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 below for enlarged images.
Q4 2010 Revenue Estimates for Apple, Inc.
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%)
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 pricy 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
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
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.
2008 is also 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.
4. iPad Unit Sales, ASP and Revenue Estimates for Q4 2010
5. iTunes: Other Music Related Products & Services Revenue
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.
6. Peripherals Revenue
7. Software Revenue
Looking at Apple’s Total Revenue Growth from 2007 to 2010
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.