Apple Q3 preview: analysts place bets ahead of earnings
Apple is set to report earnings for its fiscal third quarter after the close of regular hours trading this afternoon. Analysts polled by Thomson Financial expect the company to post earnings of $1.08 on $7.37 billion in revenue, fueled by sales of 2.2 million Macs, 10 million iPods and about 700,000 iPhones.
Despite the general bearish feel going around on Wall Street, the “whisper numbers” have rose as high as $1.11 on $7.45 billion in revenue. In mid-June, I published my initial earnings forecast for Apple’s fiscal third quarter, but have made some revisions to those estimates in light of recently released data on Macintosh sales by the Gartner Group.
I am now looking for Apple to record approximately $1.20 in EPS on $7.720 billion in revenue. I expect Apple to sell 2.54 million Macs, 10.5 million iPods and about 700,000 iPhones. I expect gross margins to rise to 34%, operating expenses to rise to $1.225 billion, and OI&E to rise to $165 million. I expect Apple to post net income of $1.08 billion after taxes of $485 million.
In terms of the revenue breakdown from Apple’s primary operations, I am looking for Apple to produce $3.725 billion in revenue from Mac sales (2.54 million Macs at $1,466.43 ASP), $1.785 billion in iPod sales (10.5 million iPods at $170 ASP), and a total of about $2.2 billion derived from its other primary operations (this includes revenue Apple recognizes through its other music related products and services, iPhone and related products & services, peripherals & other hardware, and software, service and other sales). The table below compares my overall estimates to Apple’s guidance.
Segment Information & Product Summary
Macintosh Sales: $3.725 billion
iPods: $1.785 billion
Other Music Related Products & Services: $810 million
iPhone: $400 million
Peripherals: $420 million
Software: $580 million
Total Revenue: $7.72 billion
Below are my third quarter estimates compared to the latest estimates on file from several of the more prominent Wall Street analysts covering Apple.
My Estimates Compared to Analyst Estimates Last Quarter (Q2 2008)
The table below compares my earnings forecast with some of the top analyst forecasts from last quarter.* The numbers highlighted in “blue” designate the closest estimate to Apple’s actual report whereas the numbers highlighted in “red” designate the estimate which was furthest from Apple’s actual report.*
Katy Huberty of Morgan Stanley missed on four out of the six major areas of prediction last quarter, shorting revenue by almost a cool billion ($815 million).
Alternatively, Mike Abramsky of RBC Capital is really starting to make a name for himself as one of the better analysts covering Apple. He was the closest out of Wall Street analyst in predicting revenue, iPods and Mac sales last quarter. He also recently made the excellent prediction that Apple would sell about 1 million 3G iPhones on opening weekend.
Andy Zaky is an AppleInsider contributor and the founder and author of Bullish Cross, an online publication that provides in-depth analysis of Apple's financial health.
Disclosure: Andy owns long term 2009 and 2010 call options in Apple. The information contained in this post is not to be taken as either an investment or trading recommendation, and serious traders or investors should consult with their own professional financial advisors before acting on any thoughts expressed in this publication.
Despite the general bearish feel going around on Wall Street, the “whisper numbers” have rose as high as $1.11 on $7.45 billion in revenue. In mid-June, I published my initial earnings forecast for Apple’s fiscal third quarter, but have made some revisions to those estimates in light of recently released data on Macintosh sales by the Gartner Group.
I am now looking for Apple to record approximately $1.20 in EPS on $7.720 billion in revenue. I expect Apple to sell 2.54 million Macs, 10.5 million iPods and about 700,000 iPhones. I expect gross margins to rise to 34%, operating expenses to rise to $1.225 billion, and OI&E to rise to $165 million. I expect Apple to post net income of $1.08 billion after taxes of $485 million.
In terms of the revenue breakdown from Apple’s primary operations, I am looking for Apple to produce $3.725 billion in revenue from Mac sales (2.54 million Macs at $1,466.43 ASP), $1.785 billion in iPod sales (10.5 million iPods at $170 ASP), and a total of about $2.2 billion derived from its other primary operations (this includes revenue Apple recognizes through its other music related products and services, iPhone and related products & services, peripherals & other hardware, and software, service and other sales). The table below compares my overall estimates to Apple’s guidance.
