As excitement over the iPhone 4 hits a fever pitch, I’ve decided to look at what’s in store for the rest of 2010, and the numbers appear to be absolutely blockbuster. While I’m still working on a full income statement model for Q4 (saved for another article), I did run estimates for total revenue and was very surprised by what the seasonal trends seem to indicate for the rest of the year. After taking a look at patterns in consumer behavior for Apple’s (NASDAQ:AAPL) various operating segments, I’m looking for Apple to do roughly $63.459 billion in revenue in 2010 driven largely by staggering iPhone, Mac, iPad and iPod sales. That’s an explosive 47.91% rise in revenue from the $42.905 billion recorded in 2009. Not bad for a mega-cap tech company that currently holds the second largest market cap among U.S. publicly traded companies. Whenever one looks out further than one quarter ahead, in this case Q4 2010, very careful analysis of the trends in product cycles need to be thoroughly considered.
Years ago, I presented some of my method to analyzing Apple, and while those methods haven’t changed much in recent years, it’s always good to revisit those methods and lay them out for my readers to see. In a recent article, I simply posted my estimates and a received a lot of questions as to how I arrived at those first call numbers. A lot of those methods will be presented in this article, and a more detailed breakdown will be given when I revise my Q3 estimates ahead of Apple’s results in July.
The tables below lay out Apple’s quarterly sales revenue by product from 2007 to 2010. Please note that 2010 is projected revenue, and actual results may vary markedly. Also, these tables have been amended to reflect Apple’s new accounting policies regarding revenue recognition of the iPhone, and this information can also be found on Apple’s website. I will be reviewing these themes in significantly more depth in a book I’m currently writing on Apple’s fundamentals for those who are interested in this sort of thing. Feel free to click on the charts and tables throughout the article below for enlarged images.
Q4 2010 Revenue Estimates for Apple, Inc.
As indicated in table 1.4 above, I’m looking for Apple to report $18.906 billion in revenue in Q4 when it releases earnings in October. Unlike Q3 where a lot of research data, web orders, and comments from Apple are readily available for analysis, Q4 estimates must be drawn from seasonal product trends and consumer behavior.
In the ensuing sections, I’ll go through each of Apple’s operating segments and demonstrate how one can logically arrive at $18.906 billion in revenue for Q4. Please view these numbers with the understanding that this is a first call projection for a quarter where we have no data besides seasonal trends, and that actual results may vary quite significantly. An outlier can easily arise under one or more operating segments, which could lead to significantly higher or lower revenue than what I have stated above. For those who are interested, you can find an analysis for Q3 published at Bullish Cross or Seeking Alpha.
1. Macintosh Unit Sales, ASP and Revenue Estimates for Q4 2010
To determine Macintosh revenue, the first thing one should look at is the seasonal shift in consumer purchasing behavior between Q3 and Q4, and determine, what if anything can be concluded regarding Q4 2010. What does the Q4 back to school shopping season tell us about the growth in Macintosh sales between Q3 and Q4? Is there any obvious change in the growth rate? Was that change more recent or was the outlier found in much earlier data. The more recent, the more likely the change might impact the current seasonal quarter. If we look at the growth in unit sales between Q3 and Q4 over the past few years, here is what one should see from the chart below.
Mac Unit Sales Sequential Growth (000s)
Q3 2007 = 1,764
Q4 2007 = 2,164
Sequential Growth = 400 (22.68%)
Q3 2008 = 2,496
Q4 2008 = 2,611
Sequential Growth = 115 (4.61%)
Q3 2009 = 2,603
Q4 2009 = 3,053
Sequential Growth = 450 (17.29%)
So what does this data tell us about what we can expect for Mac unit sales for Q4? For one, it tells me that we have two years, 2007 and 2009, where the sequential growth is similar in nature. And then we have 2008's low sequential growth rate. So what happened in 2008, and is the data reliable? Well, personally I think the 2008 data is somewhat of an outlier because Apple’s fiscal Q4 2008 took place in the midst of the financial crisis. So one should expect to see some weakness in Q4 2008, and I’m actually surprised that Apple saw any sequential growth at all.
