Apple Q2E – Pushmi-pullyu

A beat is on the cards but guidance could be a hiccup.

• Apple reports Q2E results after the US close today. (Wednesday 23^rd April 2014).
• Consensus is calling for Revenues / EPS of $43.6bn / $10.16 in fiscal Q2E and $38.5bn / $8.57 for fiscal Q3E.
• The iPhone is likely to be the key determining factor as consensus is looking for around 38.3m units with ASPs of around $605.
• This translates into revenues of $23.17bn (53% of total revenues).
• Indications are that the iPad and the Mac have performed in line with expectations but RFM channel checks are pointing to a healthy beat in terms of iPhone shipments.
• RFM believes that the end market has shipped around 42.7m units which translates into extra revenues of $2.6bn which could take revenues above $46bn beating consensus by 6%.
• All things being equal, I would expect that to flow nicely to the bottom line giving a healthy beat on the bottom line and a rally in the share price.
• However, Apple is a company of many moving parts and there are a few caveats.
  • First. RFM figures are based on sell-out data whereas Apple will report sell-in. If inventories of iPhone 5s are already being wound down for the iPhone 6, the beat might not happen
  • Second. The Apple fan base is expecting the iPhone 6 to be a major hardware upgrade and so more users may delay purchases than is customary. This could result in weak Q3E revenue guidance.
  • Third. iPad is still 20% of revenues and the lack of a refresh this quarter and the increasing popularity of phablets may eat into demand somewhat. Hence there is a possibility that healthy demand from iPhone may be offset by a miss on iPads both for this quarter and the one to come.
• Net net, I think that these risks have already been baked into expectations as:
  • Inventories usually move in line with demand from quarter to quarter and the checks have not revealed any abnormal inventory movements.
  • Discussion around the iPhone 6 and the iPad have been in the public domain for some time and this looks to have been taken into consideration when looking at forecasts for fiscal Q3E.
  • Consensus for fiscal Q3E has fallen from revenues / EPS of $39.91bn / $9.06 on Jan 28^th 2014 to $38.26bn / $8.50 as of 20^th April.
  • I hopeful that these cuts have captured the risks detailed above.
• Therefore I am expecting a good set of earnings and a healthy beating of expectations driving a mid-single digit rally in the shares come Wednesday evening.