Segment Information & Product Summary
Macintosh Sales: $3.725 billion
iPods: $1.785 billion
Other Music Related Products & Services: $810 million
iPhone: $400 million
Peripherals: $420 million
Software: $580 million
Total Revenue: $7.72 billion
Below are my third quarter estimates compared to the latest estimates on file from several of the more prominent Wall Street analysts covering Apple.
My Estimates Compared to Analyst Estimates Last Quarter (Q2 2008)
The table below compares my earnings forecast with some of the top analyst forecasts from last quarter.* The numbers highlighted in “blue” designate the closest estimate to Apple’s actual report whereas the numbers highlighted in “red” designate the estimate which was furthest from Apple’s actual report.*
Katy Huberty of Morgan Stanley missed on four out of the six major areas of prediction last quarter, shorting revenue by almost a cool billion ($815 million).
Alternatively, Mike Abramsky of RBC Capital is really starting to make a name for himself as one of the better analysts covering Apple. He was the closest out of Wall Street analyst in predicting revenue, iPods and Mac sales last quarter. He also recently made the excellent prediction that Apple would sell about 1 million 3G iPhones on opening weekend.
Andy Zaky is an AppleInsider contributor and the founder and author of Bullish Cross, an online publication that provides in-depth analysis of Apple's financial health.
Disclosure: Andy owns long term 2009 and 2010 call options in Apple. The information contained in this post is not to be taken as either an investment or trading recommendation, and serious traders or investors should consult with their own professional financial advisors before acting on any thoughts expressed in this publication.
Comments
I'm just wondering if the author was aware that Apple is not including the iPhone in this quarter's report.
It's the quarter's revenue for the iPhones they've sold previously (subscription 24 month thingy)... But I get your point.
I'm just wondering if the author was aware that Apple is not including the iPhone in this quarter's report.
This is correct. According to the CC in April, because of the announcement (March 6th) of iPhone 2.0, Apple decided to not report revenue from any new iPhones sold between the announcement and the release of 2.0. The expectation was by the end of June, but we know now that it didn't happen until July 11th. Therefore, no revenue from any iPhone sold between March 6 and June 30 will be reported on last quarter's income.
It's the quarter's revenue for the iPhones they've sold previously (subscription 24 month thingy)...
Yes, but that is different from the implications of the claim that Apple will have sold 700k iPhones last quarter. The revenue from those phones will not be recognized until this quarter.
I'm just wondering if the author was aware that Apple is not including the iPhone in this quarter's report.
I'm fully aware of all iPhone related recognition issues. Apple will recognize past quarters' revenue from the iPhone which amounts to about $400 million. It will not recognize any revenue from the 700,000 it sold this past quarter.
See here:
http://www.appleinsider.com/articles...es_iphone.html
Yet, that doesn't mean one shouldn't include unit sales in his/her estimates which is different than revenue estimates.
Apple is set to report earnings for its fiscal third quarter after the close of regular hours trading this afternoon. Analysts polled by Thomson Financial expect the company to post earnings of $1.08 on $7.37 billion in revenue, fueled by sales of 2.2 million Macs, 10 million iPods and about 700,000 iPhones.
Despite the general bearish feel going around on Wall Street, the “whisper numbers” have rose as high as $1.11 on $7.45 billion in revenue. In mid-June, I published my initial earnings forecast for Apple’s fiscal third quarter, but have made some revisions to those estimates in light of recently released data on Macintosh sales by the Gartner Group.
I am now looking for Apple to record approximately $1.20 in EPS on $7.720 billion in revenue. I expect Apple to sell 2.54 million Macs, 10.5 million iPods and about 700,000 iPhones. I expect gross margins to rise to 34%, operating expenses to rise to $1.225 billion, and OI&E to rise to $165 million. I expect Apple to post net income of $1.08 billion after taxes of $485 million.
