Estimates for Apple’s second quarter earnings (ending March)

Apple’s CFO guidance statement:

We expect revenue to be about $22 billion, compared to $13.5 billion in the March quarter last year. We expect gross margins to be about 38.5%, reflecting approximately $50 million related to stock-based compensation expense. We expect OpEx to be about $2.35 billion, including about $250 million related to stock-based compensation. We expect OI&E to be about $50 million, and we expect the tax rate to be about 25.5%. We are targeting EPS of about $4.90.

via Apple Management Discusses F1Q11 Results – Earnings Call Transcript – Seeking Alpha.

This is a particularly aggressive revenue growth forecast of 63% (note again that Apple’s P/E has dropped to 18 and 14 ex cash and 10 on a forward basis) . Since Apple always guides very conservatively, the likely figures for the top and bottom lines are likely to be higher.

How much higher? Here are my estimates (growth in parentheses is year over year).

  • iPhone units: 18.4 million (110%)
  • Macs: 3.62 million (23%)
  • iPads: 6 million
  • iPods: 10.1 million (-7%)
  • Music (incl. app) rev. growth: 25%
  • Peripherals rev. growth: 23%
  • Software rev. growth: 23%
  • Total sales: $24.5 billion (82%)
  • GM: 38.8%
  • EPS: $5.89 (77%)

Looking a bit further ahead, earnings suggest the company is now trading at a forward P/E of about 9.5.

  • Les S

    Where in these numbers do you see China contributing? To what degree?

    As always great post and thank you for your invaluable work!

    • asymco

      February 3rd is when the year of the rabbit begins. Last year, Chinese New Year led to the first sequential post-Christmas increase in iPhone sales. The iPhone grew 131%. I am being perhaps a bit conservative in putting only 110% growth this year considering Chinese New Year and Verizon hitting simultaneously. But I may revise upward as we hear more during the quarter.

      The degree China will contribute is significant. Perhaps 20% of iPhone growth.

      • It's the year of the rabbit! I'm still writing year of the horse on my checks;-)

  • I think that your iPad number is too high — as Apple products reach the 1 year mark, sales tend to taper off as people wait for the next version. I expect a new iPad in April, so sales will probably start tapering off towards the end of February.

    • asymco

      There's just no track record with the product. Very hard to make a call.

      • I've seen extremely aggressive estimates for the iPad that I find hard to believe. Yours, however, seems conservative here.

      • Joe_Winfield_IL

        Besides the short history and continued initial rollout, I would imagine that it is difficult to segment the iPad market. Anecdotally, it seems like Christmas was a huge catalyst for the consumer market, just as with iPod. I know of several people who gave or received one as a gift (this would also explain the dip in ASP during calendar Q4). However, business buying is also anecdotally strong, and is more immune to seasonality. Also, the education market has massive potential; does this push sales higher in the late summer? Finally, there is the annual refresh cycle that dampens sales in anticipation of version 2.0.

        I don't envy anyone who tries to project iPad sales and corresponding earnings, etc. Horace, do you know of any reliable data that show a breakdown of users according to user type?

      • poke

        I believe Cook said they're adding more countries this month, so that will also increase sales.

      • FalKirk

        Cook said: "That did get us into supply-balance and also allowed us to expand to 46 countries, or to a total of 46 by the end of the quarter, which added 20 during the quarter. And we're confident enough to add another 15 countries during the month of January that will take us over 60. "

      • Based on how the iPad was released around the globe, the rest of the world (non-USA) has staggered iPad release dates, so while release date likely in April in the US, it's later in the UK, even later throughout Europe, even later in China, etc. How much people around the world are willing to delay iPad gratification to wait for iPad2 in their region complicates predictions. Or will Apple sync launch around the globe?

      • bick

        Assumptions that we won't see iPad2 until April I think are wrong. I'm looking for a March release of iPad2, so some pent-up US demand for iPad2 might find it's way into this quarter's sales.

    • r00tabega

      Keep in mind the iPad was just introduced in some countries late last year… for them it's not one year old yet.

    • Hamranhansenhansen

      The 6 million is a taper from last quarter's 7.3 million. There is no year-ago quarter to taper from. Even though last quarter was a holiday quarter, they are still adding countries and the product is still growing. There are organizational sales now. Companies buying thousands at once.

