New Game, New Rules:  Deciphering Q4 2012 Guidance

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    Posted: 24 July 2012 07:30 PM

    EDIT:  Combination forward-looking/retrospective earnings analysis topic.

    [ Edited: 28 July 2012 03:57 AM by Mav ]

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    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
    AFB Night Owl Team™
    Thanks, Steve.

         
  • Posted: 24 July 2012 08:44 PM #1

    this is the only thing i miss about steve jobs…..

    he never let aapl be so predictable that this type of topic could be written…

    do what is best for the customer and the product ....not so that we can dechiper guidance…

    for all we know maybe TC & PO think 4S sales are going to tank and 1-2 weeks of 5 sales will get us to the Q4 number…

    no offense mav…. love your posts…. but i hope you understand my point

         
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    Posted: 24 July 2012 08:51 PM #2

    I don’t think apple has changed its guidance methodology at all - they simply had a bad quarter, and I think they are expecting to do better next quarter with a September iPhone release.

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    Posted: 24 July 2012 11:26 PM #3

    Will be working up some numbers over the next little while.

    It’ll be a much quicker read this time I think, and I’ll spare the more detailed thought process unless anyone wants an explanation.

    Long story short:  The new Best Play? from the evolving estimation landscape is to stick very, very closely to guidance.  The effect on estimations will be pretty dramatic as we’ll see in the next couple of weeks.

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    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
    AFB Night Owl Team™
    Thanks, Steve.

         
  • Posted: 24 July 2012 11:46 PM #4

    Given the downturn in iPhone sales this quarter, I’m surprised that the revenue guidance is as high as it is (only $1B less than actual this quarter).  You would think that Apple would need to protect against even more iPhone declines this quarter (particularly if the reason for the decline is proximity to refresh), and guide a few billion lower than it has. 

    Given almost certain declines in iPhone 4 sales in Q4, the revenue guidance means either: 1) the next iPhone will launch in September, or 2) it’s gonna be a big summer for Macs and iPads.

         
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    Posted: 25 July 2012 12:25 AM #5

    macorange - 25 July 2012 02:46 AM

    Given almost certain declines in iPhone 4 sales in Q4, the revenue guidance means either: 1) the next iPhone will launch in September, or 2) it’s gonna be a big summer for Macs and iPads.

    I was also thinking this.  Very unlikely for AAPL to want to disappoint again.  If I had to guess, I’d say late August/early September for refreshed iMacs + iPad Mini, and late September iPhone announcement, with availability 7 days later.

         
  • Posted: 25 July 2012 12:30 AM #6

    I disagree - I don’t think there s a true appreciation on their part for the rapidly changing environment on a macro level and on a competitive level.  They seem to be only focused on product but not doing anything about timing.  They need to address this in my opinion.

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  • Posted: 25 July 2012 12:43 AM #7

    Here’s my takeaway: $7.65 may seem positive in light of today’s fail, but the market will take no solace from EPS next quarter between $8.50 and $11. Remember, in October, AAPL guided to $9.30. The signal was: Huge, huge gains ahead. And yet it flailed around for most of Oct and Nov. The market brushed that off.

    Same expectations right now on my end.

         
  • Posted: 25 July 2012 01:12 AM #8

    mav….i think you are right in sticking close to the number for Q4…

    my take is that we are in the midst of iphone 5 ramp….and launch will occur in the Q4 quarter, but very late and not enough to make up for “delayed” purchases….therefore soft iphone comps and the main contributor to the declining margin…

    surely delayed mac sales from Q3 will roll in and delayed iPad 3 sales in China (again due to late start there as well)


    look….i really don’t think Q3 was a failure…..we as eternal optimistic AAPL fans put the cart before the horse plain and simple….

    would i like to see better product timing??? well not really….iphone 4S is not even a year old….yeah i know it is just a revamped 4 model but is still is the best product out there….and who qualifies for a phone upgrade at $199 after 9 months????  let me know what carrier is going to do this after you hear question upon question on carriers hitting AAPL for better ASPs/lower subsidies…

    still no place better to be in the market right now….yeah i know AAPL will take its hits for a couple of days/weeks….but been here before as well….

    last comment….do you think TC and PO think Q3 was bad????  doubt it….  they laid out a number and beat it….sorry that it wasn’t 20% higher…..but what do you expect in this economy???  go sit at the Apple store nearest to you….bet you it is busy from the minute they open to the minute they close….we are doing just fine….

    keep your eye on the donut….not the HOLE…..