In terms of the revenue breakdown from Apple’s primary operations, I am looking for Apple to produce $3.725 billion in revenue from Mac sales (2.54 million Macs at $1,466.43 ASP), $1.785 billion in iPod sales (10.5 million iPods at $170 ASP), and a total of about $2.2 billion derived from its other primary operations (this includes revenue Apple recognizes through its other music related products and services, iPhone and related products & services, peripherals & other hardware, and software, service and other sales). The table below compares my overall estimates to Apple’s guidance.
Segment Information & Product Summary
Macintosh Sales: $3.725 billion
iPods: $1.785 billion
Other Music Related Products & Services: $810 million
iPhone: $400 million
Peripherals: $420 million
Software: $580 million
Total Revenue: $7.72 billion
Below are my third quarter estimates compared to the latest estimates on file from several of the more prominent Wall Street analysts covering Apple.
My Estimates Compared to Analyst Estimates Last Quarter (Q2 2008)
The table below compares my earnings forecast with some of the top analyst forecasts from last quarter.* The numbers highlighted in “blue” designate the closest estimate to Apple’s actual report whereas the numbers highlighted in “red” designate the estimate which was furthest from Apple’s actual report.*
Katy Huberty of Morgan Stanley missed on four out of the six major areas of prediction last quarter, shorting revenue by almost a cool billion ($815 million).
Alternatively, Mike Abramsky of RBC Capital is really starting to make a name for himself as one of the better analysts covering Apple. He was the closest out of Wall Street analyst in predicting revenue, iPods and Mac sales last quarter. He also recently made the excellent prediction that Apple would sell about 1 million 3G iPhones on opening weekend.
Andy Zaky is an AppleInsider contributor and the founder and author of Bullish Cross, an online publication that provides in-depth analysis of Apple's financial health.
Disclosure: Andy owns long term 2009 and 2010 call options in Apple. The information contained in this post is not to be taken as either an investment or trading recommendation, and serious traders or investors should consult with their own professional financial advisors before acting on any thoughts expressed in this publication.
[ View this article at AppleInsider.com ]
Why do you think the stock is being punished harshly today down to $161.xx?
I own a private hedge fund and it looks like all the financial shorts are now shorting tech big time regardless of whether Apple blows out the numbers or not. It seems that for each iPhone that is sold, Apple sells 3 to 4 Macs. My family owns 5. I think the shorts should be taken out and shot on this one. What do you think?
Greg
Why do you think the stock is being punished harshly today down to $161.xx?
I own a private hedge fund and it looks like all the financial shorts are now shorting tech big time regardless of whether Apple blows out the numbers or not. It seems that for each iPhone that is sold, Apple sells 3 to 4 Macs. My family owns 5. I think the shorts should be taken out and shot on this one. What do you think?
Greg
I think they are just doing their job. They will be hurt severely tomorrow when they reap the harvest of what they have sown .
Why do you think the stock is being punished harshly today down to $161.xx?
I own a private hedge fund and it looks like all the financial shorts are now shorting tech big time regardless of whether Apple blows out the numbers or not. It seems that for each iPhone that is sold, Apple sells 3 to 4 Macs. My family owns 5. I think the shorts should be taken out and shot on this one. What do you think?
Greg
I think that Apple is valued as a growth stock, not based on current revenue. Thus the relatively high P/E ratio compared to other stocks. And if you look at the stock outlook over the next few quarters, there might be a couple bumps in the road (and a slight stalling of top-line growth). The slow activation of iPhone 3G's probably pushed Apple's revenue-per-hour severely downward in all their retail stores-- both in terms of iPhones and Macs that people didn't buy because they didn't want to go anywhere near an Apple Store and/or couldn't get the heck inside.
Since iPhones are ammortized over an extended period of time ("subscription" valuation), but Macs are accounted for in whole the quarter they're sold, I see risk for the current quarter's numbers and a likelihood that Apple is going to guide unusually conservatively due to the possibility that Apple is focusing on iPhones instead of Macs right now.
And, in the end, I think most investors probably just fast forward to the guidance bit of the conference call and ignore the past quarter's numbers when looking at a buy/sell decision after announcements.
Yet, that doesn't mean one shouldn't include unit sales in his/her estimates which is different than revenue estimates.