Thus, we know, due to the financial crisis, that 2008 quarterly data has to be somewhat unreliable in telling us what the normal season sequential growth trend actually is between Q3 and Q4, and what it might have actually been in 2008 had we not entered a grueling recession. That being said, when one looks at the sequential growth rate in 2009, one should notice that the sequential growth rate is actually weaker than what we saw in 2007. We saw a 22.68% sequential rise in Macintosh unit sales between Q3 and Q4 in 2007 while only seeing a 17.29% sequential rise in the same quarter last year. This suggests that the sequential growth rate between Q3 and Q4 might be contracting. Though one year of data hardly makes a trend, a lower sequential growth rate is likely warranted especially to account for the law of large numbers. At least, that is what the recent changes in the sequential growth rate might be telling us.
Also, one must consider that Macintosh sales will be somewhat affected by iPad cannibalization. Sure it will probably be pretty negligible, but the concern does exist. Thus, we take 15% of 3,100,000 units to get us to a rough first call estimate of 3,565,000 units. As we get data in Q4, those estimates will obviously change. Who knows though? I’ve seen scenarios where my first call doesn’t change in any meaningful way, and are pretty in-line with final results as consumer behavior tends to be more predictable than many really believe it to be. While the past doesn’t really predict the future, sometimes behavior can – history does often times repeat itself.
Now the question becomes, how much revenue will Apple post if this trend in consumer behavior continues? Well to answer that question one must analyze seasonal trend as well as other factors regarding Macintosh ASPs. Particularly one should look at what tends to occur with ASPs between Q3 and Q4 of previous fiscal years to see if there is any identifiable trend that can be used to predict Q4 ASP. The chart below tracks Macintosh ASP from 2007 to 2010.
The first thing that should be obvious from a brief glance at the chart above is that Macintosh ASPs have been on a consistent decline since 2007. This is largely due to Apple's aggresive pricing policy, which isn't a bad thing as Apple has chosen volume over higher prices to convert more and more people to the Macintosh ecosystem. What is also readily apparent here is that Macintosh ASPs tends to have an overall slight seasonal incline between Q3 and Q4 despite very generous back to school shopping season incentives Apple regularly offers to students in the fall.
Yet, while Macintosh ASP saw a slight incline between Q3 and Q4 of 2007, and between Q3 and Q4 of 2009, 2008 saw quite the substantial decline in ASP. And I think that is easily explainable by the financial crisis. It would stand to reason that if one were to buy a Mac in the midst of the financial crisis, he or she would probably select a model that is less pricey than what he or she might have purchased under more stable economic conditions.
However, if one were to be very conservative when looking at the trend, it would make some sense to project a drop in ASP especially in light of the stronger dollar. Apple does at least 30% of its Macintosh business overseas and the stronger dollar directly impacts the average selling price of European Macs on the currency conversion. Thus, to be safe, it would be better to underestimate than overestimate. So while the trend suggests ASPs should rise in the fall quarter, its far more conservative to project a slight decline.
Modeling for a sequential decline of about $10 would be a good starting number until we get more data in the fall quarter. I’m estimating $1,250 ASP based on a $10 sequential decline from Q3 2010. From there, one can calculate Macintosh revenues to be around $4.456 billion ($1,250 ASP x 3,565,000 million units). Finally, the chart below gives an overview of Macintosh revenue from 2007 to 2010 including Q3 and Q4 estimates:
2. iPod Unit Sales, ASP and Revenue Estimates for Q4 2010
Very similar to the analysis of Mac sales above, one should look at the same factors to arrive at an estimate for iPod unit sales and revenue. First, one should look to the sequential growth trend to tease out any season patterns of growth, and determine whether that trend might be changing. Then after laying out the sequential growth rates, it’s important to determine whether any confounding variables might alter an otherwise clean and consistent trend. And while this analysis is a little trickier than looking at Mac sales on some level, I think good estimates can be deduced from looking at the recent seasonal trend.
