Apple 3Q15 (Fiscal) Earnings


July 20, 2015

Here we go again… Apple is set to report its fiscal third quarter 2015 earnings tomorrow afternoon. Our projections for the quarter are below:

AAPL 3Q15

iPhones. We expect 50.5 million iPhone unit sales, representing a 44% annual increase and a 17% decrease from last quarter (which included the Chinese New Year). The ASP will likely remain high at $640 per unit, down only slightly from last quarter. However, there is potential upside here as channel checks have indicated stronger than expected interest in the 6 Plus, which has higher gross margins and ASP.

iPads. Don’t need to spend much time on this one. We expect 10.0 million units at an average selling price of $420 per unit. There continues to be interest, especially on the enterprise side, but we see slowing sales until Apple refreshes this product line.

Mac. We have a relatively conservative estimate of 4.5 million Mac sales at a $1,200 ASP. This is consistent with last quarter and the year ago quarter; however, there may be upside in this category due to the new Macbook Apple introduced this spring.

Software/iTunes. There has been a trend to see a slight decline in software sales between the March and June quarters; therefore we expect $4.9 billion in sales down from $5.0 billion last quarter.

Peripherals/Other. This is where things get fun. Excluding the Watch, we anticipate $1.75 billion in sales in this category (up only slightly from last quarter). We will be watching the gap between this figure and the reported number, which will approximate the revenue generated by the Apple Watch. We’re currently expecting a conservative 3.5 million units at a $550 ASP. This would equate to $1.9 billion in revenues. We have not adjusted our unit projection in over six months, because there’s been a relative dearth of data points that would influence our analysis.

On the ASP side, we currently expect 66% Sport / 33% Apple Watch / 1% Edition. With the Sport, we’re modeling 60% buying the smaller watch at a $350 ASP and 40% buying the larger model at $400 ASP. With the Apple Watch, we are modeling a 50/50 split between model sizes with ASP of $550 and $700, respectively. Lastly, we’re showing 1% purchasing the Edition at an average ASP of $10,000. In our view, these are all conservative ASP projections. There is upside to each aspect of this analysis; until we have more information, we do not want to “count on” more aggressive fundamentals here.

REVENUES / EPS. We are looking for $50.5 billion in revenues and $1.94 EPS, driven by gross margins at 40.5%. This is our base case, which tends to err on the conservative end of the spectrum. We believe there is upside, especially in the Mac and Apple Watch categories. However, as we all know, the most likely category to shift the results significantly from our projections is the iPhone.

Guidance. Our current revenue projection for Apple’s fourth fiscal quarter is $53.8 billion. In order to generate a “beat” roughly equivalent to the previous several quarters, we anticipate management guiding to a range with $50.5 billion as the midpoint and gross margins at 39%.

Management Commentary. We will be getting our first official results on the Apple Watch, which may help to subdue the unfounded “flop” rumors that have been widely discussed. This is Tim’s chance to quiet the peanut gallery (assuming he has good news to share). Management may also discuss user numbers for the brand new Apple Music service and recently launched Apple Pay. While neither of these contribute much to the bottom line at this point, it may help to shift the sentiment and quiet the recent dissent. The more significant questions – from a revenue standpoint – will revolve around any recent shifts in demand from Chinese consumers for the iPhone. The crash in Chinese stocks has led many investors to the conclusion that Apple will take a significant hit. Continued strength and encouraging commentary will likely have a big impact on analyst expectations and may lead to meaningful hikes in 2016 projections… and a higher P/E multiple.

BONUS CHART. Based on our current (relatively conservative) estimates for the June, Sept and Dec quarters, we’ve updated the chart below. In case there was any confusion, it’s clear that EPS expectations drive share price. Investors are forward looking and tend to price shares based on the future six months. As you can see below, investors began pricing in the negative EPS growth roughly five months early – in September 2012. With our EPS expectations through the December report (in late-Jan 2016), shares should continue to appreciate.

AAPL Price and EPS Growth

UPDATE – BONUS CHART #2: The chart below illustrates AAPL’s PE range over the past seven years. Shares of Apple tend to trade within a 4-5x PE range for roughly 18 months before adjusting into a new range. It has recently been trading between a 15x-19x PE range, with most of the action between a 16x-18x range. Based on our expected $8.75 LTM EPS to be reported tomorrow, we’d expect it to trade between $131-$166 (15x-19x) this quarter, with a majority of the price action between $140-$157 (16x-18x). If the share price does not move, it will be trading at a 15.0x multiple come Wednesday morning. If, on the other hand, it keeps the same multiple as today (16.3x), it will be trading at $143.

AAPL PE Range