      Also, the model year does not change this quarter, but next quarter. And I don't think they are going to retire iPad 3G, so it won't ramp down. I think they will introduce a new model at the current price points and reduce the price of the current model to $399 or maybe $349.

  • CndnRschr

    Yup, its not as though anyone was close to the iPad 2010 numbers. 7.33 million in the last quarter was compounded by various things, especially lack of competition. The next quarter will see the product mature into businesses (which will not put off such acquisitions much longer as they've had them on trial for several months). The iPad2 will depress sales to some degree but there is also some pricing space for Apple to close-out the iPad (remember the TJMaxx $100 cheaper iPads?). I think iPods will likely drop about 15% as the current range (excepting the Touch) has not caught fire. There again, something like a software revision for the iPod Nano to improve its capabilities might boost sales. Will Apple start dropping prices on iPods by cutting margins as they become less important to the bottom line (essentially cementing the hold on music players)? I think yes, with the exception being the iPod Touch.

  • HTG

    Horace… rather than just the bare numbers and growth rates would you care to do another post giving your rationale for the numbers?

    I'd be interested in your reasoning and I expect a good number of readers would also be interested…

  • the market is afraid of android. it's that simple. now the market may be wrong. it probably is wrong. but it's afraid of android. it's also afraid of a future without steve jobs inventing new products.

    • Iosweeky

      The market is WAY more afraid of apple losing SJ than it is of the android threat.

    • asymco

      I argued against the Android causation in another post: P/E compression for Apple started years before Android was the twinkle in a hedge fund's eye.

    • Hamranhansenhansen

      The market was schooled by Bill Gates plus IBM versus the non-Jobs Apple of 1986-1996. Hardly a fair fight. They think that is the rule, not the exception. They should be looking at iPod instead, because unlike Mac/PC 1986-1996, iPods is this century, consumer devices, portable devices, under $500 price points, user purchasing, consumer users, desktop/cloud integration, 1-click purchases, flash storage, ARM SoC's, finger interfaces, audio video, and many other features that are the same as iPad and iPhone.

      Android is a feature phone OS that is stretched thin even on a smartphone (Java applets instead of native C apps, terrible battery life, poor computing usability). On a mobile PC, it is even worse. There are no hardware or software profits in Android, so we are going to see manufacturers who rely on Android exit the industry over the next couple of years as Android itself is sued out of existence. At some point, investors who are tired of hearing that it is The Year Of Android for the 5th time in a row will get the picture.

  • the market knows that in a few years time most people will have smart phones laptops and pads. there will be growth overseas. but it's not hard to imagine that android has advantages in capturing the next smart phone buyer in these places. the market is worried about what comes after phones ipads and notebooks if jobs isn't there to invent it.

    • Vatdoro

      I think in the short term android might have an advantage in emerging markets, like India.

      Mainly for 3 reasons.

      1) Low end manufacturers will produce extremely cheap phones using a free OS (android).
      2) Their 3G networks aren't built out yet so they can't subsidize them with a data plan (Horace has written about this).
      3) The people don't know any better (ignorance). How many people do you know who got suckered into an android phone just because the salesperson told them it can do everything an iPhone can do? Now imagine the android device is free (or maybe $50) and does not require a data plan (see reason 2).

      That situation would definitely lead a a lot of people to go with android in the short term. But, one problem with android is it's not "sticky". Android users don't pay for apps, there is not an iTunes for android for purchasing music, tv shows, or movies. Basically the users have zero investment in the android platform. Once these emerging markets mature in a few years a good percentage of the android users will appreciate the improved experience offered by iOS and switch accordingly. There is absolutely nothing keeping people on android.

      I see android as a "gateway drug". Some people get android as their first smartphone, but end up moving to an iPhone eventually.

      • dchu220

        Asia will be an interesting market to watch. Mainly because it will test the 'stickiness' of app purchases. Culturally, people in China and Taiwan aren't used to paying for apps. I have friends who are CEOs and their iPhones still have zero paid apps. People just aren't used to paying for software out here. You can still take your Mac into a store and get all the software you want installed for $60-90 US.

  • Iosweeky

    $1000 a share within 30 months.

