Monday, January 19, 2015

Fiscal 1Q 2015 Final Estimates

As of Friday's close of $105.99, AAPL is trading at a 12.5x multiple on my next-twelve-months EPS estimate (9.5x ex-cash).

I expect very strong results for Q1 with record-breaking net income of $15.7b, but guidance for Q2 may come in light (even at the top end) relative to expectations. Hope I'm wrong on that.

I'm estimating last quarter's revenue growth in the high teens (setting the tone for the whole 2015 Fiscal Year) as well as strong +39% gross margins, majorly driven by a high proportion of the iPhone user base upgrading to 6 and 6 Plus with unit sell-through growth estimated at 29/24/17% for Q1/Q2/FY15 (compared to 11/27/16% for Q3/Q4/FY14) and FY15 ASPs holding steady or slightly increasing despite FX headwinds early in the fiscal year.

I've finally (and very tentatively) modeled something for Apple Watch: as a base case (for now) I consider it a solid accessory for the iPhone and then strongly discount it by 25-35% (due to final product uncertainty and other unknowns such as pricing potential) which results in about 15% of compatible iPhone penetration (75m of 500m iPhone-5-and-higher user base after first 3 years).

Those saying Watch doesn't move the needle must not be looking beyond FY2015 at all, as in fact I model only 6.5m units for this fiscal year with shipments starting in the end of March contributing 1m units in the current quarter. Yet, my conservative base case already represents about 25% of the company-wide revenue growth in '16 and '17, getting to a modest $20b by then (somewhat slower than iPad which had the steepest revenue uptake of any Apple product, but this excludes additional wristbands and other Watch accessories which I model separately and even more tentatively). Again, it could easily be 2x that, considering the fast adoption of compatible iPhones and the customer base's high acquisition power.

This model saturates relatively quickly (sort of like iPad?), and long-term (beyond 2020) approaches $30b/yr since it's limited by its 15% penetration of compatible iPhones, and by how much the iPhone base itself grows, and a similar assumption (perhaps the only slightly optimistic one?) of roughly 3 years for the replacement cycle. But if Watch becomes untethered from iPhone all bets are off as I have no clear paradigm towards deriving a sensible TAM (other than Horace's silly/profound "every wrist"), guessing a likely penetration and rate of adoption within this TAM, the replacement cycle, and especially pricing. At least not until more clear market size/segment/pricing and version 2.0 signals come about, clues about which at first Apple will wisely try to hide within the new "Other products" catch-all category until the bulge is too obvious. So I don't expect to be able to delve into reframing Watch before the end of Q4, or perhaps next year if we don't get 2.0 by the end of this year.

Mac and iPad continue with their role-reversal tangled dance (Takes Two To Tango!), now about to attempt a 12" twist-move performed by the rumored 12" retina MacBook Air followed by the 12-13" iPad Pro, perhaps starting as soon as this quarter or next. I'm estimating Mac/iPad unit sell-through that's 19/6, 9/13, and 12/4% higher/lower from the same period the previous year in Q1, Q2, and FY15 respectively (compared to 11/10, 20/9, and 15/3% higher-Mac/lower-iPad for Q3, Q4, and FY14 respectively) and ASPs in slight decline during Q1-Q2 mostly due to FX effects (love that pun, FX FX, sorry).

The strong dollar (11-year highs on the USD index) has become an even stronger headwind than last couple of quarters for ASPs and gross margins (as most costs are pegged to the dollar), and yet both metrics will hold up or even increase slightly, such is the pricing power of Apple's current (and soon-to-be-released) product lineup.

