Expectation Meters for Apple's 1Q20 Earnings

My expectation is for Apple to report good 1Q20 results as the company benefits from a wearables platform that is gaining momentum with consumers around the world. Apple wearables are positioned to be the top story when the company reports 1Q20 earnings tomorrow.

Apple’s 1Q20 results and 2Q20 guidance may contain some financial noise. Accounting related to Apple's TV+ promotion and AirPods Pro supply issues will likely result in some revenue being pushed off to subsequent quarters. Meanwhile, anxiety surrounding coronavirus may add some complexity when it comes to Apple’s revenue guidance range for 2Q20.

My 1Q20 Estimates

The following table contains my estimates for Apple’s 1Q20 and revenue guidance for 2Q20.

An in-depth discussion of these estimates, including the methodology and perspective behind the numbers, is found in my 3,900-word Apple 1Q20 earnings preview available here. Above Avalon membership is required to read my earnings preview.

In what has become a quarterly tradition at Above Avalon, I publish expectation meters ahead of Apple's earnings. Expectation meters turn single-point financial estimates into more useful ranges that aid in judging Apple's business performance.

Ahead of Apple’s 1Q20 earnings, I am publishing three expectation meters:

  1. iPhone Revenue

  2. Wearables / Home / Accessories Revenue

  3. 2Q20 Revenue Guidance

iPhone Revenue

In each expectation meter, the number found in the white shaded box reflects my official single-point estimate. A result that falls in the gray shaded area would be considered near my estimate. This signifies that the product or variable being measured is pretty much performing as expected. A result that falls in the green shaded area denotes strong performance and the possibility of me needing to raise my expectations for that particular item going forward. Vice versa, a result falling in the red shaded area denotes the possibility of needing to reduce my expectations going forward.

As shown below, my expectation is for Apple to report $51.9 billion of iPhone revenue for 1Q20. A result within $51.5 billion to $52.5 billion of revenue would be considered near my expectation. An iPhone revenue result that exceeds $52.0 billion would signal the iPhone business has officially returned to growth after four quarters of revenue declines.

Wearables / Home / Accessories Revenue

Apple’s “Wearables / Home / Accessories” catch basin stands to be the most intriguing product category when it comes to 1Q20 results. The category includes revenue from AirPods, Apple Watch, Beats, Apple TV, HomePod, iPod touch, and various Apple-branded and third-party accessories.

There are three primary revenue growth drivers in this segment (in the following order): AirPods, Apple Watch, and accessories. Each driver looks to have had a good 1Q20.

In what ends up saying a lot about today’s Apple, the “Wearables / Home / Accessories” category is well-positioned to be the top driver of the company’s year-over-year revenue growth (+$4 billion), exceeding Services year-over-year revenue growth (+$2 billion) by a wide margin.

As shown below, my expectation is for Apple to report $11.3 billion of revenue in “Wearables / Home / Accessories” with AirPods and Apple Watch responsible for the vast majority of that revenue.

2Q20 Revenue Guidance

Sell-side consensus expects Apple to report $62.5 billion of revenue in 2Q20. My estimate is for Apple to announce 2Q20 revenue guidance in the range of $57.5 billion to $60.5 billion. This range is a bit low as it includes a $2 billion negative impact from coronavirus in China. One near-term risk facing Apple in China is coronavirus resulting in less customer demand due to the various travel restrictions and reduction in retail foot traffic. While there are ways of mitigating those potential headwinds, Apple may not be able to escape without some impact.

Close attention to management commentary will be required when it comes to assessing whether or not guidance reflects coronavirus risk factors. In the event that Apple sees no discernible impact from coronavirus, having the low end of management’s 2Q20 revenue guidance end up closer to $60B would be considered a good result.

My full 3,900-word Apple 1Q20 earnings preview, along with my working Apple earnings model (an Excel file that also works in Numbers), are available here. Above Avalon membership is required to read the earnings preview. Access to my Apple earnings model is available to Above Avalon members at no additional cost.

My earnings review will be sent exclusively to Above Avalon members after Apple reports. To have the review sent directly to your inbox on Wednesday morning (ET), sign up at the membership page.

Apple 4Q19 Earnings Expectation Meters

There is increased attention around Apple’s 4Q19 results. Apple shares are up 19% since the company reported 3Q19 results back on July 30th. Since the start of the year, AAPL shares are up 58% while the S&P 500 is up 21%. For a trillion dollar market cap company, such outperformance is noteworthy.