Yes, but the implication in your original story is that the iPhone sales will be counted as a part of the revenue stream for the quarter. It's sloppy writing, at least.
It's not just you. Every analyst I've read over the last few weeks has made the same, or worse, implication. It's setting AAPL up for a fall. Great for buyers like me. Bad for the less educated stock holders.
It's just sloppy, really. Shaw Wu is a particularly egregious example.
Why do you think the stock is being punished harshly today down to $161.xx?
I own a private hedge fund and it looks like all the financial shorts are now shorting tech big time regardless of whether Apple blows out the numbers or not. It seems that for each iPhone that is sold, Apple sells 3 to 4 Macs. My family owns 5. I think the shorts should be taken out and shot on this one. What do you think?
Greg
You own a hedge fund and you are asking an internet forum what to do?
(I wonder what your clients would think of that.)
Make a call and put your money where your mouth is.
Yes, but the implication in your original story is that the iPhone sales will be counted as a part of the revenue stream for the quarter. It's sloppy writing, at least.
It's not just you. Every analyst I've read over the last few weeks has made the same, or worse, implication. It's setting AAPL up for a fall. Great for buyers like me. Bad for the less educated stock holders.
It's just sloppy, really. Shaw Wu is a particularly egregious example.
Umm. No. Tell me where the writing implicates that Apple will record any revenue from the 700,000 iPhones recorded. Everyone knows Apple is not recording revenue this quarter. As a matter of fact, no one even cares about iPhone sales in this report. We all know that Apple discontinued the EDGE iPhone for most of the quarter.
The article doesn't imply anything with regards to revenue recognition. Do you want every analyst to state that Apple won't be recording revenue from iPhones sold between early March and July 11? I've already said that numerous times. Here's one of those times:
http://www.appleinsider.com/articles...es_iphone.html
Don't be so worried about iPhone sales or iPHone revenue. No one cares about these numbers this quarter. The focus will be on iPod sales, Mac sales and Gross margins. And hopefully, to a lesser degree, guidance.
You own a hedge fund and you are asking an internet forum what to do?
(I wonder what your clients would think of that.)
Make a call and put your money where your mouth is.
Touche.
Yes, but that is different from the implications of the claim that Apple will have sold 700k iPhones last quarter. The revenue from those phones will not be recognized until this quarter.
Oh I see your concern. You're worried about the first line of the article? Ya. One could misconstrue that as implying that revenue is derived from those 700,000 iPhones. The line is suppose to be informative of expectations. Yet, like I said. No one cares about iPhone sales or revenue this quarter.
...No one cares about iPhone sales or revenue this quarter...
Hi Andy, welcome to AI Forums... Appreciate your articles and insight, but statements like that, well, the forum people here are pretty touchy.
Oh I see your concern. You're worried about the first line of the article? Ya. One could misconstrue that as implying that revenue is derived from those 700,000 iPhones. The line is suppose to be informative of expectations. Yet, like I said. No one cares about iPhone sales or revenue this quarter.
No offense to anyone, but if I had half a brain (maybe that's the problem already), as an investor or someone interested in Apple, the big question I would have is,
Given that AAPL and Apple,Inc. is poised as a major growth company/ stock/ etc. Given that the iPhone 3G is ludicrously popular, how is Apple going to sustain such growth? From a financial, leadership, operations perspective?
If Apple is at such a phenomenal place right now, and people are not able to access their products and services, due to the entire company being under major strain as a result of its own success... How will Apple sustainably manage this situation and prevent the large pool of potential customers salivating at the gates from being turned off?
I would make the big call and say, for every 2 iPhone 3G enquiries that a customer experiences as "out of stock", one of those customers is going to pop next door and buy a Nokia.
Finally, from a global perspective, anyone that seriously thinks of AAPL reaching $300 by end of next year will have to see a strong, sustainable, successful rollout of the iPhone 3G in cumulatively over 70 countries in the world.
One more thing.
