Apple: Earnings Look Ahead – Part 1
Malcolm is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One thing is clear, Apple (NASDAQ: AAPL) is headed for another record quarter. Sales of its iDevices are leading once again as the holiday season charges out of the Black Friday/Cyber Monday gate. (See: The iPhone is back on top.) So the question is not “will it be good?” but rather “how good?”
It’s never too early to look ahead to earnings reports. After all, the analysts are updating regularly. So why shouldn’t we? Besides, what is the point of making predictions after the quarter is over? Anyone can do that. The trick is to do it before all the sales are done.
One advantage of Apple is that with their limited product lines, you can look at each one individually, project a sales figure and average selling price (ASP), then add up the results and you have a gross sales figure. From there I will select a gross margin and net margin. Applying these, we will get net income.
- Note: The complete tables of historic data appear in companion data article. All tables and charts run on Apple’s fiscal year (Oct 1 – Sept 30).
So, the first thing to do is to estimate the sales figures for:
We start with figures from last year – Q1 2012.
But first let’s look at my methodology.
Nothing magical about it. I look at historical data, particularly the numbers for the previous quarter and the year ago quarter. Importantly, I look at the trend lines for growth and try to put this quarter’s numbers into a reasonable extension thereof.
I like to use the iPod growth curve as an example of what to expect. Here is a product that has reached a mature stage. The first chart gives a picture of sales over the years. My assumption is that the iPhone and iPad life cycles will follow a similar pattern – steep growth followed by a gradual leveling off.
Two very important things to note:
- The iPhone and iPad have both gotten off to starts of such rapid ramping that I expect the curves to be somewhat compressed in time. That is to say, they will reach their respective peaks in less time than did the iPod.
- We need to be very careful about drawing too strong a parallel with the iPod sales, specifically regarding its decline over the last few years. The introduction of the iPhone, which includes the iPod functionality, essentially stole sales from its older sibling. I do not expect to see this happen with the iPhone and iPad.
Chart 2 gives the growth for all three iDevices. I think that we can see that the latter two are still in rapid growth. For this reason, I will project the current quarter more or less inline with past growth. I will discuss the adjustments and justifications for each in the corresponding sections below.
(Charts by the author)
1 - Macs
This was pretty simple. Last year, units grew 26%, but this year the industry is hurting, with overall industry PC growth negative. Macs, however, have seen continued growth, although a lot slower than before. I just took the previous year and added 10%, then reduced for the fact that the brand new iMacs will be in very limited supply. These are very popular models, so it should have a real negative effect. I left ASP virtually unchanged from the September quarter.
2 - iPods
The projection here is that the we will see a similar drop in unit sales as last year, but the higher price of the new iPod Touch will add a bit to the ASP. The new Touch might have added units, but I think the iPad Mini will cannibalize some sales as users see a small price increase will bring them a much larger screen.
3 – iPhones
This presented a more difficult decision. Growth has averaged 201% year over year, and 129% Q1 over previous Q4. More importantly, last year’s Q1 over previous Q4 was 217% reflecting the fact that users deferred purchases in the September 2011 quarter in anticipation of the introduction of the new 4s model. The identical pattern occurred in the last quarter of this year, and sales have of the new iPhone 5 have been very strong – back ordered until just this week.
Analysis: It has been noted that 62% of iPhone 5 sales have been to existing customers. Obviously these buyers will hesitate to upgrade just before a new model is available. Additionally, they are likely to be very savvy of the upgrade cycle. Therefore, it seems highly likely that the pattern is repeating itself.
In fact, one would expect the effect to be even great this year than last:
- There are even more current iPhone owners than before.
- The drop in sales for FQ4 was even greater than last year.
That said, the question is to what extent? Or, where are we in the adoption curve? Is it really possible for Apple to double sales of the iPhone once again?
I should note, that this was a question that was asked repeatedly in the past regarding the iPod, yet from 2003 through 2007, the average FQ1 yoy increase in sales was an astounding 318%. The figure for the iPhone, since initial release, has been 201%.
We do know a few things:
- The historic growth
- It will be available in China next month
- Apple knows all this as well – so they have been planning for it
- The iPhone 5 has met with great sales
All these indicate that we should be working with figures in the same range as earlier.
Note: recent reports of supply issues could affect this negatively. However, the fact that now the supply has caught up with demand indicates that this should not be a limiting factor.
So, I went through some trial numbers, beginning with some analysts indicating that 50 million units is possible. You can see my worksheet.
I thought I would keep in mind that we may be approaching a top in the sales curve. This will still take some time as smartphone sales worldwide are still growing. Yet it would not be unreasonable to think that it may be beginning.
In the end, I have decided to go with the aggressive figure of 56 million. This would represent the slowest growth rate so far, and the Q1/Q4 ration is slightly below last year’s. This gives the following figures.
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