I’ve postponed my estimates for the fourth calendar for a long time. The reason is that there have been conflicting data to deal with and I’ve been hoping for some clues to give clarity. Unfortunately, even though I waited, I have not received many clues. Here are the challenges we have to deal with in this quarter:
- Management gave very low guidance for the quarter’s earnings and sales. Normally this should not be a concern since the long-term pattern has been for them to “sandbag” significantly. For example last year’s fourth quarter was guided at $9.3 EPS while the company delivered $13.87, a 49% “beat” to their guidance. However Q2 and Q3 beats were only 7% and 13% respectively and if we assume a similar number (10%) for Q4 we get about $13/share which would be a year-on-year decline in earnings (down from $13.9). This has not happened for many, many years. Management explained this through a lengthy set of reasons including a shorter quarter (13 weeks vs. 14 weeks), new product launches, currency fluctuations, deferrals and unfavorable component pricing. Then again, similar explanations were used in the past with no reflection in what actually happened.
- Management also launched a large number of new products. This normally leads to a surge in sales. In fact, 80% of revenues would come from a new portfolio of products. Having such a broad launch quarter into a holiday, would normally imply huge growth. Not only is this a critical launch quarter for many products but they also rolled out the iPhone to more markets more quickly than ever: 100 countries in three months. The broad roll-out implies a steeper ramp in production and thus more volumes. This would also contradict the lowered expectations from the CFO. However…
- Production was constrained. It was quite a long time before waiting times decreased for the iPhone–longer than what we saw last year. In the earnings call Tim Cook said “It’s difficult to predict when supply and demand will balance, but I’m feeling very confident on our ability to supply quite a few iPhones”. This again implies significant acceleration but did they achieve the targets? He did also announce that they met their target of 100 countries during the quarter but it’s not clear if this was as quickly met as they would have liked.
- Margins are complicated. Launch quarters have lower margins typically and this is well understood. However, we have new products in the form of a new iPad at a new price point as well as the new iPhone which may have had some difficult manufacturing issues (i.e. yield). So how much faith do we put in the perennial pessimism in guidance?
- There was a vast increase in CapEx in the prior quarter. Normally CapEx spending “leads” production and is in proportion to it. However, the surge in Q2 and Q3 seemed to be unmatched by vast new production, at least that’s what we are led to believe by both consensus and by management guidance. Did this CapEx differ in character from previous CapEx? Was it more “strategic” and less “tactical”? Will the disconnect continue?
There are also the deeper questions:
- Why there are no new operators being signed? The addressable market has not increased in the last 6 months. Why?
- Is there a faster product cycle in the works? Is there a shifting of gears to a new product development process?
- What’s the nature of the relationship with Samsung as a supplier? Is their replacement characterizing the new type of CapEx spending?
All these currents make this quarter doubly difficult to forecast. And it does not help that it comes on the back of two weak quarters which were argued away as exhibiting transition effects.
So I’m very uncomfortable with my forecast and find it hard to defend this quarter. I considered not publishing one at all because it gives too much confidence when none is warranted. However, I received so many requests to publish that I relent and offer the following:
- iPhone units: 55.5 million (50%/62%)
- Macs: 5.0 million (-4%/+3%)
- iPads: 24.4 million (58%/70%)
- iPods: 11.2 million (-27%/-22%)
- Music (incl. app) rev. growth: 25%/38%
- Peripherals rev. growth: 10%/19%
- Software rev. growth: 5.5%/14%
- Total revenues: $60.0 billion (30%)
- GM: 39.8%
- EPS: $15.74 (13%)
I included two growth figures (in parentheses). The first is a straight y/y value and the second is adjusted by assuming there were 13 weeks last year (and that sales were evenly distributed over those weeks).
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