Apple's Results Not As Positive As They Appear

| About: Apple Inc. (AAPL)

Summary

A 14-week quarter and an earlier iPhone launch in many markets masks weakness for the new iPhone cycle.

Harsh decline for iPad.

Mac units down 9% for the year might be indicating a new trend.

We take a look at Apple's (NASDAQ:AAPL) fiscal first quarter and leave the purchasing decision to you. The market sees the recent results as positive, however, we can't quite agree. Beating expectations is not the same as good results. The iPhone, iPad and the Mac are displaying weakness.

iPhone

On a 13-week basis and adjusted for channel inventory, the picture becomes clearer. Flat on year and slightly down compared to calendar Q4 2014.

iPhone Units in Millions

Fiscal Q1 2015

Fiscal Q1 2016

Fiscal Q1 2017*

Units Shipped

74.468

74.779

78.290

Sequential Inventory Variation

(0.2)

3.3

1.2

Sell-Through

74.268

71.479

77.090

13 Weeks of Sales

74.268

71.479

71.563

On Year Variation in % for 13 Weeks of Sales

--

(3.755)%

0.117%

*Fiscal Q1 equals calendar Q4

If we look at the difference in launch timing between the last two years, as well as the number of days of sales during the quarter in such markets, we should be able to better understand the situation.

Market

Date of Availability in 2015

Date of Availability in 2016

Days of Sales in FQ1 2016

Days of Sales in FQ1 2017

FQ1 2017 Number of Days in % on Year

Austria, Belgium, Denmark, Finland, Ireland, Italy, Luxembourg, Mexico, Norway, Netherlands, Portugal, Spain, Sweden, Switzerland, Taiwan

Oct 9

Sept 16

79

98

124.05%

Andorra, Bosnia, Bulgaria, Croatia, Czech Republic, Estonia, Greece, Greenland, Hungary, Iceland, Isle of Man, Latvia, Liechtenstein, Lithuania, Maldives, Monaco, Poland, Romania, Russia, Slovakia, Slovenia

Oct 9

Sept 23

79

98

124.05%

Bahrain, Kuwait, Qatar, Saudi Arabia,

Oct 10

Sept 23

78

98

125.64%

India

Oct 16

Oct 7

72

86

119.44%

This is how Apple achieved solid growth in certain markets, a 14-week quarter and an earlier launch in second and third tier markets can have a misleading effect.

iPhone Units in Millions

Calendar Q1 2014

Calendar Q4 2015

Calendar Q4 2016

Calendar Q4 2016 Normalized for Timing Differences

13 Weeks of Sales

74.268

71.479

71.563

68.5

On Year Variation in % for 13 Weeks Sales

--

(3.755)%

0.117%

(4.17)%

The earlier launch should seriously impact the following two quarters as demand slows down sooner.

iPad

The iPad had the weakest FYQ1 in both units and revenue since launch year in 2010, even if we don't deduct the extra week.

iPad

CQ4 2010

CQ4 2011

CQ4 2012

CQ4 2013

CQ4 2014

CQ4 2015

CQ4 2016

Units

7.331

15.434

22.86

26.035

21.419

16.122

13.081

Revenue

4.37

8.769

10.674

11.468

8.985

7.084

5.533

ASP

596

568

467

440.5

419.5

439.4

423

Apple has argued that in 2015, the iPad Pro 12.9 inch launched during the quarter. However, retail availability was November 11 and Apple had mild shortages during the quarter. The iPad Pro 9.7 inch that retails from $599 and up, started shipping on March 31. Given all that, both units and especially ASPs were weak.

Apple needs a major refresh, across the board, as soon as possible. The latest rumors are suggesting some new models this spring but major updates only arriving later this year.

Mac

Remarkable ASP on demand for the new MacBook Pro, less remarkable in units when considering the extra week, but Apple had some shortages for the new MacBook Pro. The new MacBook Pro offers very little computing per dollar while starting at an extremely high ASP and can't drive sales in the long run. There is good initial demand but it won't last.

In calendar 2016, Mac unit shipments were down 9% on year, showing unprecedented weakness. This weakness must be closely observed as it is likely, at least in part, due to the 12.9 inch iPad Pro. It could also accelerate.

Keep an eye out for new MacBooks and new price points. Apple has already lifted the entry price for the MacBook from $899 to $999, likely in an attempt to aid sales of the iPad Pro 12.9 inch and it might try to adjust MacBook pricing further, while also introducing a refreshed iPad Pro 12.9 inch.

iPad Pro 9.7 w/ Keyboard

iPad Pro 12.9 w/ Keyboard

MacBook Air

MacBook

MacBook Pro

$748

$968

$999

$1299

$1499

The arrival of a new 12.9 inch iPad Pro would likely lead to a reduction in price for the first generation model, filling the gap between the 9.7 inch and 12.9 iPad Pro. The MacBook Air could be canceled and replaced by a $1,099 MacBook. Such a move might appear reasonable, but it is good business only if iPad units and ASPs see an increase. By trying to merge the two product lines and turn the iPad into a PC, Apple has one less key product category that its customers can purchase.

Calendar 2012

Calendar 2013

Calendar 2014

Calendar 2015

Calendar 2016

Revenue

54,990

55,133

52.428

46,599

40,536

Units

82.757

91.325

82.949

69.939

61.095

Mac plus iPad revenues and units in millions

Services and All Other

Services did well and Apple will have good margins here as long as the user base doesn't start to decline. Apple Music has provided some upside in 2016, but Services revenue fully depends on the install base.

Calendar 2013

Calendar 2014

Calendar 2015

Calendar 2016

Services Revenue

16,761

18,465

21,166

25,464

Devices* Shipped in the Latest 3 Years

614.764

733.458

816.585

848.617

Services Revenue per Device

27.27

25.17

25.92

30.00

*Mac, iPad and iPhone in million units

In the All Other segment, the AirPods' delay harmed the quarter but will boost calendar Q1. For now, Apple has severe shortages; hopefully, it is because of great demand and not production issues.

Apple Watch sales were boosted by the second generation product, seasonality, price cuts and promotions as well as a required increase in channel inventory. The current quarter will see Watch sales returning to the normal pattern. iPhone and iPad accessories will track with units sales

Outlook

With the midpoint at $52.5 billion, it is 2 billion more than last year.

AirPods, Services and MacBook Pro are gains on year while iPhone and iPad will be down on year.

Apple might be factoring in some revenue from yet to be launched products and counting on shipping about 48 million iPhones, excluding channel inventory.

Takeaway

A soft quarter if you add context and there are dangers ahead on a weak iPhone cycle. Apple continues the decline that has defined the post iPhone 6 era. The addition of the iPad Pro models has failed to slow down the segment's decline or boost ASPs, while the Mac segment appears to have peaked.

However, most investors are somewhat aware of Apple's weaknesses, and today the mood is positive while the expectations for the iPhone 8 are very high. Apple is likely to trend up ahead of the launch, with some likely dips on results. New product launches, a likely increase in cash returns to shareholders and maybe even cash repatriation should provide additional upside.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Personal Computers, Earnings
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