I believe Apple (NASDAQ:AAPL) has the potential to deliver a major revenue beat in the December quarter.
My reasoning is based on last year's comparable quarter. Apple had a difficult q1 last year (q1 is Apple's December quarter). The stock fell over 20% and Apple struggled with supply and PR issues. Despite this Apple was still able to deliver the fourth biggest quarter in corporate history. Apple's difficulties last year sets it up for a much easier comparison. With the market currently predicting little or no revenue growth (current estimate $57bn vs. $54.5bn in q1 2013) Apple could deliver a substantial beat.
Problems in December quarter last year
- iPhone 5 and iPhone 4 had major supply problems
- iPad 4 was just a token refresh and customers preferred the mini
- iPad mini supplies were severely constrained
- The Mac division had a disastrous quarter. Apple's new iMac was only available at the very end of the quarter.
- The maps application issues had a negative impact
Apple Advantages versus Year Over Year Quarter
As always the iPhone will be the most important part of the December quarter. In the year ago quarter Apple had major supply issues. The iPhone 5 was not readily available in the US until the very end of November. Apple did not release the iPhone 5 in China until December 14th. Perhaps even more importantly, and what some analysts have forgotten, is that the iPhone 4 was supply constrained for the entire December 2012 quarter. Apple underestimated the demand for lower price point phones. Here's what Cook said looking back on the q1 2013 quarter.
We did have significant shortages … supply of iPhone 5 was short to demand until late in the quarter and iPhone 4 was short for the entire quarter
5S vs. 5
Once again Apple is struggling to meet demand for the iPhone 5S as it did with the iPhone 5. The 5S currently has a 2-3 week shipment date on Apple's website. Cook said the 5S "is in very serious backlog" but he also said the "I feel like we're doing really well on supply".
How does this compare with guidance for the December quarter last year? Here's what Cook said in 2012:
I'm pleased with the current level of output in what is the largest volume ramp in Apple's history. It's difficult to predict when supply and demand will balance, but I'm feeling very confident on our ability to supply quite a few iPhones.
Positive Differences this Year
- Apple is selling its latest iPhones in China for the entire quarter.
- It is rolling out its latest phones to new countries faster than the previous year.
- The 5S is an S cycle phone which should mean it's easier to build and supply.
- Demand should be stronger for the 5S versus the 5, as evidenced by Apples record launch weekend and recent quarterly sales (up 25.6% YoY)
- Apple does not have the negative publicity with its maps application which it suffered from last year.
- The 5C is a new product Apple didn't have last year
Apple also has the 4S which I don't expect will suffer any supply shortages. It's currently available to ship within 24 hours from Apple's website. This is important when we consider the supply constraints on the iPhone 4 in the year ago quarter.
I expect demand and supply to be stronger for the 5C and 4S versus the 4S and 4 last year. If this is true Apple should sell a lot more phones versus the year ago period.
|Q1 2013||Q2 2013||Q3 2013||Q4 2013||Est Q1 2014|
|ASP:||$ 642||$ 613||$ 581||$ 577||$ 583|
|Total Revenue:||$ 30,660||$ 22,955||$ 18,154||$ 19,510||$ 34,814|
|YoY unit Growth%:||29.01%||6.75%||20.03%||25.59%||25.00%|
I'm estimating 25% YoY growth in units roughly the same as the Apple's growth in Q4. This is actually 4% below Apples growth in the December quarter last year so I consider it fairly conservative.
The One Big Negative versus a Year Ago
The major negative versus Q1 last year is average selling prices (ASPs). Apple's ASPs traditionally show quite a big uptick in the Q1 quarter. However Apple said on the call that ASPs would be roughly flat versus Q4 and much lower than the year ago period. This is primarily because of a shift in mix to lower priced phones which is occurring for the following reasons.
