Posts At Eventide: AAPL June Quarter Trends To Track

Following the release of Apple's March quarter results earlier this week there are several trends impacting near-term revenue and earnings growth that have either been confirmed by the March quarter results or more conspicuously revealed by the results. I will be tracking the following trends throughout the June quarter:

The Global Tablet Market: I've said several times outside of the Apple iPad, a global consumer market for tablet devices does not currently exist. While iPad unit shipments in the March quarter were below the expectations of most analysts due primarily to supply constraints, the tablet market is in a nascent phase of development. The Apple iPad will remain the undisputed leader in the tablet market well into CY 2012. The market can not at this time economically support a large number of potential competitors and Apple's global retail store presence is a competitive advantage competitors simply can not match.

The Apple iPhone Reigns Supreme: The Apple iPhone is Apple's preeminent revenue product. For the next several quarters the Apple iPhone will continue to dominate the global smartphone market. Revenue share is far more important than unit sales and the perceived threat to the iPhone eco-system from Android-based smartphones is nothing more than smoke and mirrors. 

The successor to the iPhone 4 (to debut later this year) will be a success on scale previously unseen even by iPhone standards. Within 90 days of release of the iPhone 4's successor, Apple will ship in the range of 30 million iPhone handsets (all models combined) provided supply can keep pace with demand. 

The Apple iPad Has A Definitive Halo Effect: The Apple iPad is a draw to Apple's retail stores. In the December quarter retail store revenue rose 95% and rose 90% in the March quarter. As much as the Apple iPad is putting pressure on global PC shipments, heavy store traffic is boosting macintosh sales. Since the release of the Apple iPad, retail store revenue growth has outpaced the pace of revenue growth of the company as a whole. 

Thank You to PED And The Active Members Of The AFB

I'd like to extend a thank you to Philip Elmer-DeWitt at Apple 2.0 for another compelling quarterly comparison of AAPL estimates from the bloggers and the Wall Street pros. Over the past several quarters Mr. Elmer-DeWitt has been the catalyst for transforming AAPL analysis into a participatory sport.

As the moderator of the Apple Finance Board (AFB) I'd to thank my fellow AFB members and independent bloggers Horace Dediu, Dennis Hildebrand, Turley Muller, Daniel Tello and Andy M. Zaky for their participation in the Apple 2.0 quarterly estimate comparisons as well as AFB members Jeff Fosberg, Alexis Cabot, Luke Kittell, Chas McKenna, Patrick Smellie, Adam Thompson and Mark Beauch. This quarter I'd like to see more of the AFB members participating in the quarterly analyst comparisons enter the blogosphere. Each of you are standouts and should more actively publish your insights and analysis.

The purpose of Posts At Eventide is to provide a wide range of information and analysis on the performance of Apple Inc. Thank you to all of the active members of the AFB mentioned above for being an inspiration to continue the hard work.

Robert Paul Leitao

AAPL FQ2 Analyst Estimates: The Revenue And Net Income Test

On December 19th, 2010 I published a post titled Apple: Testing Analyst EPS Estimates With Revenue Forecasts. In that post I demonstrated a fairly easy method to test the relationship between an analyst's revenue and eps estimates. 

In Apple's 1st fiscal quarter of FY 2011 (the December quarter) roughly 22.45% of each revenue dollar flowed to the net income line. In this post I'm comparing the March quarter revenue and eps estimates of 14 unaffiliated analysts and 34 Wall Street analysts as published by Philip Elmer-DeWitt at Apple 2.0 to determine each analyst's net income to revenue ratio.

Bloggers Versus The Pros
Each quarter Apple 2.0 publishes analyst estimates and categorizes the estimates based on the affiliation of the analysts on the list - professional Wall Street analysts or unaffiliated analysts such as myself. My March quarter estimates are published in a separate post at Posts At Eventide and are included in the list. There's usually a wide gap in the average revenue and eps estimates between the members of the two groups. The gap in the March quarter estimates between the professional Wall Street analysts and the unaffiliated analysts illustrates this consistent trend. Not only is there a gap in the average revenue and eps estimates, there are also gaps in the estimated percentage of revenue the analysts suggest will flow to Apple's net income line.

