Forecasting this Quarter’s “Story”

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    Posted: 03 April 2012 04:09 AM

    Two quarters ago the earnings-release headline was “Apple ‘missed’ because they delayed releasing the iPhone.”

    Last quarter the story was “37 Million iPhones sold, MONSTER RECORD PROFITS.”

    What will be the takeaway from this quarter’s earnings release? 

    China 4s launch at the beginning of the quarter bookended by the new iPad launch at the tail end?

    Or could the big story center on how the Independent Analysts once again got too far ahead of Apple’s generally predictable guidance sandbag? 

    (I hope not).

    Reading and then digesting for 24 hours a post on the PED site penned by the venerable Falkirk, I’m thinking the big story this quarter will center on the profits generated by the new iPad.

    I love Falkirk’s “Iceberg” quotation.

    **************
    Falkirk via PED: “I’m focused on the iPad numbers. A year ago in the first fiscal quarter, Apple had terrible (for Apple) tablet sales both because customers delayed purchases in anticipation of the iPad 2 and because Apple couldn’t get the production of the iPad 2 up to speed fast enough.

    This year, Apple signaled that they were in great shape, supply-wise, by selling the iPad in 10 countries on day one and a whopping 25 more countries just a week later. And despite record sales on the debut weekend and unprecedented early distribution opportunities, there appear to be no iPad shortages.

    This can mean one of two things:

    - Demand has dropped; or
    - Apple has managed to radically increase their supply of iPads.

    If it’s the former, I’m only worried for this quarter. I’m quite confident that tablets are trending, that Apple is riding the crest of that trend and that Apple is going to sell of ton of iPads this year.

    If it’s the latter…wow. Look out. If 3 million iPads in 3 days was just the tip of the iceberg, then that’s going to be one damn big iceberg.

    If iPad sales meet or match expectations, that means that demand is rapidly growing, that Apple has found a way to supply that demand, and that the star that is the iPad is about to go supernova.”

    **************

    I think the big story will be TC’s BIG BET and BIG PAYOFF from iPad production/sales.

    So, we’ve got about three weeks until we see the numbers… What headline do you think will dominate this earnings release?

    Perhaps more importantly, why are our earnings’ forecasts coming in 47% higher than Apple’s EPS guidance of 8.5?  Are we missing something? Or did Apple guide lower than usual for some reason?

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    Posted: 03 April 2012 04:25 AM #1

    Well you have asked all the right questions… The answers remain in the actuals..  GM will be a big story in my opinion..  The story will be the fact that GM held steady above 44% even with a major product launch and retooling.  This was maintained by the overwhelming success of the 4s…

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    Posted: 03 April 2012 05:08 AM #2

    There’s some uncertainties.  You can’t ignore Apple’s lower guidance entirely, even as you (well, many of us anyway) craft guidance “tabula rasa”, or without any regard for Oppenheimer’s guidance aside from adjusting up from guided GM, and working from tax rate, OpEx, and OI&E.

    I should make a point to re-listen to the CC just to make sure I haven’t overlooked any clues.

    FalKirk was being partly rhetorical on the supply of iPads, I think.  I suspect he was thinking, as many of us active on AFB are, that Apple has built up a HUGE supply of iPads to satisfy demand in the early stages of the new iPad launch.  For me the only question is to what extent Apple, by March 31, was able to catch up with shipping backordered iPads from China, and to what extent various customers picked up iPads/switched their orders for pickup direct from Apple Stores or other retail partners, where supply seemed fairly plentiful.  (But not so much for in-store pickup depending on model - check out the iPad in-store pickup “widget”, it gets you a decent read on iPad model popularity).

    I think Apple may have sold as many as 10 million iPads in the 15 days after the new iPad launched.  Who knows.  But it’s not iPad driving the earnings bus this quarter, it’s iPhone.