         
  • Posted: 26 July 2012 01:43 PM #9

    dolemite - 25 July 2012 03:43 AM

    Here’s my takeaway: $7.65 may seem positive in light of today’s fail…

    What fail?  Apple beat its own guidance.  The only failure was on the part of the analysts.  They were the ones that “missed”.  The tail should not wag the dog.

    That said, those who bought on the strength of those inaccurate analyst predictions are perfectly justified in selling off.  It is to be expected.

    As to the present guidance, it is either due to the iPhone product cycle, or Apple’s growth is slowing as its markets mature.  We should not fear that.  Either growth will recover or it won’t.  If it does the stock price should jump accordingly.  If growth continues to slow I don’t believe there will be any significant further share price declines.  Apple right now, at a P/E of something like 11 is already priced for slow growth.  If that’s the case I expect the dividends to increase dramatically.  Perhaps that’s why a dividend was initiated at this point in time.  Maybe Oppy and Cook see a leveling off and a more stable income in the future.  As a (mainly) buy and hold investor in AAPL, that doesn’t bother me. The herd stampedes this way and that at every unfamiliar noise.  The old bull saves a lot of energy by simply watching them run back and forth, and continuing to graze placidly on sweet dividends.

         
  • Posted: 26 July 2012 02:10 PM #10

    I don’t see a Q4 iPhone release. If that happens, product wise the only thing going for us this quarter is back to school sales of Macs and iPads. Personally, I think we will see tremendous YoY increases in both categories. Although I’m not sure if it will be enough to satisfy the gap created by lost iPhone sales.

    The shortest plays I will make this quarter are April 13. Too many macro issues and too few forseeable AAPL positives for me to go any shorter.

         
  • Posted: 26 July 2012 08:20 PM #11

    Read the balance sheet. There is 5.822 billion in the current portion of deferred revenue. If we assume this is accrued evenly it means Apple will recognise a quarter of it or 1.453 billion in the 4Q. In other words Apple has already earned 1.453 billion out of their estimate of 34 billion. with their conservatism do we doubt Apple cannot reach at least 34 billion in the 4Q?

    I don’t.

         
  • Posted: 26 July 2012 08:47 PM #12

    Zeke - 26 July 2012 04:43 PM
    dolemite - 25 July 2012 03:43 AM

    Here’s my takeaway: $7.65 may seem positive in light of today’s fail…

    What fail?  Apple beat its own guidance.  The only failure was on the part of the analysts.  They were the ones that “missed”.  The tail should not wag the dog.

    Respectfully disagree. Apple narrowly edged out its guidance by 64 cents. Even during the 4Q11 miss when analysts truly got overly excited after the 3Q11 blowout, Apple still beat its guidance by $1.55 ($7.05 v. $5.50, if I recall correctly).

    So, if your only metric is “Apple must beat guidance to qualify as a win,” then yes, sure, your argument holds up. And $8.69 would’ve been a win. But this is not a stock whose results have performed just slightly higher than guidance. It has consistently destroyed guidance by a much larger margin than it did this quarter, and it’s concerning to me as an investor that years of guidance annihilation came to a screeching halt Tuesday.

    This quarter didn’t constitute an analyst failure. It constituted an Apple failure. Plain and simple. And I’ve not seen that happen in four years of following the stock.

    We are on new ground, whether we like it or not.

         
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    Posted: 26 July 2012 09:13 PM #13

    Zeke - 26 July 2012 04:43 PM

    What fail?  Apple beat its own guidance.  The only failure was on the part of the analysts.

    Some of the blame must go to Apple. They’ve consistently guided so low and “beaten” their own guidance by upwards of 20% that the market now expects that every quarter. They are suffering (if you want to call it that) from their own consistent over-performance.

    The first two quarters of FY2012 were nearly flawless. I think it was unreasonable to expect that type of performance every single quarter.

    It’s like a pitcher who goes out each week and pitches a complete game shutout. The first time he allows a run, even if he still wins the game, people will be disappointed. It’s unreasonable and unfair, but there it is.

