Apple: Earnings Look Ahead – Part 2

Malcolm is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

This continues the discussion of projected earning for Apple (NASDAQ: AAPL) fiscal Q1 2013 from here.

  • Note: The complete tables of historic data appear in companion data article. The tables and charts run on Apple’s fiscal year (Oct 1 – Sept 30).

 Having previously covered Macs, iPods, and iPhones, we'll move on to...

4 – iPads

This is another tricky one with the introduction of the iPad Mini on October 23. This splits the iPad category into two parts for the first time, and the two segments are very important as the price differential is large.

So, now we not only have to project iPad sales, but the Mini raises the following questions:

  1. What are base iPad 4 sales?
  2. What are Mini sales?
  3. To what extent does the Mini cannibalize the grande?

>> By “base sales” I mean what they would have been without the Mini.

Let’s start with #1 – projected sales of the new iPad with Retina Display (iPad 4). Here is my worksheet for this issue.

<img src="/media/images/user_13421/apple_ipad_q1-12_large.png" />
 

Factors to consider:

  1. Previous year showed 201% yoy growth and 138% sequential growth.
  2. FQ4 2012 over 2011 growth was only +26%, very low.
  3. The iPad 4 is brand new – should add growth factor.
  4. iPad 4 (wifi only) becomes available in China 7 Dec.
  5. iPad 4 is currently in stock at Apple store (not back ordered).
  6. Other tablets are entering the market in competition with iPad.
  7. Tablet market is growing >> One report says to 500 M units by 2015, @ 50%/year
  8. The first three days of sale for iPads 4 & Mini sold a record 3M
  9. Cyber-Monday data show iDevices top search lists.

Personally, I do not think that we are far enough into the adoption curve for there to be a very large attenuation of growth. (Remember, I am pretending here that there is no iPad Mini.) Still, the depressed growth in Q4 2012, indicates this may be happening.

I will therefore go with the more conservative 24 million “base” sales for the quarter. This represents a serious slowing of yoy growth to +57%.

Question #2 – Mini sales

The question here appears to be: How many can Apple make? Factors:

  1. All models show 2 week delay in availability in Apple store.
  2. There are reports of production delays in the screen which uses a new technology.
  3. Sales of iPad Mini + iPad 4 were 3 million in first 3 days (wifi only minis)

I think Apple knew well that there would be a great demand for the Mini and prepared for it (with the exception of screen issues). Therefore, I am going with a sales figure of 10 million iPad Minis.

Question #3 – Cannibalization Rate

The studies that have been made on cannibalization rates – some saying low, others high - have all had their flaws. The logic they use to move from data to conclusion is inconclusive in my mind.

Clearly, many people will opt to go for a lower priced tablet than for the iPad 4. It seems to me that these would be in different groups. There are those who would not have bought the iPad 4 because it is too expensive or they do not like the size, but now are going for the Mini. There are those who will opt for the Mini because of price, or because they can upgrade to an LTE version for the price (more or less) of the Wifi only iPad 4. This is cannibalization of the larger model.

I will estimate that 40% of Mini buyers would have bought the iPad 4 if the Mini were not available. I think this is overstating the factor, but will be conservative here in terms of overall sales. That would mean we need to subtract 4 million units from the previous iPad figure, leaving an estimate of 20 million large-format iPads (includes older models).

However, Most of the cannibalization will come at the expense of the lowest priced iPads, and so I am raising the ASP for that category somewhat.

Together, these total 31 million iPads for the quarter. This is a 196%/214% increase in year-over-year and Q1/Q4 numbers. This number seems extraordinary. Yet to me, it seems quite reasonable, given the entrance of the Mini, which essentially opens a new market.

