Seeking Alpha
, WattWenn (2 clicks)
Long only, value, growth at reasonable price, medium-term horizon
Profile| Send Message|
( followers)  

Apple (NASDAQ:AAPL) has a history of conservative guidance. For the first time, Apple has given a range for expected revenue - $41bn to $43bn, that is 5-10% up on the $39.2bn for Q2 2012. Although it expects a gross margin of 37.5 - 38.5%, unlike in previous quarters no guidance was given for EPS. Until recently, Intel (NASDAQ:INTC) updated guidance mid quarter, so Apple may try that to reduce volatility in the share price and increase transparency. The likely timing for any revenue guidance upgrade is before the end of February and after the end of Chinese New Year. This started on Feb. 10, is a seven-day holiday in Mainland China and the main gift giving season as many receive bonuses and many migrants to the cities return home.

So where will the increased revenue come from? Apple entered the quarter with unmet demand for the iPhone 4, iPad mini and iMacs and having had record sales in FY Q1 for iPhones, iPads, iTunes and Accessories (four out of the six product categories).

iPhones

The roll-out for iPhone 5 was completed before the end of December, and apart from the 5 million sold in September, largely took place last quarter. For the 4S, the roll-out was over two quarters, selling 37 million in FY12 Q1 (14 weeks) and 35 million in Q2 before dropping back to 26 million in Q3. If we take Q3 as the baseline and adjust Q1 sales to13 weeks, this suggests about 17 million for initial demand, channel fill etc. Taking this from last quarter's 48 million iPhone sales suggests a baseline for this quarter of about 31 million.

The launch in mainland China, however, was held back until December 15. So the 2 million sales there in the first weekend could largely have been sales that normally would have been spread through a non-launch quarter and in this quarter last year, with the iPhone roll-out total sales in China nearly doubled over the previous quarter (Q1 12), even though there were only 7,000 iPhone outlets. Now there are 17,000 and sales of high-end electronics in Nanjing over Chinese New Year, monitored by the Ministry of Commerce, were up 36%.

The contract with China Mobile (NYSE:CHL) and its 700 million subscribers still awaits a Qualcomm (NASDAQ:QCOM) baseband chip with TD-SCDMA support. It was announced at the Mobile World Congress last February and, since Snapdragon now supports TD-SCDMA, Qualcomm's chip could soon be available. If the iPhone contract follows the lines of Sprint's four-year commitment to 30.5 million for its 50+ million subscribers, Apple could see a four-year contract for 45 million, if only 75-80 million of China Mobile subscribers are considered rich enough. Even with sales backloaded, say with 6 million in year one, followed by 9, 13 and 17 million in the remaining years, that should lead to sales of nearly 2 million in the 3 months after signing to cover pent-up demand and channel fill.

The President of DoCoMo (NYSE:DCM), Japan's largest carrier also wants iPhones. In November DoCoMo had its largest subscriber loss since being spun off from NTT in 1991. Meanwhile Softbank, the original iPhone carrier in Japan, had lead subscriber gains for 11 straight months and the last five years. DoCoMo has just over 60 million subscribers for LTE, 3G and 2G services, so, using the Sprint contract as a guideline, that should lead to a four- year contract for 35 million iPhones. Sales could be spread, with 5 million in year one and 7, 10 and 13 million in the following three years and 1.5 million in the first three months for initial subscriber demand and the channel. DoCoMo probably needs to announce this agreement before the end of its financial year in March as it had a net outflow of customers (under mobile number portability scheme) for 47 straight months.

Then there is T-Mobile in the U.S., which is probably the least likely to be signed this quarter, as it has limited high speed network to promote and will be trying to sell unsubsidised iPhones with lower monthly charges. Again, using the Sprint contract as a guide, we could see four years and 25 million iPhones, with 3 million in year one and maybe 1 million during the first 3 months.

So from a baseline of 31 million, the extra demand for iPhone 4, a strong Chinese New Year, the large boost in the numbers of Apple approved LTE carriers and some possible new large carrier contracts, iPhone sales could well be in the 33 - 37 million range; that is slightly down to slightly up on last year's 35 million.

iPads

iPad sales at this time of year are still largely driven by consumer demand. Later in the year education deals will have more of an effect and although there are some promising roll-outs in business, such as in the airlines and Barclays Bank, it is still early days there for large scale adoption.

