone 5 sales during the last days of the quarter. While there were likely 2-3 million more iPhone 5’s sold to customers at retail locations around the world, we’re taking a cautious approach.
iPods: We’re modeling a 20% decline in iPod sales over the previous quarter. New iPods were announced in early September, but were not on sale until October. This likely stalled sales late in the quarter and shifted the demand to next quarter. We also expect a relatively stable ASP at $155 per unit.
Macs: We expect a 30% increase in Mac sales over the previous quarter, and a slight bump in ASP’s. A number of new portable and desktop Mac’s were released in June, likely driving sales. Moreover, the important back-to-school season took place in late August and early September, with students most likely to purchase a new computer than at any other time of the year. We’re modeling a slight 3% increase in ASP’s due to the release of the MacBook Pro with retina display. This unit was sold out for weeks after sale, and demand has been high. The sales price of this unit will likely drive an overall bump in the price of average sales for the Mac line.
Other: The iTunes store and sales of peripherals/software has been relatively stable over the past few quarters, growing at a steady (and slow) rate. We’re modeling no growth in these areas.
Margins: We expect gross and net income margins to compress over the past quarter, in line with previous quarters during which there are significant new product introductions. As they ramp up production, margins will increase over time. This quarter, we’re modeling 42.0% gross margins, a 1.0% drop over the last quarter. We’re also using the lower end of the net income margin range of 25.0%.
Overall, we expect revenues to come in a hair below $37 billion and EPS of $9.82. EPS for the last twelve months will grow to $45.31 and the company will likely report upwards of $135 per share in cash.
After Earnings Review:
Earnings were just released. I’ll quickly go through each major line item. We projected $9.82 EPS on $36.8 billion in revenues. Apple came in at $36.0 billion of revenues and $8.68 of EPS, missing both of our estimates.
Macs: Mac revenue came in at $6.62 billion, exactly in line with our estimate. While Apple sold 4.92 million macs, slightly less than our forecast of 5.25 million, this was offset by a better than expected average sales price (ASP) of $1,344 against our projection of $1,640. Overall, our estimate was off by less than $2 million on a multi-billion dollar business line.
iPods: iPod revenue came in at $820 million vs. our estimate of $868 million. The company sold 5.3 million units, which was less than our 5.6 million unit expectation. The ASP was also $2 below our estimate of $155. Overall, we were very close here.
iPhones: iPhone revenue came in at $17.1 billion vs. our estimate of $17.7 billion. While Apple sold 26.9 million phones, 1.6 million less than our 28.5 million unit estimate, the ASP came in meaningfully higher at $636 vs. our estimate of $620 per phone. If I could choose whether to have seen higher unit sales or higher ASP, I would choose a higher ASP every time. Especially going into this quarter. What this means is that the company is selling more higher priced phones in the unit mix. This bodes very well as we head into the December quarter. Overall, our estimate was off by less than 3.5% off total iPhone revenues, which was the most difficult product line to forecast given the uncertainty around iPhone 5 supplies and sales of older generation phones ahead of the refresh.
iPads: iPad revenue came in at $7.5 billion vs. our estimate of $8.1 billion. Apple was able to sell only 14 million units, which is a million less than our re-forecast projections. The ASP also decreased slightly over the past quarter, which is evidence of the popularity of the lower priced iPad 2 in the quarter. While this may not seem favorable, it actually lends a lot of support to my expectation of the iPad mini being a tremendous hit over the Holidays. Overall, our projections for this product line were pretty weak. We didn’t expect the iPad mini introduction to meaningfully impact demand (which we now know that it will) and did not forecast inventory in the channel dropping due to the iPad 4 refresh.
iTunes, Software and Peripherals: We anticipated $3.55 billion in revenues from these additional business segments. Apple reported revenues of $3.89 billion, slightly higher than expected.
Gross Margins: This is where things get really tricky. We projected 42.0% gross margins, 200 basis points above where the quarter came out (40.0%). Not only were operating expenses up for the quarter, but OI&E (other income and expenses) took a big hit from hedges – primarily around foreign exchange. More importantly, the company guided analysts to 36.0% in gross margins for the December quarter due to the fact that they’ve refreshed nearly every product line in the past 4 weeks. The first iPhone costs more to make than one six months down the line, due in part to economies of scale, component costs dropping, and production efficiencies. Because nearly every product is brand new, the production costs are going to be highest during the current quarter. I’m not quite sure what to make of this right now, and will continue to readjust my expectations for next quarter.
Guidance: Peter Oppenheimer (CFO) guided Wall Street to $52 billion in revenues and $11.75 in EPS. Based on my current estimates for this quarter, I expected Apple management to offer guidance between $51-$53 billion. Well, I couldn’t have been any closer on the revenue guidance. Smack dab in the middle. The EPS guidance has not historically been very meaningful, since it flows through a series of very conservative assumptions (operating expenses, OI&E, extremely low gross margins). With a low-end Apple 15% beat, we’ll be right at my forecast near $59 billion in revenues. What I’ve come to realize is that the percentage beat is determined primarily by whether the quarter is driven by supply or demand. When supply is constrained, it’s driven by supply – meaning that every supply-constrained product will be sold. When production ramps up and is able to meet demand, the quarter is based on demand.
This quarter and next are both driven by supply. Apple will sell every single iPhone it is able to manufacture. We know this because a consumer who wants to purchase a new phone has to wait 3-4 weeks for delivery. If supply wasn’t an issue, they would have as many as needed waiting in stores. Tim Cook knows precisely how many iPhones they can build this quarter. He also knows that he’ll be able to sell every one that they produce. So he can tell you precisely what Apple’s iPhone revenue will be at December 31. Cook, of course, wants to beat his guidance. So he’s low balling guidance to give himself a cushion. He can do that because the product is supply constrained. And since every product line has seen a very recent refresh, there’s a similar story behind each one.”