You see any focus on Apple should logically be along the lines of the "three legs" of Apple in Steve's vision. At the end of the day, the question is, as it has been for the iPod, how does hype translate into sustained growth and expansion of the company through those three legs. The iTunes Store, particularly the App Store, what with movies and so on, is a phenomenal success for Apple. Imagine if Apple opened up legal music downloads in a lot of Asia. They could potentially double their revenue stream from the iTunes Store alone. It's a daunting task but anyone that has studied Asian media piracy would know that there are ways to tackle the problem. Here's a hint: offer great Karaoke-ready tracks. And a hell of a lot of Indian and Chinese-speaking artists.
If Apple and AAPL is going to survive the harrowing state the US economy is in right now, these are the kinds of questions US business leaders, employees, shareholders and voters must start to ask.
More than ever, survival now could hinge on Thinking Different.
I have no clients! FYI, the Shorts go from one sector to another. They left Financials and went into Tech after GOOG and MSFT earnings! Have a nice day and be nice to people. It works better for you in the long run!
Oh I see. You don't own a hedge fund, rather you have made an investment in a hedge fund.
My mistake. If you are going to give your money to other people to invest for you, it is
important to find someone you can trust enough that you do not have to obsess over
things like whether short sellers are hitting AAPL. If you can't relax, you might as well
handle your own investment decisions. That was the nicest tip I could think of to give you.
With regard to niceness in general, you may have a point, except when it comes to
areas where there is competition (like investing). There Leo Durocher had it right, in my
opinion.
Hi Andy, welcome to AI Forums... Appreciate your articles and insight, but statements like that, well, the forum people here are pretty touchy.
What, you think that the folks here need protection from remarks that they might not like? I find that attitude highly condescending, do you see yourself as a mother figure?
No offense to anyone, but if I had half a brain (maybe that's the problem already), as an investor or someone interested in Apple, the big question I would have is,
Given that AAPL and Apple,Inc. is poised as a major growth company/ stock/ etc. Given that the iPhone 3G is ludicrously popular, how is Apple going to sustain such growth? From a financial, leadership, operations perspective?
If Apple is at such a phenomenal place right now, and people are not able to access their products and services, due to the entire company being under major strain as a result of its own success... How will Apple sustainably manage this situation and prevent the large pool of potential customers salivating at the gates from being turned off?
I would make the big call and say, for every 2 iPhone 3G enquiries that a customer experiences as "out of stock", one of those customers is going to pop next door and buy a Nokia.
Finally, from a global perspective, anyone that seriously thinks of AAPL reaching $300 by end of next year will have to see a strong, sustainable, successful rollout of the iPhone 3G in cumulatively over 70 countries in the world.
One more thing.
Read this excerpt from an article I wrote in June. It talks about managing earnings growth:
With the exception of Q1 and Q2, Apple has historically beaten its EPS guidance by a margin of 50% each quarter. Yet, this trend has likely changed quite significantly due in large part to Apple's shift in managing expectations and guiding more aggressively on the gross margin front. In Q1 and Q2, Apple beat its EPS guidance by a margin of 23.9% and 23.4% respectively. Yet, before these past two quarter, Apple would regularly beat its EPS guidance by a staggering average of 52.2%.
Yet, I think the past two quarters reflects a shift in Apple's earnings strategy from offering ultra-conservative guidance to offering just conservative guidance. This is likely due to the fact that Apple's EPS growth rate is slowing somewhat modestly thus necessitating a practice of both managing expectations and solidifying an income smoothing plan. By using the subscription method of accounting with the iPhone and Apple TV, Apple's management is effectively "smoothing" its income growth rate so as to show consistent solid-growth rather than short-term explosive growth. In other words, Apple's management moderates its income with smoothing tactics while managing expectations by offering more aggressive guidance. In my opinion, by using these tools to effectively manage earnings expectations, Apple's management demonstrates its astute ability to act in the best interest of the shareholders in the long term. This new guidance trend suggests that Apple should earn about $1.24 in EPS which is directly consistent with my EPS forecast. The table below exhibits the trend of Apple's shift in guidance strategy with regards to EPS
http://bullcross.blogspot.com/2008/0...ut-of-way.html
Look up the terms "income smoothing." It should help answer your question about shifting from explosive growth to regular growth. Good managers are able to make the transition smoothly. Allowing the stock to change its character over time.