$34B + $8.68 EPS = ?  Deciphering the Oppenheimer Code for fiscal Q3 2012

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    Posted: 26 April 2012 09:49 PM

    (Part 3 in a quarterly series)

    Oppenheimer does an superlative job of keeping everyone guessing, thanks to consistently sandbagged guidance - estimates were all over the map this quarter.

    But at the same time, guidance clearly has value (as a mixture of “useful” and “adjust upward from this” clues), so I’m gonna keep rolling that boulder uphill because there’s something of value waiting for me if I can get to the top, I just know it.  (I actually got quite close to to iPhones and revenues with the first run of last quarter’s exercise, though I was way off on EPS.)

    So, let’s start with the numbers provided by Oppenheimer:

    >> $34B revs, $8.68 EPS

    >> 41.5% GM

    >> OpEx ratio:  9.7% ($3.3B OpEx guidance)

    >> Tax rate:  25.25%

    For simplicity and because it?s practically immaterial now :bugeyed:, I applied a +20% YOY factor to Other Music, Software, Peripherals, and used Oppenheimer?s guided OI&E.

    I then forced the numbers to fit guidance as best as possible in a “plausible” way using reasonable ASP guesses.

    The results:

    >> 25.8M iPhones @ $640 ASP (26.8% YOY growth)
    >> 13.43M iPads @ $565 ASP (45.2% YOY growth) - yes, ASP could be higher but that would drive the iPad number even lower
    >> 4.5M Macs @ $1250 ASP (14% YOY growth)
    >> 6M iPods @ $155 ASP (est. contribution of a whole 3.5% to Apple?s total revenue - remember when?)

    Applying all of Oppenheimer?s profitability metrics, and you get:

    $33.995B revs, $8.21B net income, EPS of just about $8.68 based on 945M shares, net income ratio of 24.15%

    Note - historical share creep trends point to 948-950M diluted shares in fiscal Q3 2012 but I’ll leave it out since it only makes about 1% worth of difference.

    Time to start playing “What’s Wrong With This Picture?”  I’ll be back with some thoughts in a few hours.

    [ Edited: 26 April 2012 09:58 PM by Mav ]

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  • Posted: 26 April 2012 10:13 PM #1

    Is Apple going to make enough new iPads to bring the channel supply up to snuff?

         
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    Posted: 26 April 2012 11:08 PM #2

    I have a spreadsheet standing by to follow up after Mav opens Door #1.

         
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    Posted: 26 April 2012 11:22 PM #3

    Crowdsourcing research more than welcome in this topic. smile

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  • Posted: 26 April 2012 11:38 PM #4

    roni - 27 April 2012 01:13 AM

    Is Apple going to make enough new iPads to bring the channel supply up to snuff?

    TC said in the call he was confident in their ability to restore demand v. supply balance.

         
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    Posted: 27 April 2012 12:54 AM #5

    Grover - 27 April 2012 02:38 AM
    roni - 27 April 2012 01:13 AM

    Is Apple going to make enough new iPads to bring the channel supply up to snuff?

    TC said in the call he was confident in their ability to restore demand v. supply balance.

    The supply balance was about the iPhone. 

    iPad supply is not meeting demand.  But the supply will be nice nonetheless.

    [ Edited: 27 April 2012 02:38 AM by Tetrachloride ]      
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    Posted: 27 April 2012 01:09 AM #6

    EDIT:  Apple is doing its damndest to ramp up, but there are _no_ guarantees of supply/demand balance in the quarter.

    Morningstar earnings transcript: http://www.morningstar.com/earnings/earnings-call-transcript.aspx?t=AAPL&qindex=2

    Last page of Q&A (I checked against the CC, the transcription is basically word-for-word):

    Chris Whitmore - Deutsche Bank: A follow-up if I could on iPad. It is supply constrained across many geos as you talked about is there a specific component issue, do you have visibility on resolution, when do you expect to be able to meet demand in the iPad?

    [Tim Cook, Morningstar misattributed]: It?s hard to answer, meet the demand. What I?m confident about however is that we will be able to supply a significant number of iPads during the quarter, and I feel very, very confident about that. It’s tough to know precisely that it will balance until you get there. But I am very confident with improving supply and that the total number will be very significant.

