Seeking Alpha
Research analyst, long/short equity, tech
Profile| Send Message|
( followers)  

Apple (NASDAQ:AAPL) plans to release its Q2 fiscal year earnings on April 20th, and investors are eager to hear what management has to say. We believe the most important items to watch out for during in the release are sales figures and guidance for the iPhone and iPad as well as indications of gross margin impact from higher component prices and changes in the product mix. Apple competes with Research in Motion (NASDAQ:RIMM), Nokia (NYSE:NOK) and Motorola Mobility (NYSE:MMI) in the smartphone market, and it competes with RIM and Motorola Mobility in the tablet market. We currently maintain $420 price estimate for Apple stock, which is about 25% above market price.

iPhone Unit Sales

Apple sold around 47 million iPhones in calendar year 2010, amounting to a market share of around 3% in the global mobile phone market. We expect Apple to sell around 68 million iPhones in 2011, and the first quarter will play an important role in how Apple kick starts the calendar year 2011. There are a few triggers for iPhone sales in this quarter. In February 2011, Apple announced that iPhone 4 will be coming on Verizon (NYSE:VZ) network. It potentially gives Apple a chance to woo about 90 million Verizon’s subscribers to adopt the iPhone.

Additionally, enterprise support for iPhone has continually increased. As of last quarter, 88 of the Fortune 100 companies and almost 60% of the Financial Times Europe 100 companies were testing or deploying iPhones. [1]

(Chart created by using Trefis' app)

iPad Unit Sales

Over the last few quarters, estimating iPad sales has been a favorite topic among market research firms. Apple sold about 15 million iPads in 2010, and we expect it to sell about 24 million iPads in 2011.

We could be proved conservative here, but the key thing would be how the company managed the supply chain related issues in the last quarter, the concern for which was shown by the management during the last quarter’s conference call (see Will Supply Constraints Temper the iPhone’s Impact for Apple?)). Additionally, the Japanese earthquake created more supply related issues for the company as many of the iPad suppliers were Japanese companies. [2]

(Chart created by using Trefis' app)

Gross Margin Outlook

Gross margins is another important parameter looked upon by investors. Apple’s gross margins has suffered in the past and has declined from 42% in calendar year Q1 2010 to around 39% in Q4 2010. [3] One of the reason for the decline was the introduction of iPad in 2010, which was a lower gross margin product than the iPhone. We estimate that the iPad’s gross margin is around 30%. However, another main reason for the decline was iPhone margins, which declined from around 61% in 2009 to 51% in 2010, as per our estimates. More recently, following the Japanese quake Apple has scrambled to ensure that components are available for the iPad and iPhone. While this helps Apple extend its lead with these blockbuster products, we expect that some cost pressures will feed through as well.

Hence, it will be interesting to see how gross margins for Apple look in the upcoming earnings release and see what the company has to say about the outlook.

(Chart created by using Trefis' app)

See our full analysis and $420 price estimate for Apple

Notes:

  1. See SeekingAlpha, Apple FY Q1 2011 earnings conference call presentation transcript, January 2011
  2. iSuppli press release: Japanese Earthquake Poses Potential Supply Problems for iPad 2, March 17th 2011
  3. Data available in Apple’s quarterly filings
Source: What to Look for in Apple's Earnings