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Revisiting Estimates for Apple’s second quarter earnings (ended March)

Estimates for Apple’s second quarter earnings ending March | asymco.

Since making the original estimates In January,

  • Revenue: $24.5 billion
  • EPS: 5.89
  • iPhone unit sales: 18.4m
  • iPod unit sales: 10m
  • Mac unit sales: 3.6m
  • iPad unit sales: 7.3m
  • Gross margin percentage: 38.8%

I revised them at the end of March to the following:

  • Revenue: $25 billion
  • EPS: 6.21
  • iPhone unit sales: 17.5m
  • iPod unit sales: 10m
  • Mac unit sales: 3.6m
  • iPad unit sales: 7.3m
  • Gross margin percentage: 39.6%

In the past I was comfortable keeping untouched estimates made three months in advance. This quarter however there have been several developments during the quarter which were unforeseen and cause me to revisit my estimates.

  1. The Verizon iPhone launch. Observations of the event focused on line lengths and buying activity. However, Apple reports shipments not sell-through. I believe the deal structure was such that Apple obtained a very large order as condition to the relationship. The January and March update analysis did not consider this order size. We have also more data on sales from HTC and RIM and there is no letup in the market’s growth. As a result I am revising the growth for the iPhone back up to 110% y/y and 18.4 million units.
  2. Crucially, I’m increasing iPhone ASP to $625 on the basis of this new demand and the likely delay of iPhone 5 launch.
  3. The iPad 2 launch. This product is still too young to see production and sales patterns. However, demand for the second version seems higher than for the first. Distribution is broader too. The unknown is production. I am keeping the unit number at 7.3 million which is the same as the level of CQ4.
  4. China is booming. The Chinese New Year occurred in the quarter and since last year that has meant a sequential increase in device sales for Apple. But it’s a double edged-sword. Almost all production activity is shut down during the holiday period. Apple depends on China exclusively for manufacturing so they will certainly be affected. So whereas it’s likely that we’ll see increased demand from China this year due to even better distribution, macroeconomics and brand value I’m unsure if supply rose to match. Overall, I’m not changing unit growth due to his increased demand but I’m cautioning that there could be downside bias in my estimates.
  5. The tsunami disaster in Japan will affect some demand in Japan and some of the supply chain will be disrupted. However, the effect will be felt more by weaker competitors. It’s possible that the event will amplify the shortages that Apple’s pre-purchase agreements already created. The consequences are bad news for Apple’s competitors but I rate it as neutral for Apple.

Given these new facts coming to light, I would update my estimates as follows:

  • Revenue: $25.5 billion
  • EPS: 6.43
  • iPhone unit sales: 18.4m
  • iPod unit sales: 10m
  • Mac unit sales: 3.6m
  • iPad unit sales: 7.3m
  • Gross margin percentage: 39.9%

Resulting EPS growth would thus be 93%.

For the record, I value my January estimates since they are based on long-term pattern recognition rather than transient events and thus are more useful in forming a market theory.

However, these transient events cannot be ignored and analysis needs to be informed by both theory and events. I will be watching to see which set of predictions (early, mid or late) will be more accurate.

  • Nicu

    Something in the opening section of your post does not seem logical : the second estimates comprise less iPhones (all else equal) but more revenue ? In the closing section you are back to the same numbers (18.4M iPhones) but with $1B more in revenue.

    • claimchowder

      Gross margin increased from 38.8% to 39.6% in the March estimate, then to 39.9% in the current estimate.

      • Nicu

        I'm talking about revenue not earnings, for which GM has no influence (ASP may have something to do with it, but it still looks dubious).

      • asymco

        Price also changed, but I did not publish that data as PED did not request it.

      • claimchowder

        Yes, sorry, I was distracted by the EPS :)

  • newtonrj

    What offset is there to the BMA growth? All things equal, the MB-Air is on a phenomenal growth curve. Showing flat growth supposes a fall-off elsewhere in the Mac line. -RJ

    • asymco

      I'm projecting Mac units growth at 23%. It is the same growth as the last quarter.

  • http://twitter.com/judsontwit @judsontwit

    Does this mean that the underlying assumption (Apple being supply-constrained for new iPhones) may not hold true for the Verizon iPhone due to advance shipment agreements, or that *despite* the shipments it is still true, and hence Jan/March analysts may be in for a surprise in terms of sales?

  • http://twitter.com/ankleskater @ankleskater

    The only change from Jan to Mar to this most recent project is # of iPhones. As noted in above comment from Nicu, your revenue projection has risen in both changes while iPhone sales volume has gone down and back up. I presume then, as hinted in the article, that ASP is also changing from projection to projection. I don't quite understand this. Apple holds a firm line on prices and does not provide discounts. I see only two factors affecting ASP: 1. sales trends of different models (more 32GB models sold, higher ASP) 2. sales split between Apple Stores and resellers (since resellers get a small cut). But I wonder about the second factor because Apple surely sells more at their own stores and at carriers than at Best Buy? So, in the end, I am concluding that you are changing ASP based on the fact that, with higher demand, customers will buy more 32GB models. Is that in fact the main consideration?