    Therein lies the greatest uncertainly, of course.  Supply is not a problem any longer - hasn’t been at all in fiscal Q2 far as I can remember.  Instead there’s lingering doubts - I actually think somewhat legitimate ones - about the extent of iPhone 4S’s popularity.  I mean, more than likely it’ll sell very, very well, over 30 million units, people dig the faster processor and Siri (I love using Siri for reminders and setting alarms/timers when it works, for example).  But as with all products with “episodic” demand (to borrow a phrase from Cramer the other day) which ALSO increases each generation, you can’t possibly guess _exactly_ how popular the 4S will remain throughout its lifecycle.  The smartphone market is maturing somewhat which complicates matters a little.  I personally think a sequential increase in iPhone sales is possible, my estimate accounts for slower YOY growth but is still at 38.1-ish million units, yet there’s always gonna be some “leap of faith” built into what is essentially an educated guess. 

    A good iPhone number (let’s say 35-36M+) will relieve a lot of investor/analyst anxiety, and a great iPhone number (sequential increase) will have people thinking back to the sales trends of iPhone 4’s run, at least through July.

    [ Edited: 03 April 2012 05:12 AM by Mav ]

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    Posted: 03 April 2012 05:48 AM #3

    Mav - 03 April 2012 08:08 AM

    There’s some uncertainties.  You can’t ignore Apple’s lower guidance entirely,...
    (...)
    But it’s not iPad driving the earnings bus this quarter, it’s iPhone.
    (...)
    A good iPhone number (let’s say 35-36M+) will relieve a lot of investor/analyst anxiety, and a great iPhone number (sequential increase) will have people thinking back to the sales trends of iPhone 4’s run, at least through July.

    These are some very good points, Mav, and they resemble my thinking about Q2 (see also here). I personally think that the iPhone number will be substantially lower than in Q1, probably around 32-33 million.

    When Apple guided to USD 32.5 billion revenues (4.5 billion less than guidance for Q1), they did this with all the information they had on January 24th. So what did they know and what did they not know?

    Known information:
    - Over three weeks of Q2 sales for all countries where the 4S was launched in 2011
    - 10 days of 4S sales in China (which includes the Chinese New Year on Jan. 23rd)
    - The timing of the new iPad launch (including the number of countries)
    - Supply capacity for the new iPad
    - Decrease in demand for iPad2 1.5 months before new iPad

    Unknown information:
    - Timing of 4S launch on China Telecom (might have also been known to TC)
    - Ongoing demand for iPhone 4S
    - Decrease in demand for iPad2 during the last 6 weeks before new iPad launch
    - Demand for the new iPad

    Please feel free to add…

    [ Edited: 03 April 2012 07:04 AM by Big Al ]

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  • Posted: 03 April 2012 07:37 AM #4

    I’ve always thought (without proof) that part of Apple’s low guidance was not including revenue for products that hadn’t shipped yet. So that would be iPad 3 revenues for this quarter (the product might have slipped to the next quarter). Quite significant this time (usually, the product transition is nearer to end of quarter and limited to one or two countries at first).

         
  • Posted: 03 April 2012 08:50 AM #5

    sleepygeek - 03 April 2012 10:37 AM

    I’ve always thought (without proof) that part of Apple’s low guidance was not including revenue for products that hadn’t shipped yet. So that would be iPad 3 revenues for this quarter (the product might have slipped to the next quarter). Quite significant this time (usually, the product transition is nearer to end of quarter and limited to one or two countries at first).

    Part of me thinks the same thing. The margin guidance was too high and the revenue guidance too low.  Something seemed off, and I think leaving out the new iPad would line up better with their guidance.  The only reasoning I can think of as to why they’d do this was because of how bad supply of the iPad 2 was during its launch quarter.

         
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    Posted: 04 April 2012 02:30 PM #6

    mcharliem - 03 April 2012 11:50 AM
    sleepygeek - 03 April 2012 10:37 AM

    I’ve always thought (without proof) that part of Apple’s low guidance was not including revenue for products that hadn’t shipped yet. So that would be iPad 3 revenues for this quarter (the product might have slipped to the next quarter). Quite significant this time (usually, the product transition is nearer to end of quarter and limited to one or two countries at first).