    [ Edited: 27 April 2012 03:59 AM by Mav ]

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  • Posted: 27 April 2012 03:35 AM #7

    After listened to the CC twice, I feel PO and TC are just trying to smooth out quarterly earnings.
    For Q3, the iphone number will be much lower than 35M, that has been emphasized for many time during CC. Q2 number was great because of the chinese holiday and channel building.
    However, for Q3, iPad number will be much higher, due to improved production.
    With better Q3 Mac sales, I feel the forecast of Q3 8.68 EPS VS Q2 8.5 EPS essentially means that we will see another $12.3 quarter, or maybe slightly lower.

         
  • Posted: 27 April 2012 06:53 AM #8

    the total number will be very significant.

     

                            This is a typically conservative Apple forecast.

         
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    Posted: 27 April 2012 06:59 AM #9

    Turning Oppenheimer’s guidance into something more realistic:

    >> iPhone

    I know what you’re thinking, at least I think I do.  8.6M iPhones in the channel at the end of the March quarter.  Target range of 4-6 weeks of channel inventory.  Is channel inventory just a fractional estimate of total quarterly sales?  I doubt it’d be that easy, but it makes a kind of sense when you consider that Apple generally isn’t in the habit of keeping unsold inventory around any longer than…well…the target range for channel inventory.  Particularly in situations where the product in question is being sold as fast as it’s made.

    Extrapolating from channel inventory just “for fun” (again, I question the usefulness of this exercise but we’ll just go with it) yields an estimated iPhone unit number from 18.63M iPhones (uh, no) to 27.95M iPhones (I’d bet an image of a $50 bill that some WS analysts will be around 28M iPhones for fiscal Q3).

    Let’s start with 27.95M iPhones.  That’s a respectable number, yes.  It’s just that the year-ago compare was 20.34M iPhones and would represent about 37% YOY unit growth.  Last I heard, the smartphone growth rate was still in the 40s% range, and I _know_ that the iPhone 4S will be just a bit more than 8 months old when fiscal Q3 2012 ends in June 30, 2012.  So, iPhone is aging, but not old.  And the somewhat limited data on the “comparable” Q1 >> Q2 periods in FY ‘09-10 doesn’t point to a 20% sequential dropoff in sales. 

    But supply/demand reached balance earlier than ever, unbelievably aggressive international rollout and demand compression, some might say.  But iPhone is “younger” in its life cycle for this time of year and we’re probably not in a transition quarter yet, I reply.  There’s also China (China Telecom QOQ sales are bound to increase, since it only had the iPhone for about 3 weeks in fiscal Q2) and the yet-unquantifable, yet-to-happen Siri in Mandarin/other new supported languages effect, which could help with sales.  But I’m hardly ignoring Oppenheimer’s “expect a sequential decline in iPhone” this time around - I am giving it full respect.

    Let’s be fairly conservative for now, and forecast a 55% YOY growth rate for iPhone’s third quarter (31.52M units).  Sounds high?  Well, lots of 2-year contracts will start ending this quarter, many of which didn’t involve iPhones, which would stem some sequential losses.  International YOY growth should still be fairly robust.  No one really expects Apple to launch or announce a new iPhone less than 9 months after the iPhone 4S.  Blended YOY growth for Q1-Q2 2012 is very high (106% YOY, about 72.1M vs. 34.9M) and even if you attribute a pretty significant 10M of “lost” iPhone sales to fiscal Q4 2011, you still have about 78% blended YOY growth.  Given that, 55% YOY growth for fiscal Q3 doesn’t seem aggressive at all.

    >> iPad

    Whew!  iPad should go easier.  13.43M units.  45% YOY growth, when the tablet market is red-hot, and when the iPad 2 may seriously augment sales.  When YOY growth rates have been 100%+ for several quarters now.  I’m thinking…no.

    Now it _did_ appear to me that the huge iPad launch in mid-March was part “show” in that supply was probably incredibly constrained after that initial burst of sales to the tune of 3M units in 3-4 days.  But iPad seems much more available in Apple Retail Stores this year, from my limited observations (including retail pickup checks via online ordering at apple.com)...to the point that I wonder if Apple should have allocated more supply to the “mail channel” since that really seems like the preferred method of delivery these days.  Anyway, the new iPad launched with all of two weeks to go in the fiscal quarter and ASP hints at a sales pause in the March quarter.  Tim Cook may have multiple vendors at his disposal to assist with Retina Display supply.  Nothing else about the iPad seems outrageously different from a production/sourcing standpoint.  And there was great confidence in this quarter’s CC to tackle the supply/demand inbalance, although there were no guarantees it’d be solved - I mean hey, iPad is probably launching in China this quarter. 

