With Apple (AAPL) set to report its Q3 2012 earnings on July 24, all eyes will turn to Cupertino, as Apple's earnings report is among the most anticipated in corporate America. This is due not only to Apple's position as the largest company in the world by market capitalization, but also its unique cultural status, both here in the United States and across the globe.
Ahead of Apple's report, several of its suppliers have also reported their results, as well as given guidance. Within those earnings releases are several interesting insights into the state of the smartphone industry, as well as where Apple is set to go.
Apple's suppliers never mention the company by name, even if everyone knows that they supply components for the company. This quietness extends from small suppliers all the way to giants such as Qualcomm (QCOM). Even if everyone knows that the customer in question is Apple, there will be no confirmation. But try as Apple's suppliers might to hide what is going on with Apple, the truth can be revealed. We have written about Apple's suppliers before, and our predictions for Apple proved to be prescient. And in light of growing macroeconomic uncertainty, it is prudent to examine what Apple's suppliers are saying this time around. We will gather insight from several companies tied to the Apple supply chain, including Qualcomm, Skyworks Solutions (SWKS), and Multi-Fineline Electronix (MFLX). Unfortunately, Broadcom (BRCM), a leading Apple supplier (Apple makes up 11% of Broadcom's sales), reports its results on July 24 alongside Apple. Thus, we will be unable to glean insight from that company.
Apple's penchant for secrecy is well known in the investor community. And in Apple's ideal world, it is likely that the company would want to muzzle all of its suppliers, so that they would be able to say nothing at all. That would increase secrecy, and therefore the publicity that Apple can generate for its products. However, many of Apple's suppliers are public companies, and as such, they have an obligation to be transparent with their own investors. And it is that transparency that can be used to reveal what is going on at Apple. We turn now to 3 of Apple's publicly traded suppliers.
- Multi-Fineline Electronix: This company is a leading circuit board manufacturer, as well as a provider of electronic assembly solutions. The company itself states that 66% of the company's revenues are derived from a single customer. All indicators say that Apple is that customer. Multi-Fineline reported its Q2 2012 results back in May (for the 3 months ended March 31), and what the company says is mixed for Apple. Multi-Fineline noted that, "Toward the end of the second quarter, we saw a softening in orders from our key customers resulting in revenues slightly below our expectations." If the words "key customers" were used, Apple has to be covered by that description. If Apple reduced orders from Multi-Fineline, it implies that sales may be softer than expected for its own fiscal third quarter (April-June). And analysts have already warned that Apple may miss Q3 iPhone estimates. Bernstein believes that Apple will miss Q3 estimates due to macroeconomic issues in Europe and China, which will be exacerbated by the lack of an iPhone 5 launch, as well as late introductions of the new iPad in China and late MacBook refreshes. For Bernstein, a lull in the iPhone cycle also means that there is a danger for Q4 as well. The firm believes that the iPhone 5 will launch in the December quarter, not Q4 2012. Therefore, Q4 estimates are also in danger. That being said, Bernstein remains bullish on Apple, with a buy rating and $750 price target. That bullish stance is supported by Multi-Fineline's outlook. In its Q2 release, the company said that soft orders caused revenue weakness in that quarter. At the same time, the company said it was upbeat about the road ahead. Specifically, Multi-Fineline commented that, "We have a significant number of new programs, associated with both existing and new customers, in the start-up phase in the fiscal third quarter. Looking further ahead, we are seeing strong demand from our customers for our flex assemblies for smartphones and tablets for the fiscal fourth quarter and into fiscal 2013 [emphasis added], when these new programs are expected to enter volume production. Accordingly, we commenced a $50 million capacity expansion project in the fiscal third quarter to position MFLEX for sustained long-term growth." Given the fact that Apple is the company's largest customer, it is clear that Apple will be utilizing Multi-Fineline's products a great deal in the quarters to come (for the record, Apple itself has confirmed that Multi-Fineline is a supplier). It makes no sense for Multi-Fineline to expand unless it anticipates more demand in the quarters to come. If Multi-Fineline is seeing strong demand ahead, but softness now, it is likely that Apple itself will follow a similar pattern. Therefore, investors should brace themselves for a softer quarter than usual. At the same time, this implies that the iPhone 5 will launch in Q1 2013 (October-December), which should propel Apple to further records in both sales and profits.