<table> <tbody> <tr> <td> <p><strong><span>iPads</span></strong></p> </td> <td> <p>Units</p> <p>(millions)</p> </td> <td> <p>ASP</p> </td> <td> <p>Revenue</p> <p>(millions $)</p> </td> <td> <p>yoy</p> <p>units</p> </td> <td> <p>yoy</p> <p>revenue</p> </td> </tr> <tr> <td> <p>Q1 2012:</p> </td> <td> <p>15.4</p> </td> <td> <p>593</p> </td> <td> <p>9,153</p> </td> <td> <p>+111%</p> </td> <td> <p>+99%</p> </td> </tr> <tr> <td> <p>Projection iPad 4:</p> </td> <td> <p>20.0</p> </td> <td> <p>610</p> </td> <td> <p>12,200</p> </td> <td> <p>+30</p> </td> <td> <p>+33%</p> </td> </tr> <tr> <td> <p>Projection Mini:</p> </td> <td> <p>10.0</p> </td> <td> <p>390</p> </td> <td> <p>3,900</p> </td> <td> <p>-</p> </td> <td> <p>-</p> </td> </tr> <tr> <td> <p>Total:</p> </td> <td> <p>30.0</p> </td> <td> <p>         536</p> </td> <td> <p>16,100</p> </td> <td> <p>-</p> </td> <td> <p>-</p> </td> </tr> </tbody> </table>

5 - Others

The others category contains a few of items of revenue. For these I just rounded up as the amounts are not large.

<table> <tbody> <tr> <td> <p>Category</p> </td> <td> <p>Revenue</p> </td> </tr> <tr> <td> <p>Other Music Related Products / Services</p> </td> <td> <p>2,200</p> </td> </tr> <tr> <td> <p>Peripherals and Other Hardware</p> </td> <td> <p>800</p> </td> </tr> <tr> <td> <p>Software, Service and Other Sales</p> </td> <td> <p>900</p> </td> </tr> </tbody> </table>

Total Revenue

The total revenue is summarized in the table below. It contains the income from each of the units discussed in the previous sections. The projection for total revenue comes to $65,606.

<table> <tbody> <tr> <td colspan="4"> <p><strong>Apple Inc.</strong></p> <p><strong>Q1 2012 <em>ESTIMATED Summary Data</em></strong></p> </td> </tr> <tr> <td> <p><span> </span></p> </td> <td> <p><span>Units</span></p> </td> <td> <p><span>Revenue</span></p> </td> <td> <p><span>ASP</span> ($)<span></span></p> </td> </tr> <tr> <td> <p><span> </span></p> </td> <td colspan="3"> <p>(Units in thousands, Revenue in millions)</p> </td> </tr> <tr> <td> <p>Subtotal Mac</p> </td> <td> <p>5,600</p> </td> <td> <p>7,840</p> </td> <td> <p>1,400</p> </td> </tr> <tr> <td> <p>iPod</p> </td> <td> <p>12,300</p> </td> <td> <p>                  2,091</p> </td> <td> <p>170</p> </td> </tr> <tr> <td> <p>Other Music Related Products / Services</p> </td> <td> <p> </p> </td> <td> <p>2,200</p> </td> <td> <p> </p> </td> </tr> <tr> <td> <p><strong>iPhone</strong> + Related Products / Services</p> </td> <td> <p>56,000</p> </td> <td> <p>36,400</p> </td> <td> <p>650</p> </td> </tr> <tr> <td> <p><strong>iPad 10”</strong> + Related Products / Services</p> </td> <td> <p>20,000</p> </td> <td> <p>12,200</p> </td> <td> <p>610</p> </td> </tr> <tr> <td> <p><strong>iPad MINI</strong> + Related Products / Services</p> </td> <td> <p>10,000</p> </td> <td> <p>3,900</p> </td> <td> <p>390</p> </td> </tr> <tr> <td> <p>Peripherals and Other Hardware</p> </td> <td> <p> </p> </td> <td> <p>800</p> </td> <td> <p> </p> </td> </tr> <tr> <td> <p>Software, Service and Other Sales</p> </td> <td> <p> </p> </td> <td> <p>900</p> </td> <td> <p> </p> </td> </tr> <tr> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> </tr> <tr> <td> <p><strong>Total</strong></p> </td> <td> <p> </p> </td> <td> <p><strong>$ </strong><strong>66,331</strong><strong></strong></p> </td> <td> <p><strong> </strong></p> </td> </tr> </tbody> </table>

The Bottom Line

The bottom line is shown in the table below. I list the Apple projections, including my figures deduced from their advisory. There is an excellent article on Apple's projections and related topics at "Why Apple Will Beat the Street."