  • lb51

    We live in Danville, CA and my son's elementary school; the entire district, are iPods, iPads, Mac Book Pro's (13") and iMac workstation. My son is in the third grade and has been signing out the iPod Touch for homework assignments. We are told that each child in class has access to the Mac Book Pro's. I am sure this is only the beginning.

    As a CME exchange member, I have changed from using Windows based workstations to using Apple computers. The products have been the most reliable and consistent systems I have personally used. I have worked with Sun workstations, the Next computer way back, and SGI systems. My team and I have developed many trading products and routing algorithms with the mentioned technology and we all find the Apple products to perform exceptionally. Yes, the other systems are gone, and Windows was our workhorse for awhile. But, the environment had many issues with running perpetual simulations. I cannot say enough good things for Apple. Our private fund has been an Apple investor since 1999 and we continue to accumulate and liquidate on rolling basis based on forward contract pricing.

    Well, in short, I believe Apple is doing a bang up job.

  • lb51

    Sorry, I should have edited the above post before submitting.

  • John

    I think the iPad number is too conservative. I would guess 8 or 9 million because it is going to new countries and because of growing interest.

    My guess is that going forward we’ll see a broader iPad lineup. For example, they could keep the current iPad and drop the price and introduce iPad 2 and maybe an iPad Pro. Pro let’s them capture more revenue and experiment with new features in small numbers without risking everything. For exame, the rumored high resolution screen mi appear in limited numbers at a high price in the Pro version.

    • FalKirk

      "My guess is that going forward we'll see a broader iPad lineup."

      You could be 100% right. But it doesn't feel like something Apple would do. Apple is very careful to keep its products lines, and each product within each line, clearly separated both by price and by function. Whether you want to buy an iPod, an iPhone, an iPad or a Mac, there are almost no decisions to make. There's almost always only one product that fits your preconceived parameters. People – including people whose livelihood depends on knowing this stuff – have no idea how much easier this makes it for people to say "yes" to a purchase. When buyers are offered a decision between two or more items, their most frequent decision will be not to make a decision. No sale. Fewer decisions leads to less indecision which leads to more sales. It's as simple as, well, keeping things simple.

      I think that Apple already has its lineup set. I think that the iPod Touch, iPhone and iPad are to iOS what the shuffle, nano and classic were to the iPod. The parallel isn't exact, but I think it has probative value.

      • Hamranhansenhansen

        iPhone is not one model, it's two: both this year's and last year's. I think they will continue that arrangement with iPad because it has been wildly successful. The high-end model sets the high-end price very low, and the low-end model sets the low-end feature set very high. It is very hard to even imagine a device that competes, let alone ship one. Now, iPhone 3GS is $49. Come on! This year we will likely see the 2011 GSM/CDMA iPhone on all carriers for $199 and iPhone 4 for $99 in either a GSM or CDMA version. Who is going to compete with $99 iPhone 4? Nobody.

        None of the vapor 2011 tablets can compete with the 2010 iPad as it is. Drop the price and put a high-end model at the current price points and it is like a buzz saw for competitors. People who want cheap will buy original iPads, and people who want the best will buy 2011 iPads.

        Selling last year's model cheap is an anti-cloning strategy on Apple's part. They essentially clone themselves and take the air out of the cloning market. Having no CDMA phone sort of camouflaged that.

        It would be interesting if future MacBook lineups rode Core 2 Duo down into $699 territory and went after the Mac clones that own that part of the market. One interesting thing is I think the PC market is ironically less mature than mobiles. Core 2 Duo with NVIDIA GPU might be the first "fast enough" and "small enough" PC configuration, and Leopard the first "good enough" PC OS. The Lion Mac lineup might want to just get cheaper, not faster. Especially with Mac App Store on board. A $699 MacBook could add a ton of new market share to the Mac.

      • FalKirk

        "Drop the price (of the original iPad) and put a high-end model at the current price points and it is like a buzz saw for competitors."

        I would be fine with this strategy, but I now believe that Apple will not follow the two-tier pricing strategy with the iPad that they did with the iPhone.

        There is little to no indication that competitors can even match, let alone beat, the iPads' current price. And even if they are able to match the iPads' price, the iPad remains the far superior product in a head-to-head comparison. With regard to 7 inch tablets, because of their smaller size, I believe that they need to be priced at $400 or perhaps even $350 to compete on an equal footing with the $500 iPad. And again, at that pricing, the iPad will win the head-to-head comparison most ever time.