- The release of the lower priced 5C
- Aggressive pricing of lower end iPhones in emerging markets
- Negative currency headwinds caused by a strong dollar
- A lower mix of higher priced higher storage phones as consumers take advantage of other alternative storage options such as the cloud
- Shortages of the high end 5S forcing consumers to buy a lower model phone or a phone from another provider
iPhone 5S 64GB
iPhone 5S 32GB
iPhone 5S 16GB
iPhone 5C 16GB
iPhone 5C 32GB
iPhone 4S 8GB
Estimated Average ASP
Note: The figures above are based on my own estimates and predictions and should not be relied upon as facts.
As a result of these factors I am estimating just a $6 increase on Q4. That's $59 per phone lower than the Year ago period. The lower YoY ASP guidance may also be because of Apples difficulties to supply lower priced phones in the year ago period.
Overall Apple has a stronger line up of products than it did last year and overall these should be better supplied. I expect the iPhone to have another strong quarter.
Don't Forget the iPad
I'm even more bullish on the iPad for the current quarter. Analysts and investors have become increasingly frustrated with the poor performance of the iPad over recent quarters and attention has shifted even further to the iPhone. I think analysts are underestimating the potential for an iPad revival in the coming quarter.
On paper the last two quarters of iPad YoY unit sales growth look dismal.
- Q1 2013: 48%
- Q2 2013: 65%
- Q3 2013: -14%
- Q4 2013: 0%
The reason for this poor year on year performance was the absence of the usual new iPad in March. If you discount the token iPad 4 update Apple hasn't properly refreshed its main 9.7 inch iPad for 20 months. Even the mini is now 12 months old. Some commentators have blamed competition from increasingly low cost Android alternatives. However the collapse in growth rates is unsurprising given the lack of new products.
Apple goes into its most important quarter with two new iPads and early reviews have been good. Demand for Apple's iPad Air should be much stronger than the iPad 4 in the year ago quarter. The Air represents a much bigger refresh than the 4 which was little more than a minor update. I also expect some pent up demand from those who have been waiting a long time for a new iPad before they upgrade.
Tim Cook confirmed some of my thinking on the conference call. Cook twice dropped heavy hints that the he was predicting a very good quarter for the iPad.
"I think it's going to be an iPad Christmas … we're pretty confident."
Cook said, "It may be that not everyone can find what they want" on iPad Air launch day. It's likely the Air will suffer some supply constraints.
The iPad Air is also being launched in China. Last year China was not in the initial launch of the iPad mini and it only received them late in the quarter so this should be a big positive.
Last year Apple sold all the 8.9 million iPad minis it was able to make. Given Apple is launching the Air in more countries this year I think it's reasonable to predict the Air will be in better supply. Reports have suggested Apple is planning to produce more than 10 million Airs. This led me to my prediction of 12.5 million Air Sales this quarter.
We should have a much better idea on Air numbers after the launch in the next couple of days.
Total mini retina
Total iPad Air
Total old mini
Average ASP estimate
Note: The figures above are based on my own estimates and predictions and should not be relied upon as facts.
Last year Apple suffered from not being able to produce enough iPad minis. Here's what Peter Oppenheimer said on the Q1 2013 call looking back on the December quarter last year:
With the iPad mini it's hard to know, we could not make enough in the quarter. We were constrained every week. Customers love the mini and we wish that we could have made more and we ended the quarter with significant backlog.
Unfortunately this year the situation will probably be even worse with the new mini. For a start the mini will only ship sometime in mid November compared to the 2nd November last year. Cook has said, "It's not clear if we'll have enough" and the consensus is that the new mini will be severely constrained.
IHS is predicting that Apple will only be able to produce 3-4 million retina minis because of issues with the display panel. I would make two points against this.
1. There were similarly gloomy predictions last year and Apple actually significantly exceeded expectations with the number of minis it was able to produce
2. I don't think logistics wizard Cook would have been so positive about iPads on the call if the situation was this bad. Cook also said "We know how many we will have".
This leads me to my estimate of 6 million new retina mini sales. Only two thirds of the new mini sales last year but well above the current gloomy forecasts.