Looking first at 2007, one should notice quite the sequential rise in unit sales from Q3 to Q4. Almost 400,000 units in fact or about 4,444 more iPods sold each day. This can largely be explained, I think, by the introduction of the iPod Touch. Q4 2007 was the first quarter that iPhone enviers were able to satisfy their desire for the device by purchasing another product with the iPhone OS. Thus, that huge jump in sales between Q3 and Q4 2007 was very likely due in large part to the introduction of the iPod Touch. Thus, I think basing estimates on the 2008 and 2009 sequential growth rate makes a little more sense than looking at 2007.
But if one looks at the Q3-Q4 2009 sequential growth rate, I think the seasonal trend in that year makes the most sense. It’s probably what we’ll see in 2010 as more and more purchasers opt to buy iPhones and iPads over iPods. This isn’t necessary a bad thing as the iPod’s importance as a revenue driver is literally declining daily, but I think any estimate above 10 million units for Q4 would be over zealous at this point. At least, not until we see what Apple’s new iPod lineup looks like this fall. Perhaps, a whole new iPod might be in the works, which might give a bump to sales.
But with the information I presently have, I going to model for 10,000,000 units. A forecast that I actually think might prove to be a little aggressive. We’ll see what happens as the quarter progresses. But a forward looking 10,000,000 units based on the season trend of consumer behavior, is a fine reason-based estimate for Q4. Results will likely not vary by much if at all.
To determine iPod revenue for the quarter, one must look to the current and seasonal trend in iPod ASPs. Again, this isn’t the final analysis, and just a prediction based on seasonal data. As quarterly data is released by NPD and other research groups, one can arrive at better more reliable estimates. Since we don’t have that data, the only way to make forward looking projections is to refer to the seasonal trend.
What is very interesting regarding iPod ASP is that there has been a distinct rise over the previous few quarter, which I find to be unsustainable. We have seen large bumps in iPod ASPs like this in the past, but for the sake of being conservative, I’m going to predict a drop in ASP due in large part to the release of the iPad and iPhone 4 this quarter. I think more dollars will be spent on those devices than on higher end iPods.
So I’m modeling for a slight decline in ASP from $160 to $158 in Q4. Thus, projected sales of 10 million iPod units at an average selling price of $158, yields a revenue projection of $1.580 billion. The two charts below present quarterly iPod ASPs and iPod revenue from 2007 – 2010:
3. iPhone Unit Sales, ASP and Revenue Estimates for Q4 2010
This segment of Apple’s operation is by far the hardest to predict especially when we’re looking deep into the future. The seasonal trend will give us at least some information, but issues regarding whether Apple can meet demand for the new iPhone 4 and gauging exactly how much that demand will be over the course of the entire quarter is hard to forecast. The actual numbers will likely vary from any estimate given by anyone. Taking a look at the seasonal trend, there are some difficulties getting a handle on what will probably take place in Q4 because the seasonal trend from the date of the iPhone launch has had some huge confounding variables that makes the trend unreliable. See below:
The only firm basis one has in making a prediction based on the seasonal trend is looking at Q3 to Q4 of 2009. The sequential growth from Q3 to Q4 of 2007 is entirely unreliable owing to the fact that the iPhone was released just two days before the end of Q3. Thus, there effectively is no sequential trend between Q3 and Q4 of 2007.
Also, 2008 is unreliable because Apple suspended sales of the iPhone in Q3 2008 and that’s why they only sold 717,000 total units in the quarter. One couldn’t buy an iPhone for a large portion of time. So it’s hard to gauge exactly how big the difference would have actually been had the iPhone been on sale for the duration of Q3 2008.