My computations are as follows. We start with the projected total revenue of $64,491 million. We give a gross margin of 41%, a little more generous than the Apple estimate. The net margin has been running 17 points below the gross margin, which gives us 24%. Applying this we get the a net income of $15,478 million. Dividing by the number of shares give the EPS of $16.45.

 

<table> <tbody> <tr> <td> <p><strong> Metric</strong></p> </td> <td> <p><strong>FQ1 2012</strong></p> </td> <td> <p><strong>FQ1 2011</strong></p> </td> <td> <p><strong>FQ1 2013</strong></p> <p><strong>Apple Projection</strong></p> </td> <td> <p><strong>FQ1 2013</strong></p> <p><strong>My Estimate</strong></p> </td> </tr> <tr> <td> <p>Net sales</p> </td> <td> <p>46,333</p> </td> <td> <p>26,741</p> </td> <td> <p><strong>52,000</strong></p> </td> <td> <p><strong>$66,311</strong></p> </td> </tr> <tr> <td> <p>Cost of sales</p> </td> <td> <p>25,630</p> </td> <td> <p>16,433</p> </td> <td> <p><em>32,240</em></p> </td> <td> <p>39,123</p> </td> </tr> <tr> <td> <p>Gross margin</p> </td> <td> <p>20,703</p> </td> <td> <p>10,298</p> </td> <td> <p><em>19,760</em></p> </td> <td> <p>27,188</p> </td> </tr> <tr> <td> <p>Gross margin %</p> </td> <td> <p>45%</p> </td> <td> <p>39%</p> </td> <td> <p>38%</p> </td> <td> <p>41%</p> </td> </tr> <tr> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p><em> </em></p> </td> <td> <p> </p> </td> </tr> <tr> <td> <p>Net Margin %</p> </td> <td> <p>28%</p> </td> <td> <p>22%</p> </td> <td> <p><em>21%</em></p> </td> <td> <p>24%</p> </td> </tr> <tr> <td> <p>Net Income</p> </td> <td> <p>13,064</p> </td> <td> <p>6,004</p> </td> <td> <p><em>11,053</em></p> </td> <td> <p>15,915</p> </td> </tr> <tr> <td> <p> EPS</p> </td> <td> <p> $13.87</p> </td> <td> <p> $6.43</p> </td> <td> <p> <strong>$11.75</strong></p> </td> <td> <p> <strong>$16.92</strong></p> </td> </tr> </tbody> </table>

Shares Outstanding (FQ4-2012): 940.69 million
Note: Apple Projection: Bold = from Apple, Italics = calculated (based on share count)

FQ4: Peter Oppenheimer, Apple’s CFO. “Looking ahead to the first fiscal quarter of 2013, we expect revenue of about $52 billion and diluted earnings per share of about $11.75.” 

Conclusion

The numbers give a projected EPS of $16.92, a figure well above Apple’s estimate. But Apple is notorious for its low estimates. My figure is only 22% over the year-ago quarter. Given Apple’s history, this seems to be a rather reasonable number.

 <<Part 1>>

Let me know what you think.

Related Article: Apple Physics: What goes down, must go up.

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Malcolm Manness has a Masters degree in Computer Science, and worked for 14 years in development, technical publications and software quality assurance. He has been investing for 20 years. Currently, he does writing, and FileMaker Pro programming on contract.

His short fiction can be found (under pseudonym J. Seunnasepp) at http://50centflash.com/.


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