Another advantage this year is that Apple is now charging a higher price ($399 vs. $329) for the new mini which will boost ASPs and Revenue.
The old mini
Apple is now selling the old mini now at an attractive $299. This is a major advantage Apple didn't have last year. Customers may find it difficult to get hold of the latest mini but this year they will have the option to buy an older model. Apple will pick up a lot of sales it would have otherwise have lost. The reduction in price to $299, below the $300 psychological barrier, is very attractive.
This leads me to a prediction of 8 million sales. The old mini could be the hidden gem which helps deliver a great quarter for iPads.
Disadvantages versus the Year Ago Quarter for iPad
- The iPad Air will have supply constraints which the iPad 4 did not suffer last year. This is because of the much higher demand for the Air and should overall be a huge net positive for the quarter
- The new retina mini may have even worse supply constraints than the old mini suffered last year.
Cooks confidence on the call and the fact that he said, "We know how many we will have", alleviated many of my worries. I expect Apple to have its strongest iPad quarter ever with two major new updates and back up models.
|Apple iPad Sales:||22,860||19,477||14,617||14,079||28,500|
|Revenue Per Tablet:||$467||$449||$436||$439||$441|
|Total Revenue:||$ 10,674||$ 8,746||$ 6,374||$ 6,186||$12,576|
|YoY Growth Units:||48%||65%||-14%||0%||25%|
I'm estimating that Apple will return to substantial YoY iPad growth. My estimated growth rate of 25% is well above the q4 numbers given Apples upcoming product launches but well below the 48% growth achieved in Q1 last year. I think it is fairly conservative.
Overall ASPs are slightly higher on a sequential basis and lower YoY. The higher price new iPad mini retina will be a positive but will be offset by the reduction to the price of the old mini. As shown above I expect the old mini to sell in greater volume because of the supply constraints with the new mini.
The Mac Should Have a Much Stronger Quarter
Apple had a very poor Mac quarter in December last year due to the late launch of the new iMac.
"We went for two months with very few iMac sales."
Apple is set up for a very easy comparison. Tim Cook was very confident about q1 2014 Mac sales. He said:
"Macbook Pro has gotten off to a huge start … I feel great about Mac growing year over year in the quarter."
This is all good news but it's important to remember that Mac sales will probably only account for about 10% of revenue. Even if the division has a great quarter, as I expect it will, it will still have a relatively small effect on Apple's overall numbers.
|Apple Desktop Sales:||4,061||3,952||3,754||4,574||4,647|
|Revenue Per Desktop:||$ 1,359||$ 1,378||$ 1,303||$ 1,230||$1,190|
|Total Revenue:||$ 5,519||$ 5,447||$ 4,893||$ 5,624||$ 5,530|
|YoY Unit Growth:||(21.9%)||(1.6%)||(6.6%)||(7.1%)||14.4%|
The iPod division is becoming increasingly irrelevant as its percentage of overall revenue continues to shrink. However the division is now declining at such a rate that it may still have a small impact on YoY revenue. Revenue fell almost 50% in the current quarter. If we project that onto the December quarter Apple may lose $1billion in revenue versus the year ago quarter.
My current sales estimates
Note these numbers are my own estimates and should not be relied upon. My numbers are also likely to change in the next few days when we get the iPad Air launch numbers
The story of last year was one of Apple being unable to produce products fast enough. This year Apple has more products to sell, demand will be stronger and supply should be better. There are many factors in Apple's favor versus last year. The two big surprises in the quarter could be higher sales of the old iPad mini and iPhone 4S.
Apple's three main divisions all point to stronger sales than the year ago quarter. Barring major supply problems Apple's iPad division has the potential for a major surprise. The guidance of $55bn - $58bn or 1%-6% revenue growth looks conservative. The highest analyst revenue estimate is currently $59.32bn. I expect Apple to pass the $60bn sales barrier and deliver a major beat in the December quarter.
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