Here we are in mid February and the lead time for the iPad mini to be shipped from the Apple Store has dropped to 1-3 days. According to Canalys, iPad minis outsold the iPad last quarter but if we give them equal share because of the iPad Mini supply issues, it's easy to calculate a rough ASP for the Mini.

From Apple's Reclassified Summary Data, the iPad ASPs for the two previous quarters were $515 and $508.

Using an ASP of $510 gives an iPad mini ASP of $424 for one iPad:one mini dropping to $378 for two iPads:one mini (if Canalys overestimated iPad Mini sales).

As there have been no reported production difficulties, it seems reasonable to look for at least 12 million sales this quarter, to take care of the backlog, current demand and fill the channel with the usual four-six weeks inventory. So from iPad minis, $4.5bn (ASP $378) to $5.1bn (ASP $424).

For the iPad, sales last year were 11.8 million. If Apple sells that again and for the first time in Q2, there is no iPad YOY increase, iPad + iPad mini unit sales would be up nearly 1 million from last quarter. If there is however considerable cannabilisation of iPad sales by the Mini, then using the $424 ASP, each 1 million Mini sales reduces the proposed revenue gain of $5.1bn by $86 million.

Macs

On the Apple Store, lead times for iMacs have gone up in Europe. Now 21.5" iMacs are showing three-four weeks lead time and the 27" four - six weeks. As they are, at least trickling into the reseller channel in the U.S., this shows that Apple is not close to catching up to demand and suggests that Apple will be able to sell as many as it makes this quarter. From Tim Cook's Q1 remarks, compared with a year ago Apple sold 700,000 fewer iMacs and there were 100,000 less in the channel. So, with recent quarterly sales being just under 1 million and as these iMacs are new designs, instead of a refresh, Apple would probably have looked at sales of around 2 million for Q2. So even with the 27" iMac constrained for the quarter, Apple could be looking at revenue gains of up to $1bn.

iPods

iPod sales should be down YOY, as they have been for many quarters now. Typically in Q2 they are slightly less than half of Q1's. This suggests about $1bn for this quarter or a YOY loss of $200m.

iTunes

iTunes however could break $4bn for the first time as people cash in their gift cards and populate their new iPhones and iPads. After allowing for last year's 14th week, the Q2/Q1 gain was over $350m. With that same gain, iTunes in Q2 will not only be over $4bn but also show a YOY gain of over $800m. Tim Cook's mention that Apple has now distributed over $8bn to developers, rather than the over $7bn last used in the January Analyst Conference call, reinforces iTunes' strong quarter.

Accessories

Last quarter showed a YOY gain of 25%. If that is carried through to this quarter, Accessories will gain $300 million revenue. At the very least, there should be enough of a YOY gain to cancel out the iPod YOY loss of $200 million.

Conclusion

Apple should be able to raise revenue guidance before the end of February to $43 - $45bn or better. Even with 2 million less YOY iPhone sales, the gains from iPad Mini sales, iMacs and iTunes should drive revenue over Apple's previous guidance. If iPhones have sold well, revenue could beat last year's Q1 and be Apple's second-best quarter ever.

The real issue with this Quarter is the YOY decrease in gross margin. Even with the revenue gains and decreased costs from the learning curve in the production ramp up and favorable component pricing, Apple will be doing well if the gross margin reaches 40% (guidance 37.5 - 38.5), compared with 47.4% a year ago. So the chances are Apple will have lower EPS than last year and the bears will be yelling 'Apple is failing' when it is replacing a quarter with an unsustainable high gross margin with slightly lower profits from solid growth. If this stock were Amazon (NASDAQ:AMZN), there would be an immediate jump in the share price from this kind of revenue increase, let alone profitability. As it's Apple the best hope is an increased dividend will drive the share price upwards, as the quarters with the most difficult compares will soon be in the past.

Source: Will Apple Up Its Revenue Guidance This Month?