        In conclusion, I now believe that when the next version of the iPad becomes available, that Apple will retire the current version, just as they have always done with their iPods and Macs.

  • Rob Scott

    My estimate for the iPhone:

    8.75 (LY Units) * 1.86 (Growth achieved in Q1) = 16 275K
    Verizon (Feb – Mar) = 1 500K
    Chinese New Year = 500K additional units

    Total iPhone Units = 16 275K + 1 500K + 500K = 18 275 000

    Here are my iPad numbers:

    I cannot think of a good reason why the iPad would slow down. It’s closer to its update cycle than the iPhone so that should slow sales down a little let’s say by 30% (30% is probably too high, drop for the iPhone between Q1 and Q3 2010 was 3%).

    46 countries sold 7.33 million an average of 159K per country.
    For the 46 countries I discount the average by 30% to 112K
    112K * 46 = 5 131K
    For the additional 16 countries I use the Q1 average units per country of 159K
    159K * 16 = 2 550K

    Total iPad Units = 5 131K + 2 550K = 7 681K

  • Adam thompson

    On the conference call, Tim Cook said iPad sales would be down sequentially. I think he knows best so estimates over 7.3M are too high.

    • Rob Scott

      Sure, orders for most of Q1 are probably in, so he has the data. My gut feel was that iPad would move 5 – 6 million for Q2, but a dirty match box calc looked better and more convincing. I am interested in knowing how Horace got to his 6 million and you to the 7.3 maximum.

      • apexofkryptos

        Adam didn't say that his estimate was 7.3.

        He just said that he believes that any estimate above that is in conflict with Tim Cook's statement.

    • Westechm

      One reason Apple blows away their own forecasts is that the forecasts are very conservative. Part of Tim Cooks reasoning is that a lot of Apples iPad sales were Christmas gifts. But they don't celebrate Christmas in China, Japn and South Korea, the fastest growing markets for IOS devices. I am on record that for the first time, at least in recent memory, Apples FQ2 sales and profit numbers will exceed, or at least come close to those in FQ1. I expect that iPhone sales and profit will also exceed expectation; 20,000,000 units is within reach. Verizon and Far East growth being the major factors.

  • jp chicago

    Should your estimate of iPad sales prove accurate, I hope the pace is mostly a reflection of a seasonal and/or product cycle origin. Stratospheric demand from all demographic segments, since launch, is as good as anyone can hope for.

    iPhone shows how $500+ computers can sell over 10M a quarter, without approaching an upper limit as long as market share is relatively small. With near-saturation market share of iPod, which has been a constant for some years now, they sold around 20M in the past three months, although it appears that everyone on earth already owns one.

    I think iPad quarterly units will approach that of iPhone this year. It took several years for iPhone to gain the momentum iPad had at the gates. A major catalyst driving iPad sales to a level of 15+ million a quarter in 2011 will be a concurrent cultural shift to Mac OS. iPad and MBA, in closing off the price points of the generic PC market, has positively reaffirmed the future of Mac.

  • timnash

    "We continue to have a sizable backlog, and believe we could have sold even more iPhones if we had been able to supply them." Apple's CFO

    This suggests that Apple will be able to increase sales to existing customers this quarter, if the supply is there. If Apple increases production by 2million, as it did last quarter, then sales to the GSM market will be 18.2 million. Apple is using Pegatron (new supplier) and Foxconn to assemble the CDMA iPhones, so at least part of that manufacturing capacity will be additional. With Verizon sales of 1.5 million and a small order from another CDMA carrier like China Telecom (40 million subscribers), iPhone sales could pass 20 million this quarter.

    • Rob Scott

      20 million is certainly possible. I expect Apple to cross 20 million in Q3, I actually expect them to move 28 million iPhones in Q3 2011 a 100% growth on ly.

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  • Horace, last year's Q2 Mac sales were 2.943m units. Your 3.63m estimate for this quarter would represent 23% growth, not 27% (would be 3.74m). So which one are you going with? Ironically, I'm right in between (3.69m).

    • asymco

      Ah. Typo. I may have failed to edit that number when pasting from last quarter's post. It should read 23% growth. I'm going with 3.62 million.

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