Revenue and Net Income Estimates By Analyst
To determine the percentage of revenue each analyst estimates will flow to the net income line, I multiplied the published eps estimates as provided by Apple 2.0 by a constant of 937.5 million shares (an estimate of the number of fully diluted shares in the March quarter) and then divided that outcome by each analyst's revenue estimate that had been rounded to the nearest $100 million.

With the exception of Scott Craig, Andy Hargreaves, Toni Sacconaghi and Mike Abramsky, the Wall Street pros expect Apple's net income to revenue ratio in the March quarter to be below the FQ1 performance. The estimates from Mike Abramsky and Brian Marshall hover around the December quarter's net income to revenue performance along with the estimate from unaffiliated analyst and Apple Finance Board (AFB) member Mark Beauch.

Among the unaffiliated analysts Turley Muller estimates net income to reach about $.2413 of each revenue dollar while bloggers Andy Zaky, Daniel Tello, Robert Paul Leitao and Horace Dediu estimate net income to reach above the $.23 per revenue dollar threshold along with Nicolae Mihalache and AFB members Jeff Fosberg, Alexis Cabot, Luke Kittell, Patrick Smellie, Adam Thompson and Chas McKenna. Please see the table of analyst estimates below the break. The revenue estimates listed are in billions of dollars. 

FY 2012 Analyst Estimates: Why AAPL Is Set To Pop

On September 11, 2010 I published a post titled FY2011 Analyst Estimates: Why AAPL Is Set To Pop. At the time the post was published AAPL had ended the week's trading at $263.41. Seven months later and with AAPL closing on Friday at $335.06, the share price is poised to again move higher and more than surpass the all-time trading high of $364.90 set on February 16, 2011.

Analyst FY 2011 Estimates

At Friday's closing price of $335.06 and a price-earnings multiple of 18.69 times trailing 12-month earnings per share, AAPL is trading at a deep discount to the company's 67% rate of eps growth in FY 2010 and the December quarter's eps growth rate of 75.2%. The current Wall Street consensus for the March quarter is revenue of $23.18 billion and eps of $5.33 per share or an eps growth rate of 60%. For FY 2011, ending in September, analysts are expecting revenue of $100.43 billion or about 54% revenue growth and eps of $22.97 or  eps growth of about 51.2%. Both estimates are well below current rates of growth. In the December quarter revenue rose 70.5% and eps 75.2%. But the disconnect between the analyst consensus and the company's current rates of growth become even more dramatic for fiscal year 2012 that begins in late September. 

FY 2012 Analyst Estimates

Expanding on a comment I made on a recent Apple 2.0 column titled AAPL: What Could Go Wrong?, the Street FY 2012 estimates for AAPL deny reality. The current Wall Street analyst consensus for FY 2012 is revenue of $117.95 billion and eps of $26.51. It's possible (and increasingly probable) Apple will meet or exceed those average estimates this fiscal year. In other words, the Street is forecasting zero revenue and earnings growth for next fiscal year. If Apple's December quarter rates of revenue and eps growth remain consistent, the company will report revenue of $111.20 billion and eps of $26.54 this fiscal year. For the March quarter I estimate revenue growth of  87% and eps growth of just under 90%. For the fiscal year I expect earnings per share of no less than $27. 

To reach the Street's current FY 2012 revenue consensus in FY 2011 revenue would need to rise this fiscal year by about 81%. To reach the FY 2012 eps consensus in FY 2011, eps would need to rise this fiscal year about 75% or about the same rate of eps growth reported in the December quarter.

Apple's Dynamic Revenue Mix

To sustain strong revenue and eps growth over the next eighteen months and through FY 2012, Apple does not need to release additional new products. In the recent December quarter (and according to my estimates again in the March quarter), iPhone revenue growth exceeded total revenue from iPad sales activity. The company's existing product lines (now including the Apple iPad) already provide a strong foundation for revenue and earnings growth for at least the next eighteen months. 

iPad revenue will surpass the revenue generated from Macintosh unit sales in the current June quarter, positioning the iPad as Apple's second highest revenue generator behind only the iPhone. The expanded domestic iPhone distribution that now includes Verizon network subscribers and the expected expansion of iPhone distribution in China sometime prior to the start of FY 2012 will sustain high rates of iPhone unit sales growth through the next fiscal year. The global market for the Apple iPad is in its early stages of development and iPad unit sales growth will also support strong revenue growth for the next several quarters. These factors alone suggest FY 2012 revenue of at least $165 billion and eps of at least $40, well above current Wall Street analyst estimates.