Detailed estimates:

3mo ending Dec-2014   Rev($M)   EPS($)   GM(%)
-------------------   -------   ------   -----
Analysts consensus     67,280     2.58
Apple guide low        63,500     2.33*  37.5
Apple guide high       66,500     2.56*  38.5
Deagol estimates       67,670     2.66   39.2 (5.89b shares)

3mo ending Mar-2015   Rev($M)   EPS($)   GM(%)
-------------------   -------   ------   -----
Analysts consensus     53,630     2.00
Apple guide low (e)    50,000     1.79*  38.5
Apple guide high(e)    53,000     2.02*  39.5
Deagol estimates       51,872     1.97   39.8 (5.85b shares)

* EPS guidance ranges derived from other figures provided
  by Apple and diluted shares outstanding estimated by me.

12m ending Sep-2015   Rev($M)   EPS($)
-------------------   -------   ------
Analysts consensus    212,710     7.81
Deagol estimates      213,321     8.06

Valuation (12mo ending on)   EPS($)  Y/Y  10x  Cash* Div  Tot
--------------------------   ------  ---  ---  ----  ---  ---
Trailing        (Dec-2014)     7.02  22%   70    21    2   93
Fair value      (Dec-2015)     8.46  20%   85    25    2  112
1yr target      (Dec-2016)    10.02  19%  100    32    2  134

* Cash/share balance net of long-term debt

F1Q15 Revenue breakdown (millions, except ASP):
iPhone    42,782 (68.0 × $629)
iPad      10,199 (24.0 × $425)
Mac        7,162 (5.65 × $1,268)
Services   4,777
Other      2,749

Income statement (millions, except EPS):
Revenue   67,670
COGS      41,148
GM        26,522
OpEx       5,494
OpInc     21,028
OI&E         329
Pre-tax   21,357
Tax        5,660
NetInc    15,697
Shrs.      5,890
EPS       $ 2.66

GM%        39.2%
OpInc%     31.1%
Tax%       26.5%
NetInc%    23.2%


Anonymous said...

Did you factor in Apple's continue push for buybacks. For the last two years they have put about 2/3s or more of their net income into buybacks? I don't see this stopping. This will continue to have a positive impact on their EPS. Is this in your calculations for the complete fiscal year? I am expecting a EPS of $8.25 for the Fiscal year. With >$4.60 for the first two quarters, the apple watch, and buybacks, getting to $3.65 in the last two quarters shouldn't be a problem.

Daniel Tello said...

Yes, I have them reaching the stated $90b goal this year and then continue buying enough to offset share dilution from employee grants. I'm pretty sure they'll expand the program in April, so I'll revise it then.

Anonymous said...

It's very possible that Apple could continue to buy back between $25B-$35B in stock per year indefinitely. Maybe even a bit more if Apple can hit $250B in revs and growing.

At this point I'd think it odd for Apple to not continue share repurchases on an "automatic" basis each year.

David Bressler (@djbressler) said...


Longer term (after the first year) do you think there's the potential for people to buy more than one watch? I assume there will be more than the 2 designs and 3 versions currently, and "watch people" do tend to buy more than one if the designs serve different purposes.


Daniel Tello said...

Sure, some would do that. A significant number (several millions)? I don't know. I think multiple extra bands/bracelets have a bigger mass potential. We'll see.

Anonymous said...

Many are estimating iPhone ASP in the $650 to $700 range. How did you come up with $629?

thanks, Stefan

Daniel Tello said...

Hi Stefan, as mentioned in the post the dollar has been on a tear last couple of quarters. In particular, the USD index 3-month average is up about 6% form September to December.

This index isn't a perfect representation of how the strong dollar impacts Apple's foreign sales when converted back to dollars, but at least it's something. And the 3-month average assumes a linear profile of sales over the quarter, while the reality is that Q1 is strongly backloaded. So it's just sort of a guideline.

Thus, I've impaired iPhone ASP by about 4% and modeled a smaller impact for the other product lines.

JavaJack said...

While the strong US dollar may be causing headwinds as you say, my investment as a Canadian with the Canadian dollar now down 20 cents to the US dollar has been a really nice, unexpected bonus for me. As always, thanks for the great information and estimates that you put so much work into.

Jack Tunnicliffe