    I think iPad’s fiscal Q3 will be entirely supply-limited.  I think Apple has at least a 100% YOY growth increase in it (I think the new iPad alone could pull it off, but iPad 2 makes it that much easier), so let’s go with about 18.5M iPads.

    >> Mac

    We’re at a 14% YOY base growth assumption for Mac right now.  New MacBooks would definitely cause a demand spike.  iMacs are due for a refresh.  Mac Pros will have maybe one last hurrah, or many pros will settle for iMacs instead.  I’d say a 20% YOY growth rate (4.73M Macs) seems quite reasonable given demand shifting and the possibility of some nice redesigns at least in terms of MacBook Pro.

    (continued)

    [ Edited: 27 April 2012 08:04 AM by Mav ]

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    Posted: 27 April 2012 06:59 AM #10

    >> Profitability Metrics

    Adjusted Revenue
    >> Revised revenue is now $40.81B.  It may “feel” a little high for a conservative adjustment exercise, but hey, Oppenheimer guided from $32B to $34B while I’ve projected the sequential revenue delta to be a mere $1.6B.  I think we’re good here.

    Tax Rate
    >>25.25% tax rate?  Might be a little high with iPhone and iPads being sold internationally (iPad has yet to launch in China).  But we’ll keep this.

    Gross Margin
    >>41.5% GM?  As I said last quarter:  ?Nnnnno.?  (/Steve Jobs, on the iPhone 1 having a stylus)
    This time around, Oppenheimer’s, uh, “excuses” for GM trending down 580 basis points were:  higher iPad and Mac mix (2/3 of margin drop); lower leverage from lesser revenue; and “nonrecurring” one-time items, who knows what they are but they didn’t seem to do anything from fiscal Q1 to fiscal Q2. 

    Non-recurring items, whatever.  Curiously Oppenheimer didn’t mention commodity pricing, though stuff like flash sure sounded like they’d still be cheap this quarter.  Lesser revenue?  I think that worry can be cast aside from now - see how Oppenheimer guided for Q2 and Q3 2011.  Also, it makes little sense for an operations genius like Tim Cook to slam the brakes on iPhone production by 20% when it’s probably not a transition quarter.  Even a substantial drop in iPhone can be made up for by an increase in iPad.  That leaves iPad and Mac mix.  That’s a clearly valid reason to lower GM, even as variable costs should improve across the board for iPhones and iPads alike to offset that somewhat. 

    We’ll dispense with a margin mix analysis and proceed conservatively from the nigh-bulletproof assumption that Oppenheimer always guides low on GM - yes, even for fiscal Q4 2011 that took quite a few of us by less-than-pleasant surprise (38% vs. 40.2% actual).  Let’s go with a GM of 43%, “only” 150 basis points higher.

    OpEx
    >>OpEx ratio of 9.7%?  Sure, maybe, if revenue levels were at Q2 2011 levels.  Oh wait, that was a $24.6B quarter, and Oppenheimer’s already guiding to $34B.  So…no.  Let’s check Q3 2011 (8.9% on $28.6B revs), Q4 2011 (9.4% on $28.2B revs), and Q2 2012 (8.1% on $39.2B revs).  Despite revs quite possibly being higher than Q2 2012, let’s pretend selling iPhones and iPads internationally will drive up SGA expenses.  So we’ll go with a very conservative OpEx ratio of 8.7%.   

    With the iPhone, iPad, Mac, GM and OpEx tweaks, what do we get?

    >>$40.81B revs (+43% YOY) - 20% revenue adjustment from guidance
    >>$10.09B net income (+45% YOY, 25.95% net income ratio)
    >>$11.21 EPS (based on 945M shares)

    Rev growth doesn’t look all that aggressive.  Earnings growth looks way, way too low considering that Apple’s MO is to grow earnings much more quickly than revenues due to higher and higher profitability with more and more revenue dollars.  And an EPS drop of a little over a dollar when Oppenheimer’s guidance is sequentially up by $0.18?  All this adds up, in my mind, to very makeable numbers.

