Will Apple's Sept. Quarter Guidance Disappoint the Street?

Apple (AAPL) has a well-established pattern of low-balling its financial guidance - and BMO Capital’s Keith Bachman thinks we will see more of the same when it comes to the September quarter.

In a research note this morning, Bachman takes a look at the direction Apple is likely to provide on September quarter numbers. He notes that in the past the company has guided to 3%-5% sequential revenue growth in the September quarter, which he notes would suggest revenue of $7.7 billion to $7.75 billion, versus the current consensus of $8.27 billion. He notes that iPhone sales in the quarter should jump to north of 4 million from around 700,000 in the June quarter, but that most of the revenue is deferred, given the company’s policy of recognizing revenue from the phone over a two-year period. Bachman thinks Apple could guide EPS for the quarter to $1 a share, versus the Street consensus of $1.24.

Bachman says factors that will influence September quarter guidance will include back-to-school promotions, deferred iPhone revenue and a potential weakening in European consumer demand. He also notes that while iPhone revs are deferred, iPod revs are not - so any cannibalization of iPod sales by the iPhone will hit the revenue line immediately.

Now, Bachman also notes that Apple also tends to beat its guidance; he notes that while September quarter guidance has generally called for growth of about 5%, the actual growth has tended to be more like 10%, which would suggest revenue of $8.1 billion the quarter (assuming $7.35 billion in the June quarter) with EPS of $1.21, closer to the Street’s current view. I would also point out that Bachman is no bear on the stock; he has an Outperform rating and $205 price target.

Two other notes on Apple this morning worth mentioning:

• Merrill Lynch’s Jeff Fidacaro, in a note this morning on June sales at Taiwanese PC manufacturers, points out that Quanta, which makes Apple’s notebooks, reported slightly worse than expected units, and that checks find it had a sequential decline from May for both in Apple notebook and iMac shipments.
• And finally, Bernstein Research analyst Toni Sacconaghi, favorite whipping boy of the Apple bulls who read this blog, this morning said he expects June quarter revenue of $7.6 billion and $1.12 a share, above the Street at $7.34 billion and $1.07. He thinks both Mac and iPod sales were strong in the quarter, aided in part by government stimulus checks. He sees Mac units up 43% year over year in the quarter, to 2.52 million units, with iPods up 5%, to 10.3 million units. He notes that iPhone sales in the quarter will be up only slightly from the previous quarter, and include no revenue from new sales, since Apple did not recognize any revenue from iPhone in the period from the announcement of its new iPhone software on March 6 until the new phone started shipping on July 11. Sacconaghi also notes that Apple has guided below consensus revenue estimates in 7 of the last 8 quarters, and below consensus EPS in 6 of the last 8. Sacconaghi says investor enthusiasm for the iPhone should help offset any disappointment around guidance, but that he remains concerned about the U.S. consumer spending environment. He maintains his Market Perform rating and $175 price target on the stock.

Apple reports earnings next Monday.

Comments

[kj:]

Eric, which other mobile phone manufacturers/consumer electronic device makers defer revenues the way that AAPL does with the iphone? Are there many? If not, shouldn't analysts at least acknowledge the cash that's coming in the door in the September quarter if AAPL does indeed sell 4 million phones? There needs to be some way to compare AAPL's sales/earnings to others on a consistent basis. Maybe they all recognize revenue/earnings this way and I'm way off base.

2008 Jul 15 02:14 PM

[Jeremy Elliott:]

My comment is similar to the sentiment from kj. Carriers subsidize up front for 3G--much different that the previous models. Does it stand to reason that the accounting principles that guided Apple to defer iPhone revenue and expenses over 8 quarters are now gone, or did I miss something back during the WWDC when all the details came out?

2008 Jul 15 05:59 PM

[Shane99:]

The way Apple records revenue will be the same as the previous version regardless if Apple gets all the cash up-front. The reason Apple recognizes revenue over 24 months is because it gives free software upgrades without charging for them. If Apple actually charged for the upgrades, they could recognize the entire price of the phone as revenue on the front end. The reason for this accounting method is that you cannot record revenue fully if a seller is obligated to give a buyer services after the initial sale (e.g. original iPhone owners being able to install version 2.0 a year after purchase). Though Apple is not obligated to develop any upgrades to software they have a history of making upgrades and giving them to owners for free.

2008 Jul 16 12:19 AM

[stockreader:]

Eric Savitz, the SEC is looking for your a$$.....no more spreading of bad news for your shorts.........moron..... is the best....... did you see the lines for the iphones yet? get rid of that ugly beard of yours!!!!!!!

2008 Jul 16 08:13 AM

[kj:]

The analyst from Citi may be the only one that I see that values AAPL on P/FCF. He estimates FCF for FY 2009 of about $9 B. If we use the current market cap of $150 B and back out cash ($20 B) we get an adjusted market cap of $130 B. P/FCF for FY 2009 would be about 14.5x. Given current growth rates and PEG, is this the cheapest stock out there?

2008 Jul 16 08:38 AM

[Jon T:]

Guys. Just look at it this way. APPL is storing up some huge amount of impetus that will one day break like the wall of a dam. When that day comes as it surely will, make sure you have all the APPL you can possibly have. I already do.

2008 Jul 16 10:22 AM

[JW, PhD:]

Wow...Fat Eric with another bearish AAPL blog. What a shocker.

2008 Jul 17 10:52 AM