The AFB AAPL FQ2 Estimate Index

The AFB AAPL FQ2 Estimate Index

The active members of the Apple Finance Board are best described as an assemblage of talented individuals with colorful personalities. They are outspoken, hardworking and focused on understanding everything there is to know about Apple and the company's financial performance.

As a service to the members of the AFB, a popular and well respected discussion board, I'm hosting the revenue and earnings estimates for Apple's second fiscal quarter developed by members of the community. As the host of the index and commentator on the members and their entries I've published my quarterly estimates in a separate blog entry at Posts At Eventide. 

This is the second consecutive quarter AFB member quarterly estimates have been collected and published. Although several members are new to the quarterly estimate development process newness to publishing estimates belies years of studying Apple as a company and years of familiarity with the company's popular and award-winning products. 

The average estimate of the 24 AFB members participating in the FQ2 index indicates expected revenue of $25.746 billion and earnings per share of $6.39. This is in contrast to the current Wall Street consensus of $23.15 billion in revenue and eps of $5.32. The AFB member revenue estimate represents an expected 90.7% rise in revenue in the quarter and eps growth of 91.9% over the prior-year period. All numbers in the chart below are in millions except per share data. 

Knowing the active members of the AFB from years of moderating the discussion board, it's a pleasure to host the FQ2 index at Posts At Eventide. Comments on the index can be made below and for registered members of the AFB in the topic created specifically for this discussion. 

Robert Paul Leitao


(Post edited 04/10/2011 to include estimates from Andy M. Zaky)

Posts At Eventide AAPL FQ2 Estimates

Posts At Eventide AAPL FQ2 Estimates

As an independent AAPL analyst and moderator of the Apple Finance Board I've witnessed the continuing transformation of Apple from primarily a one product company at the beginning of this millennium to a newly claimed position as a global technology leader offering an array of popular and award-winning products. 

My estimates rely heavily on Apple's recent quarterly results and I actively track trends that emerge on a rolling basis over the most recent eight fiscal quarters. For more information on the data I compile and the results I track, please see the Posts At Eventide Resource Guide.

FQ2 Revenue and Earnings Estimates

For the March quarter my models forecast revenue of $25.256 billion and earnings per share of $6.30. This represents anticipated revenue growth of 87% over the prior-year period and eps growth of 89%.

This extraordinary pace of revenue growth is due in part to an accelerating rate of iPhone unit sales boosted by the iPhone on the Verizon network and a lessening of iPhone supply constraints. In the March quarter I anticipate revenue growth from iPhone unit sales to be greater than the total revenue generated from iPad unit sales activity.

In year-over-year comparisons I expect a slight reduction in gross margins. Apple has become more aggressive on product pricing in pursuit of increasing unit sales. iOS-based devices (the iPhone, iPad and iPod touch) are designed to deliver post-purchase revenue activity over the economic life of each unit sold. Offsetting the moderation in gross margins is the reduction of operating expenses relative to revenue. For the second consecutive quarter I anticipate operating expenses consuming less than 10% of reported revenue. For an analysis of the growth in operating expenses relative to growth in revenue, please see my February post titled Apple's SG&A Expenses Versus Revenue. 

Posts At Eventide FQ2 AAPL Estimates

	Revenue Segment	Units FQ2 '11	Units FQ2 ’10	Unit Growth	FQ2 Revenue
	Macintosh	3,625,000	2,943,000	23.2%	4,585,625,000
	iPhone	18,125,000	8,752,000	107.1%	11,563,750,000
	iPod	10,000,000	10,885,000	-8.1%	1,800,000,000
	iPad	6,750,000	N/A	100%	4,320,000,000
	Peripherals				565,000,000
	Software, Services				762,500,000
	Other Music				1,658,750,000
	Revenue Total				25,255,625,000
	Cost of Sales	60.2%			-15,203,886,250
	Gross Margin	39.8%			10,051,738,750
	Operating Expenses	9.5%			-2,400,000,000
	Operating Income	30.3%			7,651,738,750
	Other Income				125,000,000
	Income Before Taxes				7,776,738,750
	Provision For Taxes	24%			-1,866,417,300
	Net Income	23.4%			5,910,321,450
	Earnings Per Share	937,503,000	Shares		6.30