    [ Edited: 27 April 2012 08:07 AM by Mav ]

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  • Posted: 27 April 2012 05:10 PM #11

    Mav, nice analysis, but did you consider “other” sales in there, such as itunes, apps, accessories etc.

    Last Q revenue for other was over $2bbn.  Not sure how Apple recognizes those sales, if they only include their net of 30%, or recognize the entire sale with a COGS of 70% (strongly think it’s the former).

    As ios continues to dominate, ‘other’ revenue will continue to climb, last few quarters it was avg 30+% increase YOY.  All these new products need apps and music.

    I think a big part of the GM beat was the ever growing influence of the solid margins of other revenue, if you add that back into the Q3 estimates, we could be looking at close to 12 EPS, even with a predicted drop off in iphone sales.

    And just a side note - can’t figure out the logic behind people going bananas over Amazon’s results ..... maybe I’m spoiled by Apple, but a 0.28 EPS on a 1% margin doesn’t exactly make me giddy with excitement ...... hard to believe it’s up 16% on such “good” news.

    [ Edited: 27 April 2012 05:12 PM by dsk101867 ]      
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    Posted: 27 April 2012 05:26 PM #12

    Yes, I just assumed they were all +20% YOY (see first post).  They have astoundingly little impact on revs and earnings now, the way iPod has lost its influence.

    The tough stuff is iPhone, iPad, profitability metrics and a side of Mac.

    This exercise leads to a conservative estimate, nothing much more than that.

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  • Posted: 27 April 2012 05:48 PM #13

    Mav - 27 April 2012 08:26 PM

    Yes, I just assumed they were all +20% YOY (see first post).  They have astoundingly little impact on revs and earnings now, the way iPod has lost its influence.

    The tough stuff is iPhone, iPad, profitability metrics and a side of Mac.

    This exercise leads to a conservative estimate, nothing much more than that.

    Since Q1/2005 this category has grown YoY (as a group) 20% or more twice, both times were during FQ1 (F2006 & F2008).  The average growth rate (YoY) for FQ3 during this time frame is -.02%.  Of seven years tracked, this category has generated a positive growth number during FQ3 twice.

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    Posted: 27 April 2012 06:15 PM #14

    Seriously.  Other Music, Software and Peripherals are such a small piece of the puzzle.

    They’ve had decent growth lately.  Making a reasonable growth projection and moving on is all I really need to do.

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  • Posted: 27 April 2012 06:21 PM #15

    Tetrachloride - 27 April 2012 03:54 AM
    Grover - 27 April 2012 02:38 AM
    roni - 27 April 2012 01:13 AM

    Is Apple going to make enough new iPads to bring the channel supply up to snuff?

    TC said in the call he was confident in their ability to restore demand v. supply balance.

    The supply balance was about the iPhone. 

    iPad supply is not meeting demand.  But the supply will be nice nonetheless.

    Apple has a proven capacity to produce 15,434,000 iPads (FQ1/2012).  In FQ2/2012 Apple produced 11,798,000 iPads.  Granted this was a transition quarter.  Nevertheless, Apple shipped 23.5% fewer iPads than they did during FQ1, and stated they could not meet demand in FQ2.

    Demand exceeds supply, you produce 23.5% than you did the previous quarter.  Transition or no, this supports reports that retina display yield was less than expected.

    A look at the iPads ASP is most revealing, and supports my view that problems with Retina display production resulted in a miss of iPad sales, and by extension Apple’s internal numbers.

    For FQ1/2012 the iPad ASP was $593 (~$33 lower than all of Fiscal 2011).  For FQ2 iPad ASP was $558, a 5.8% decline from FQ1.  This tells me that Apple had ample supply of the $399 iPad 2, but not enough of the new iPad (starting at $499) to maintain an ASP 5.8% higher than realized.

    In hindsight, I believe that Apple planned to ship 13,500,000 iPads during FQ2 (I over estimated at 15.5 million).  An extra 1.7 million iPads increases EPS to $12.75 (guidance $8.50 X 1.5).

    Ignore calculations.  I discovered a fat finger mistake in my spreadsheet just as I hit send.  Correcting it now.

    Mistake (FQ1/2012 ASP) corrected.  All calculations referencing that number have been upgraded.

    [ Edited: 27 April 2012 06:52 PM by Gregg Thurman ]

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