    The sad reality is that the stock market has always focused on short-term quarterly reports. As a long-term investor in AAPL, this quarter’s report does not trouble me. Nothing has fundamentally changed in Apple’s business. They are still on an unprecedented growth trajectory for a company this massive.

    AAPL is up over 40% so far in 2012. Even if it stayed flat for the rest of the year, that is an outstanding return for the year. But a new iPhone and probably an iPad Mini is coming fairly soon. Those product launches will almost certainly propel AAPL to new highs before the year is out.

         
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    Posted: 26 July 2012 11:37 PM #14

    gyromac - 25 July 2012 04:12 AM

    ...
    would i like to see better product timing??? well not really….iphone 4S is not even a year old….yeah i know it is just a revamped 4 model but is still is the best product out there….and who qualifies for a phone upgrade at $199 after 9 months????  let me know what carrier is going to do this after you hear question upon question on carriers hitting AAPL for better ASPs/lower subsidies…
    .....

    The bulk of purchasers buy a new phone every 2 years.

    Ranked in order of volume, my guess of the breakdown of people buying new iphones at launch:

    1. Current iPhone owners whose 2 year contract is up for resigning with a subsidised handset (Right now & into this quarter we will have have the 23 million who bought the iPhone 4 two years ago)
    2. People on new iphone carriers added in the last 18 months who are looking to get their first iPhone as their 2 year contract has come up for renewal (Verizon, Sprint + dozens more carriers worldwide).
    3. People on new iPhone carriers who are being added at the new handsets launch (hopefully this year: China Mobile, NTT Docomo, T-Mobile USA)
    4. People on existing iPhone carriers whose 2 year contract is up for resigning, and who are switching from a feature phone or competing smartphone platform to an iPhone for the first time.
    5. People resigning their contracts early with less subsidy, and those purchasing unsubsidised models.

    I don’t know where Enterpise fits in on this - my wifes comapny just replaced all their top executives phones with iphones - but they gave them iphone 3GS units!?!. My feeling is that enterprise purchasers pay little attention to handset launches and just buy the iphone dependant on their own budget calenders etc.

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  • Posted: 27 July 2012 12:20 AM #15

    dolemite - 26 July 2012 11:47 PM
    Zeke - 26 July 2012 04:43 PM
    dolemite - 25 July 2012 03:43 AM

    Here’s my takeaway: $7.65 may seem positive in light of today’s fail…

    What fail?  Apple beat its own guidance.  The only failure was on the part of the analysts.  They were the ones that “missed”.  The tail should not wag the dog.

    Respectfully disagree. Apple narrowly edged out its guidance by 64 cents. Even during the 4Q11 miss when analysts truly got overly excited after the 3Q11 blowout, Apple still beat its guidance by $1.55 ($7.05 v. $5.50, if I recall correctly).

    So, if your only metric is “Apple must beat guidance to qualify as a win,” then yes, sure, your argument holds up. And $8.69 would’ve been a win. But this is not a stock whose results have performed just slightly higher than guidance. It has consistently destroyed guidance by a much larger margin than it did this quarter, and it’s concerning to me as an investor that years of guidance annihilation came to a screeching halt Tuesday.

    This quarter didn’t constitute an analyst failure. It constituted an Apple failure. Plain and simple. And I’ve not seen that happen in four years of following the stock.

    We are on new ground, whether we like it or not.

    I’ve been following AAPL and been invested almost exclusively in it for 10 years now.  When all your eggs (nearly 7 figures worth) are in one basket you tend to watch it very carefully.  I’ve spent a minimum of an hour a day researching AAPL for those 10 years, probably at least 5000 hours.  I’ve seen this before.  Nothing new.  And yes, it is an analyst failure, just as they’ve failed EVERY quarter.  The amateurs here at AFB have been very close most of the time.  People like Katy Huberty are routinely 30% off the mark and still get a paycheck.  Why, I don’t know.

    But as I said, the last year or two of Steve’s life had to be a production nightmare for Apple, with decisions and approvals delayed, things having to be re-worked when Steve was able to pay attention and object to designs or concepts already in testing, and the turmoil of the reins changing hands.  If it takes 2 to 3 years to develop a new product then those that were in development last year probably will be behind schedule (like iPhone 5), hurried, and/or incomplete for the next year or two (Apple TV?).