    Part of me thinks the same thing. The margin guidance was too high and the revenue guidance too low.  Something seemed off, and I think leaving out the new iPad would line up better with their guidance.  The only reasoning I can think of as to why they’d do this was because of how bad supply of the iPad 2 was during its launch quarter.

    Would be interesting to clear this up. Does anyone else think or even know whether Apple includes new product launches in its revenue guidance or not?

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  • Posted: 04 April 2012 03:10 PM #7

    I think the board needs to have a defence if a shareholder lawsuit got serious. So they must have a fixed methodology for guidance, and they must make a public statement if they change the methodology. When challenged “you misled us” they need to be able to show that deviation from guidance was not their fault. So the methodology IMO cannot include explicit “sandbagging”, because that is misleading in itself. (Guiding low of course makes it harder for shareholder lawsuits to show consequential loss).

    At the very least, it is obvious that Apple has historically made product transitions near the end of a quarter, so that there is no influence on prior quarter figures and no early disclosure to competitors of sales run rates. If they don’t sandbag, then they must be excluding quite few revenues.

         
  • Posted: 04 April 2012 03:22 PM #8

    I’m hoping that this quarter’s story is that iPad and iPhone are in the rapid growth part of the adoption S-curve, where margins hold up, and volumes grow rapidly. So I’m hoping volumes will be unexpectedly high for both iPhone and iPad, and margins rock solid. Hence the market will love AAPL better than it has, and better than it will. The new trust in Apple will receive solid reinforcement.

         
  • Posted: 04 April 2012 03:32 PM #9

    No volume out there today

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    Posted: 04 April 2012 04:13 PM #10

    Y’know, I could care less about volume.  If anything volume has been high all year (as far as massively skewing the avg volumes)

    Dan Fitz showed how low-volume periods were more or less canards.  I try to understand technicals but fundamentals always trump them long-term IMHO, subject to market conditions.

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    Posted: 04 April 2012 05:31 PM #11

    sleepygeek - 04 April 2012 06:10 PM

    I think the board needs to have a defence if a shareholder lawsuit got serious. So they must have a fixed methodology for guidance, and they must make a public statement if they change the methodology. When challenged “you misled us” they need to be able to show that deviation from guidance was not their fault. So the methodology IMO cannot include explicit “sandbagging”, because that is misleading in itself. (Guiding low of course makes it harder for shareholder lawsuits to show consequential loss).

    At the very least, it is obvious that Apple has historically made product transitions near the end of a quarter, so that there is no influence on prior quarter figures and no early disclosure to competitors of sales run rates. If they don’t sandbag, then they must be excluding quite few revenues.

    That sounds plausible. However, that would mean that when Apple gives guidance on a quarter with a product transition without including the sales of the new product, they would underestimate the revenues for that quarter. Let’s look at some of the quarters with product transitions.

    Q3 2009: iPhone 3GS
    Q3 2010: iPhone 4, iPad (went on sale in Q3 before Q2 earnings call, so should have been included in guidance for Q3)
    Q2 2011: iPad2
    Q1 2012: iPhone 4S (went on sale in Q1 before Q4 earnings call, so should have been included in guidance for Q1)

    Now let’s compare it with the revenue guidance and actual numbers:

    Quarter Ending Guidance Actual Beat
    2009 Q3   Jun.09   7,800   8,340   6.9%
    2009 Q4   Sep.09   8,800   9,870   12.2%
    2010 Q1   Dec.09   11,500   15,683   36.4%
    2010 Q2   Mar.10   11,400   13,499   18.4%
    2010 Q3   Jun.10   13,400   15,700   17.2%
    2010 Q4   Sep.10   18,000   20,343   13.0%
    2011 Q1   Dec.10   23,000   26,741   16.3%
    2011 Q2   Mar.11   22,000   24,733   12.4%
    2011 Q3   Jun.11   23,000   28,571   24.2%
    2011 Q4   Sep.11   25,000   28,270   13.1%
    2012 Q1   Dec.11   37,000   46,330   25.2%