    I wonder about the effect of the Japanese disasters being neutral to Apple. Despite their billion dollar investment on the supply chain, could Apple have indeed secured enough supplies on screens, memories and batteries? True, the competitors would be more adversely affected. But that does not spell an upside for Apple since they are already selling every unit they can make.

    • Iosweeky

      The iPhone 3GS is not available on verizon, therefore all verizon sales are of the iPhone 4 variety – not a mixture of 3GS / 4 models as seen on other carriers. This will take ASP up a tiny bit.

  • http://twitter.com/ankleskater @ankleskater

    Good point, Davel. Indeed, it seems likely Apple is paying more to secure its supply chain particularly given the Japanese disasters. Should this show up in the GM somehow? Is it taken into account already in non-obvious ways?

    • asymco

      You won't see an impact in the last quarter. Component price increases will take time to propagate. Terms are negotiated in advance and payments are made after a delay.

      • Shash

        fantastic point @ankleskater. any comments on the ASP point made, asymco?

      • capabalnca

        And further to this point: Component price increases are neither recognized at the time purchase nor the time of payment. Rather they are recognized upon shipment of the finished goods.

  • Steve Weller

    The asymmetry of Mac sales in terms of laptops and desktops, plus the MBA effect have me expecting the Mac sales number will be much closer to 4M than everyone thinks.

    Also, a single data point: on a very non-technical forum my wife belongs to someone asked the question: what laptop should I buy now that my old Windows machine has died. Overwhelmingly the response was "Apple". Windows made second place but only in the form of Windows 7.

    • asymco

      At least half of sales of Macs go to new customers. It's still a very long way to gaining significant share vs. Windows. This is why the iPad and iPhone are so important. They don't try to fight the same battle and have re-defined the product.

      • Brian

        1/2 of Mac sales in Apple stores go to new customers. Apple has not given the overall percentage but I would expect to see a much higher growth rate if it was 1/2 of all mac sales.

  • http://twitter.com/anicehassim @anicehassim

    Horace,
    With the $ gyrations of late, particularly against the euro and yen, is forex gain a potentially larger factor on GM this Q. Especially since overseas sales are exploding at a separate rate of growth. It seems like any negative will be slammed by Market.
    2ndly is today's downgrade news not good for AAPL in that rising interest rates (as result of sounder management by America) will result in an earning boost of some consequence given the rate at which they are putting cash in the bank.

    • asymco

      I believe forex is hedged, or at least it should be. I can't analyze too many factors outside the scope of the company and its markets. It's hard enough to predict within 20% what one company did *last* quarter (and many don't get that close.) Predicting what an economy or a dozen politicized governments might do in six months seems completely impossible.

  • JD

    Will this period’s earnings reflect iPad 2 sales?

  • Kristian

    When can we start buying those t-shirts btw?

    • asymco

      Working on the design still.

  • theharve

    worrying about supply constraints doesn't make much sense since you have to pay for iwhatever at purchase.
    it only affects instore sales.

  • HTG

    We'll see on Wednesday then…. Looking forward to the pros vs bloggers league table…

    • Kristian

      Can't wait for that. Champagne is waiting :)

  • Addicted

    Is that true? I wouldn't be surprise but Have there been any reasonable estimates to that effect?

    • Kristian

      Yep. "Jeff Huber, senior vice president of commerce and local, announced that some 350,000 Android devices are being activated every day." (Thursday, Apr 14, 2011)

      Now when we add up these estimates that are very conservative together: iPhone 18400000 + iPod Touch 5000000 + iPad 7300000 makes 30700000 divided by 90. We are little short under the 350000 devices per day. Actually we are only missing 800000 devices. Real numbers we get tomorrow, but I am very confident that Apple beats these numbers Handsomely (komeasti).

      • Kristian

        Alright. Apple sells over 350 000 iOS devices per day.

        "Shipments of the second-generation Apple TV continue to be strong, reaching more than 2 million estimated units since the device launched late last year, according to a new report."
        -Analyst Ming-Chi Kuo of Concord Securities

        via Apple Insider

  • http://www.fxexchangerate.com/ fxgeorges

    That's where the no future for the Mac is coming from.

    But Apple is doing just fine with Macs. It's the other major lines that are expanding faster. IPhone sales in 2010 up 89% over the previous year. 15 million iPads sold as a new product last year, with expectations of double that, or possibly even more, this year. Computer sales are up just 25-30% YOY. That much slower growth, and so we see a smaller percentage of the business. I predicted this would happen several years ago, but without knowledge of the iPad. It will continue to drop as a percentage of sales. When it gets to 10% a year or so from now, it will be a good question as to what Apple might want to do about it. My feeling is that it would be a good time to begin a well thought out limited clone program. Apple could then afford to lose some of that 10% of sales if it significantly increased OS X penetration.