First, it would be wise to notice that iPhone sales have absolutely exploded in Q1 and Q2 of 2010. So that suggests that interest is outright accelerating for the device. Not just for iPhone 4, but for any iPhone period. We should have seen a very weak Q2 due to general seasonal weakness, and due to the fact that everyone knew that iPhone 4 was just around the corner. This didn't happen. Instead, Apple, defying all logic, went on to post record iPhone sales in Q2. That would not have happened if iPhone sales weren't drastically accelerating on an ongoing sequential basis.
Moreover, if we look at 2009, and if we look at the year over year growth rates, we can get a rough idea of what to expect in Q4. In 2009, we saw a 2,159,000 unit sales jump in Q4 over Q3 or roughly 41.6% sequential rise in sales. If we look at the year over year growth rate in Q4 of 2008 to Q4 of 2009 with the iPhone 3G to iPhone 3GS, we only saw a jump of 475,000 units or roughly 6.9% YoY growth.
Yet, given that iPhone 4 is a whole new design, and given the fact that we’re seeing record demand in pre-orders, it stands to reason to expect a larger YoY rise. Especially because if we use the YoY growth rate of 6.9% we would only get 7,875,000 total units sold in the quarter which is significantly below Q2 numbers (Apple’s weakest quarter of the year). That number wouldn't make any sense because how can one expect to see weaker sales in a quarter that benefits from an iPhone launch?
Thus, I think its best to look at the actual unit sales growth number instead of the rate. Adding a 2.1 million unit rise to Q4 of this year, like the 2.1 million unit rise last year, makes a lot more sense. Because trying to use the sequential growth rate of 41.6% would just be silly considering the law of large numbers. It’s much easier to go from 4 million to 6 million units than to go from 9 million to 13 million units. I think a good first call would put iPhone sales at 11.5 million units for Q4 of 2010. That gives us a very solid sequential growth rate that can be adjusted as we get news from NPD and Apple regarding iPhone sales as the quarter progresses.
iPhone ASP is much easier to forecast. I’m looking for a sequential decline in iPhone ASP in Q3, and a slight sequential rise in Q4 based on the ongoing trend in iPhone ASPs. $620 ASP for Q4 will probably be pretty close to the actual results. So to arrive at iPhone Revenue multiply the 11.5 million units forecasted above by the $620 ASP, and we arrive at $7.13 billion in revenue. While I haven’t completely jotted down the analysis in this article, arriving at a $620 is based on the same exact sequential, and YoY growth trend analysis and considerations used at arriving at iPod and Macintosh ASPs. The chart below outlines iPhone quarterly revenue since its inception in Q3 of 2007. Please note that Q3 and Q4 are mere projections, and that actual results may differ.
While we do not have very much seasonal data on the iPad, what we do have is the current run rate released directly from Apple. At 59 days after launch, Apple sold 2 million units in Q2 2010. At 80 days after launch, they sold 3 million units. That means in the last 20 days, Apple sold roughly 50,000 iPads a day. The run rate is obviously accelerating. For the first 60 days, the run rate was about 34,000 iPads a day.
If we see a consistent 50,000 units in Q4 with no acceleration or deceleration in the run rate, then Apple is on track to sell about 4.5 million iPads in Q4. Though, I think that due to the back to school shopping season, and the general draw to Apple stores as a result of the iPhone 4 (halo effect), we should probably see at least some acceleration in units sales. I think 5 million units for Q4 makes some sense. It accounts for a small amount of acceleration in the run-rate, and it’s a solid estimate which will be modified only slightly once sell-through data is released for July and August. Thus, 5 million units multiplied by the $650 ASP gets us to $3.250 Billion in Revenue.
5. iTunes: Other Music Related Products & Services Revenue
iTunes and other music related products and services along with software and peripherals has been one of the easier product segments to forecast. There’s a nice consistent year over year, seasonal and sequential trend that help guide forecasts. Obviously, from time to time, there are slight outliers that yield somewhat different results, but those outliers tend to be rare and when they do occur, the result don’t vary markedly from my estimates. Here’s what tends to happen with iTunes.