    Of the four quarters with new products available for sale, the two in which (at least one of) the products were announced before guiding for the next quarter were quarters where Apple beat its revenue guidance above average. The two other quarters (in which the new products have not been announced before guiding for the next quarter) Apple beat its revenue guidance below average. That leads me to the conclusion that Apple either overestimated the revenue potential for the two quarters (2009 Q3 & 2011 Q3) or underestimated the number of people that would hold back sales until the new product goes on sale (let’s call it the “4S effect”).

    [ Edited: 04 April 2012 05:58 PM by Big Al ]

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  • Posted: 06 April 2012 05:00 AM #12

    I believe this quarter’s story will be that Apple sold more iPhone units than during the Christmas quarter, I think around 38m units. Even if sales come in just below last quarter’s number, they will still have sold more iPhones per week than last quarter (13 vs. 14 weeks).

         
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    Posted: 06 April 2012 05:38 AM #13

    YangFeng - 06 April 2012 08:00 AM

    I believe this quarter’s story will be that Apple sold more iPhone units than during the Christmas quarter, I think around 38m units. Even if sales come in just below last quarter’s number, they will still have sold more iPhones per week than last quarter (13 vs. 14 weeks).

    It would be interesting to know how you get to your conclusion. Any observations that would be useful to share here? Or just a feeling?

    Al

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    Posted: 06 April 2012 07:00 AM #14

    YangFeng - 06 April 2012 08:00 AM

    I believe this quarter’s story will be that Apple sold more iPhone units than during the Christmas quarter, I think around 38m units. Even if sales come in just below last quarter’s number, they will still have sold more iPhones per week than last quarter (13 vs. 14 weeks).

    The story will be continued Blockbuster growth year-on-year for both iPhone & iPad - but neither will be sequentially higher than Q1.

    Pros will on average undershoot, independants will on average overshoot.

    Q1 was the “perfect storm” for an iphone sales bonanza:

    1) Launch quarter with an extended amount of pent up demand on existing and new carriers compared to previous years (due to delayed release),
    2) It was also the christmas quarter with a lot of iphones being bought as gifts (at least 10% of sales in my opinion),
    3) The 14 week of extra sales - an extra week that TC himself said is a bigger week than normal.

    Q2 had an increased amount of carriers, and a full quarter of sales for existing carriers that received the iPhone 4S later through quarter 1 who have now had a full quarter to sell. However I think that increased distribution will not be enough to drive sales higher than Q1’s “perfect storm”.

    I’m at 33 million iphones for Q2, and I think that is a terrific amount of sales! I would love to be wrong and have iPhone sales 37 million+, but I think wall street will be most happy with any number above 31 million.

    iPad?

    Hard to tell, apple has been amazing at keeping stores with ample supply, but very shabby with filling orders online - I know 2 people that ordered their ipad from apple online on launch day here (March 23rd), and both of them were finally billed for, and received their units this week - those sales won’t be included in Q2 results - I wonder how many more were like that around the world. I’m at 13.5 million iPads for Q2.

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  • Posted: 06 April 2012 01:13 PM #15

    sleepygeek - 04 April 2012 06:10 PM

    I think the board needs to have a defence if a shareholder lawsuit got serious. So they must have a fixed methodology for guidance, and they must make a public statement if they change the methodology. When challenged “you misled us” they need to be able to show that deviation from guidance was not their fault. So the methodology IMO cannot include explicit “sandbagging”, because that is misleading in itself.

    Thank you Sleepy. That Apple has a determinable “methodology” for the guidance they provide, is key to my success this year. It worked very well for me prior to 2011 as well. My problem during 2011 was not fully comprehending that others would react negatively when the methodology did not seem to work.

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