April 26, 2013 (1:00 pm)
A few readers have asked us to explain how we achieved our *very preliminary* estimate of Apple LTM (last twelve month) earnings jumping from a trough of ~$39 this upcoming September 2013 to roughly $49 just three quarters later (June 2014). We disclosed these figures in our previous post discussing why earnings growth – or lack thereof – drives price action, which you can see here. Below, we broadly explain some of our underlying assumptions
iPod/Mac Business. iPod and Mac sales have formed fairly predictable sales trends over the years. We adjust ASP’s and unit shipments seasonally based on historical consumer demand, projected product mixes, and widely expected product refreshes. We don’t expect a meaningful change in either of these business lines, nor do we expect much in terms of growth in either category.
iPad Business (Unit Sales). We expect iPad sales to decline sequentially (not year-over-year) over the next two quarters – with estimates of 18mm in June and 15mm in Sept. We expect education sales to support demand through the quarter. We are conservatively modeling introductions of an iPad mini with retina display as well as a new larger iPad with an iPad mini-like body in early October. We expect a boost in sales to ~30mm units in the December quarter, followed by ~25mm in the March quarter (buoyed by Chinese New Year) and ~22.5mm in the June quarter. We believe the most significant year-over-year growth to come from iPad sales in FY2014.
iPad Business (ASP). iPad average selling prices (ASP) have declined from a peak of $667 to the current $450 per unit. Nearly $100 of the decline took place after the release of the mini with a significantly lower price point. Tim Cook noted that iPad mini sales shattered their expectations this quarter, meaning the mix was highly tilted toward the mini. We expect this mix to be relatively constant through FY2013 (i.e. the shift has already taken place, and the ASP is nearing a trough), and for the ASP to remain at $450 for the June and Sept quarters. Once Apple releases a mini-like body for the larger iPad, we expect the mix to shift slightly back towards the larger iPad as it becomes smaller and more mobile and an increase in ASP to the $475 region.
iPhone Business (Unit Sales). We are projecting a sequential decline in iPhone sales to 28mm units for the June quarter. In the year ago quarter, Apple sold 26mm units. Like the March quarter, we expect a beat of at least 2mm units year-over-year due to (a) additional carriers, (b) additional countries, and (c) aggressive pricing and financing in emerging markets. We do expect a slight uptick (again, sequentially) to 30mm units in September, with the assumption that the quarter is “saved” by a late-quarter launch of the new iPhone model, adding 5-8mm units in the last days of the quarter. Our very preliminary estimates for the December and March quarters are 50mm and 45mm units, respectively. While this may seem dramatic, we’ve been reviewing previous launch quarters to get a handle of potential customers. 37mm units were sold in the Dec 2011 quarter, meaning 30+mm customers will be eligible for an upgrade that quarter. Additionally, a combined 37mm units were sold during the June/Sept 2011 quarters – these customers will be eligible earlier, but may very well wait for the new model. While the 50mm and 45mm estimates may seem aggressive, we believe they are closer to the realistic end of the spectrum. Further, 50mm units in Dec 2013 would only represent a 4.5% year-over-year increase in sales.
iPhone Business (ASP). iPhone ASP’s have been in the low- to mid-$600’s for almost the entire history of the product category. The recent slight move down to $613 is due primarily to the higher demand for lower priced models (4 and 4S). We assume continued deceleration in ASP (as the lower priced phones continue to outsell the 5) to $600 through the September quarter. In December, we expect a bump to $625 in order to account for likely higher sales of the new (and higher priced) model.
Margins. This is truly a wild card. We are estimating a 37.0% and 36.5% gross margin for the next two quarters. We expect margins to jump in Dec/March as sales skyrocket (based on estimates above) and the cost per unit slightly declines. However, our estimates do not assume Apple see’s higher than a 39% margin through FY2014 (which we believe is very conservative). Further, Horace Dediu put together a fantastic analysis explaining how the recent change in Chinese warranties affected gross margins by up to 1% this past quarter.
Earnings. The buyback is very important to consider here. Currently, we are estimating a mid-$7.00 and an $8.00 EPS figure for the June and Sept quarters, respectively. That is higher than we previously estimated due primarily to the lower float. Thereafter, in FY2014, we expect to see fairly easy year-over-year beats in earnings per share in the Dec/Mar/June quarters in the amount of $2, $4 and $4, respectively. This allows us to achieve the trough to peak estimates from ~$39 in September 2013 to ~$49 in June 2014.
We have not yet modeled further than June 2014 due to the lack of transparency into future product releases, which could have a material impact beyond that point. That said, we expect the buyback to have an increasingly large effect on EPS in FY2015 and beyond. The year-over-year comparisons should be easily beat, driving LTM EPS to levels never seen before by this company.
Please share your thoughts.