Usually there’s quite a significant jump from Q4 to Q1 as a result of the holiday shopping seasons. People get iTunes gift certificates and new iPods for Christmas, and decide to make a lot iTunes purchases to fill up their new iPods with music, movies and television – hence Christmas is usually the busiest day for iTunes. That should be clear looking at the table below. Notice that every Q1 represents the first huge step up in revenues for the year.
Following on the Q1 momentum, Q2 is usually the largest revenue quarter of the year for iTunes. This is mainly the result of people carrying over their iTunes gift certificates into the March quarter. There’s a lot of iTunes buying that happens in January. So this tends to make a lot of sense.
In Q3 we usually experience a pullback from the frenzied buying in Q1 and Q2. Q3 usually represents the weakest quarter of the year in terms of iTunes revenue. Though I think as a result of the iPad release this quarter, we’ll see some follow through and a better quarter than Q1 as people download and purchase apps for the iPad.
In earlier years, Q4 tended to be pretty weak in terms of sales as noted in 2006 and 2007. Though I think that trend has completely changed as a result of the App Store, and Apple’s decision to release new iterations of the iPhone in June every year. This consistent June/July release of the iPhone brings with it, higher activity on iTunes than what we’ve seen in the past during Q4. Thus, using the same methods of analyzing consumer behavior, seasonal, yearly & sequential trends, I’ve arrived at a $1.225 billion revenue number for Q3 and a $1.3 billion revenue estimate for Q4. The chart below outlines iTunes revenue growth from 2006 to 2010. Again, Q3 and Q4 are mere projections and actual results may vary quite markedly.
Peripherals presents us with an interesting trend. In the past, it was a little easier to make predictions regarding the direction of peripherals until Apple experienced this huge drop off in revenue in 2009 followed by an equally powerful rebound in 2010. So it’s somewhat difficult to get an exact handle on where this is headed. If one looks at 2009 as a complete outlier year, then he or she should see that the trend is generally up over the past 3-years. In 2007, we saw a tiny drop off in peripherals between Q2 and Q3, while in 2008 Apple experienced a healthy pick-up in sales.
I'm modeling for a slight increase in Q3, and a larger increase in Q4, due in large part to the general draw to Apple retail stores as a result of the recent release of the iPad and iPhone 4. Also, 2010 seems to be a huge for Apple in terms of general sales as consumers are spending more dollars at Apple stores in 2010 than any other year. Also, Q4 tends to be the best quarter for peripherals, and so a model projecting a slight jump in revenues in Q4 is warranted here. I’m modeling for $480 million in Q3 and $520 million in Q4 - a slight sequential gain in Q3 and a seasonal jump in Q4, which is consistent with each of the 3 previous years. The chart below outlines Peripherals revenue from 2007 to 2010. Notice that Q3 and Q4 are just mere estimates and actual results may vary significantly.
7. Software Revenue
Software revenue tends to have its seasonally best quarter in Q4 when Apple isn’t releasing new versions of its operating system. The last 3-quarter have seen relatively flat sequential growth though posting close to record numbers every quarter. I’m expecting more flat growth in Q3 and a slight bump in Q4, which is commensurate with the current sequential and seasonal trend for software sales revenue. The chart below outlines Apple’s quarterly Software revenue from 2007 to 2010. Notice that Q3 and Q4 are only projections and that actual results may vary markedly.
Finally, the two charts below outline Apple’s revenue growth from 2007 to 2010 as well as the year over year quarterly growth rate in percentages. Please note that Q3 and Q4 of 2010 are projections, and that actual results may differ I’ll be sure to revisit Q4 once the quarter is upon us, and once we get some initial data that might give me a better picture of Apple’s Q4. But I think the projections made above are a fairly stated picture based on the seasonal patterns of consumer behavior. For those who are interested, I’ll be doing a far more in-depth look at Apple’s financials in a book I’m writing over the summer.
Disclosure: At the time of this writing, the author holds no position in the equity markets. The information contained in this blog is not to be taken as either an investment or trading recommendation, and serious traders or investors should consult with their own professional financial advisors before acting on any thoughts expressed in this publication.
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