January 21, 2014 3:54 PM ET
Apple: Street Can’t Agree if iPhone or iPad is Driving FYQ1 Upside
By
Tiernan Ray
With Apple‘s (AAPL) fiscal Q1 conference call due Monday, January 27th, the Street is revving up its models for what the quarter, and the forecast, may bring.
Apple has forecast revenue of $55 billion to $58 billion. The Street is modeling $57.42 billion in revenue and $14.09 per share in EPS for the quarter. The outlook for Q2 is currently pegged at $45.84 billion and $10.91.
Several analysts seem to expect upside in the report, though it seems no one can agree on whether it comes from the iPhone or the iPad. There’s also the matter of the deal inked with China Mobile (CHL) to carry iPhone for the first time, announced last month. Not everyone, it seems, has fully modeled the impact of that deal in either December, or, more importantly, March.
Morgan Stanley‘s Katy Huberty reiterates an Overweight rating on Apple shares, and a $630 price target, modeling $57.2 billion on sales of perhaps 54 million to 55 million iPhones, and iPad shipments “as high as 26 million” that may lead to revenue upside. She’s modeling EPS of $14.01, assuming gross margin of 37.3%.
Huberty writes that 2014 will be “the beginning of a new cycle of growth and innovation monetization,” noting investors are “more excited than in recent memory for the next iPhone, which likely will have a large screen, as it should allow Apple to better compete with Samsung [Electronics (005930KS)] in the high-end smartphone market,” and that she anticipates new services offerings this year, including a mobile payments service that might be introduced at the Worldwide Developers Conference in June.
For Q2, Huberty models revenue of $45.8 billion, on sales of 45 million iPhones. That number is “slightly higher than current supply chain data points but Apple typically outperforms the supply chain in C1Q,” she writes. iPad units may decline to 22 million, and with gross margin at perhaps 36.9%, consistent with the 36.9% to 37.5% range of the last three quarters, she’s looking for EPS of $11.67.
Mizuho U.S. Equity Research’s Abhey Lamba reiterates a Buy rating on Apple, and a $575 price target, modeling Q1 sales “likely in the $58 billion to $60 billion range” with EPS of perhaps $14.50 to $14.75. That’s assuming 55.86 million units of iPhone and 25.3 million units of iPad, and a better-than-expected decline of 7% in Mac sales:
We expect iPhone and Mac sales to offer significant upside to forecasts, which will likely be partially offset by a slight shortfall in iPad sales. The upside to iPhones is widely expected by investors while the iPad underperformance will likely not be material. Apple should benefit from broad distribution of the iPhone 5S and 5C. Our checks indicated that iPhone shipments could be about 57 – 58 million units in the quarter. For iPads, the company experienced increasing competition from lower cost Android offerings but iPads continue to offer significant advantage over other products.
Lamba sees possible downside in the Q2 forecast on a “seasonal downtick”:
Regarding outlook, we expect management’s guidance for the March quarter to indicate a seasonal downtick, which might be greater than currently reflected in consensus. While we expect China Mobile to help expand Apple’s presence in China, we believe the uptake will be slow and the benefit will likely be slightly lower than currently baked in the models. Overall, management’s revenue outlook could be about $2 billion below consensus while margin forecast could be in-line. We expect management to forecast $42-44 billion in revenues for F2Q14 versus consensus of $45.8 billion and gross margin to be about 37%, which would be in-line with consensus. As such, EPS also has a downside risk.
Susquehanna Financial Group‘s Christopher Caso is modeling $57.07 billion in revenue and $14.02 per share in net profit, writing that “S stands for success,” as “our production checks [in December] indicated a more favorable production shift in favor of iPhone 5s (the opposite of what happened last year).”
“While expectations have now risen since September, we still feel comfortable with estimates into earnings, with our iPhone production estimates marginally ahead of Street consensus on the back of strong iPhone 5s demand.”
He’s modeling 53 million units of iPhone sell-through in the quarter, and a “favorable impact on margins” as a result of greater demand for the iPhone 5S than iPhone 5C.
Expectations for iPad may be too high for last quarter, he thinks:
As has been the case for a few quarters, we continue to believe Street iPad estimates are slightly too high. Our 4Q iPad production forecast indicates 22-24 mln units in C4Q, with sell-through expectations of 24 mln. We believe that’s 1-2 million units shy of consensus. Consensus estimates for iPad have largely been too high all year, as the iPad growth rate has slowed. That said, our production forecast had increased by 2 mln units vs. expectations at the start of the quarter, so we believe shipments were likely marginally better than AAPL’s own expectations at the start of the quarter, largely due to better availability of the retina iPad mini. For C1Q, our production forecast indicates 14-16mln units, with sell-through of 16 mln, with our revenue expectations indicating a 35% Q/Q decline.
Caso sees upside in the March quarter from higher-than-expected iPhone production:
Our March-quarter build plans show stronger production than most of the Street; swing factor in guidance likely to be margins. Importantly, our production checks indicate that our iPhone production forecast holds up well into C1Q, the complete opposite from what happened last year, when iPhone 5 production forecasts were cut sharply in mid-December 2012. Phones for China Mobile have likely contributed to this strength. We believe our C1Q iPhone production estimate of 43-46 mln units is among the highest on the Street. We think our 44 mln unit sell-through estimate for C1Q is a few million units higher than consensus expectations, and well ahead of the most bearish estimates, which are in the mid-30s. We note that our EPS estimates take a more conservative approach than the rest of the Street, since we have modeled iPhone segment margins down Q/Q, in line with seasonal trends. However, if AAPL manages to keep iPhone segment margins flat Q/Q (not unreasonable given the favorable mix trends), that would allow corporate gross margins to grow Q/Q, and could drive EPS well over $11.
Moreover, the Street is not currently factoring the payoff from the deal with China Mobile, he thinks:
We believe consensus for C14 iPhone units is in the 175-180 mln unit range. If one backs out what we think is a very conservative 10 mln incremental China Mobile units from that expectation, it would indicate only 5-10% Y/Y unit growth for iPhone units excluding China Mobile. Given that C14 should also benefit from the iPhone 6 cycle (with a larger screen), the addition of DoCoMo (not insignificant), and easier Y/Y comps in 1H14, we think the bias is toward the upside. We, therefore, conclude that either the Street has not included any significant impact from China Mobile in their estimates, or just a modest impact from iPhone 6. Either way, we view Street estimates as conservative.
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