- Skyworks Solutions: Skyworks beat its previous revenue estimates for Q3 2012 (3 months ended June 29) by over 1.5%. Given the company's position as an Apple supplier, that would imply that iPhone sales may not be as soft as some analysts and observers expect them to be. In its commentary alongside its Q3 2012 earnings release, Skyworks said that it is seeing a general slowdown in the smartphone market, but that it is able to avoid that due to the ramp of a "significant program." It is why the company is guiding for sequential earnings growth of over 10% for Q4 2012, as well as record revenues due to this "significant program." According to Credit Suisse, that program is the iPhone 5. Skyworks already has a presence in the iPhone 4S, and industry sources indicate that the company will have $2 more of technology in the iPhone 5. Based on Credit Suisse' math, 50 million iPhones will be sold in calendar fourth quarter (Apple's Q1 2013), which would imply 3.9 million units per week. Given the fact that Apple would need 4 weeks of inventory to start with to ensure a smooth launch, that implies $30 million in incremental revenue growth for Skyworks, which would account for all of the revenue growth guidance that Skyworks has called for. Skyworks' results contradict those of Multi-Fineline. If Skyworks beat its previous estimates, then it implies that iPhone sales are not as weak as some think. But both companies are upbeat about the road ahead, and expect strong sales and profits, which bodes well for Apple' future quarters.
- Qualcomm: Qualcomm sits at the nexus of almost every trend in the mobile world, due to its huge patent portfolio, as well as its exposure across a wide range of platforms (including iOS, Android, and Windows Phone). Qualcomm's results for Q3 2012 (3 months ended June 24) resembled those of Multi-Fineline, albeit on a much larger scale. Qualcomm's growth estimates have "moderated slightly," and the company expects "the demand profile of the calendar year to be more back-end loaded as new devices are launched for the holiday season. Although our outlook for semiconductor volumes in the fourth quarter [fiscal] has been reduced from our prior expectations, we are ramping supply of our 28 nanometer chipsets to help enable what we expect to be a strong December quarter [Q1 2013] for our semiconductor business." Qualcomm's results for Q3 2012 came in below expectations, and Jefferies is among those that think that the company's argument of supply issues is being used to mask demand issues. If Qualcomm's "issues" (the company still made a profit of over $1 billion in its last quarter) are indeed demand-related, then it is possible that Apple could be impacted as well. So far, Apple has proven to be very resilient against economic stress, but there is no reason why that has to be the case every quarter. In a quarter with an iPhone launch, macroeconomic issues can be easily digested. But absent such a launch, it does become harder to bypass the macroeconomic picture. That being said, Qualcomm also sees a strong holiday quarter, which implies that the iPhone 5 will be a success.
The takeaway from 3 of Apple's suppliers is that investors need to prepare for the possibility that this upcoming earnings release could be soft, and that Apple could also guide for a soft Q4. The consensus estimate, per data from Reuters, calls for $10.38 in EPS for Q3 2012, and $10.28 for Q4 2012.
Click to enlargeApple's guidance for the fourth quarter isn't that relevant, as the company always sandbags guidance and analysts largely ignore it when compiling their own calculations. Based on the data above, Wall Street itself is expecting an iPhone 5 launch in Q1 2013, as earnings are estimated to soar to a new record of over $15 per share.
Investors need to understand that Apple is a long-term story, and these upcoming quarters should not be seen as representative of Apple's long-term trajectory. Even Bernstein, which is quite worried about these quarters, writes that, "moreover, we note that the issues we highlight are principally related to the timing and the launch of iPhone5, and other than enhanced seasonality, our thesis and outlook for Apple remain unchanged. Moreover, once visibility into the timing of the iPhone 5 launch becomes apparent, we believe that investor sentiment will become meaningfully positive." We share that view, and would use an earnings selloff as an opportunity to add to our position in Apple. The iPhone 5 is set to be a resounding success, and Apple's suppliers are upbeat about the opportunity that it presents. Why else would Multi-Fineline be investing $50 million in capacity expansion in this environment?
In our view, the Q3 earnings release will either hand investors profits if it is good, or will hand investors a buying opportunity if Apple disappoints. We will of course be listening closely to Apple's earnings conference call, and once again remind investors that Q3 and Q4 2012 should not be seen as representing where Apple is going in the long-term. We continue to believe that Apple's best days are ahead of it, and that should a buying opportunity manifest itself in shares of Apple, investors should take advantage of it.