Apple’s strong stock performance has led to questions regarding what management will have to announce on Wednesday to meet or exceed expectations. At the same time, Apple’s 4Q19 results have the potential of containing some noise as Apple works through its flagship iPhone and Apple Watch launch. For example, the iPhone was not in demand / supply equilibrium by quarters end.

The following table contains my overall estimates for Apple’s 4Q19. My expectation is for Apple to report strong 4Q19 results and 1Q20 revenue guidance.

A detailed discussion of these estimates, including the methodology and perspective behind the numbers, is found in my Apple 4Q19 earnings preview available here. Above Avalon membership is required to read my earnings preview.

Each quarter, I publish expectation meters ahead of Apple's earnings release. Expectation meters turn single-point financial estimates into more useful ranges that aid in judging Apple's business performance. In each expectation meter, the white shaded area reflects my official single-point estimate. The gray shaded area represents a result that is considered near my estimate. A result that falls within this gray area signifies that the product or variable being measured is pretty much performing as expected. A result that falls in the green shaded area denotes strong performance and the possibility of me needing to raise my expectations for that particular item going forward. Vice versa, a result falling in the red shaded area denotes the possibility of needing to reduce my expectations going forward.

Over the years, the expectation meters have evolved with Apple’s changing business and financial disclosures. Ahead of Apple’s 4Q19 earnings, I am publishing three expectation meters:

  1. Products vs. Services Revenue

  2. iPhone vs. non-iPhone Revenue

  3. 1Q20 Revenue Guidance

Products vs. Services

Apple breaks out revenue into two categories: products (i.e. hardware) and services. The iPhone likely weighed on Apple’s 4Q19 products revenue due to both declining unit sales and a lower average selling price (ASP). The end result is products revenue that will show little to no growth. Partially offsetting lackluster growth in products, Apple’s Services revenue is expected to grow in the vicinity of 15%. This dynamic will likely improve in FY2020 as both products and services will once again contribute to Apple revenue growth.

iPhone vs. Non-iPhone

Another way of thinking about Apple’s business is to allocate the company’s various products and services into two buckets: iPhone and non-iPhone. Last quarter, Apple’s non-iPhone business registered more revenue than the iPhone business for the first time since 2012. It is unlikely that this dynamic will repeat itself in 4Q19 as the iPhone business gains revenue momentum due to the flagship iPhone launch.

Guidance

Consensus expects Apple to report $86B of revenue in 1Q20. That seems on the light side. My estimate is for Apple to announce 1Q20 revenue guidance in the range of $88B to $91B. Apple has to report more than $88.3B of revenue in 1Q20 to reach a new all-time record for quarterly revenue.

Apple has two tailwinds for issuing strong 1Q20 revenue guidance:

  1. Apple is facing one of the easier year-over-year quarterly compares in years given the demand implosion in China seen in November and December 2018. This will make it that much easier for Apple to report revenue growth in 1Q20.

  2. The environment is conducive to both Apple Watch and AirPods selling well during the 2019 holiday shopping season. Apple not only faces a lack of genuine smartwatch or wireless headphone competition, but also has strong product lines with attractive entry-level pricing available.

On the flip side, one headwind worth monitoring is declining iPhone ASP. Apple cut pricing of its lowest-priced flagship iPhone by $50. In addition, Apple remains aggressive with pricing outside the U.S.

Despite Apple’s strong stock price outperformance so far this year, the company continues to have the lowest forward valuation multiples among the Wall Street giants. A good argument can be made that Apple’s strong stock price outperformance in 2019 hasn’t been driven by expectations of strong 4Q19 numbers or even solid 1Q20 guidance. Instead, the marketplace may be betting on improved visibility around Apple’s financials through FY2021. The environment is becoming more hospitable for iPhone revenue growth to return in FY2020. At the same time, Apple wearables continue to gain momentum. There is then growing smoke around the idea of Apple potentially having a busy first half of CY2020 from a new product perspective.

My working Apple earnings model as well as my granular 4Q19 estimates including unit sales, ASP, and margin expectations, are available here. Above Avalon membership is required to read my full 4,000-word earnings preview. Access to my model is available to members at no additional cost.

My Apple earnings review will be made available exclusively to Above Avalon members. To have the review sent directly to your inbox once published, sign up at the membership page.

Apple 3Q19 Earnings Expectation Meters

Apple finds itself in a financial tug-of-war as declining iPhone revenue is being offset by growth in every other product category. When Apple reports 3Q19 earnings on Tuesday, we will get the latest snapshot of how this tug-of-war is playing itself out.

While the press remains infatuated with the storyline that slowing iPhone sales are driving Apple to become a services company, which isn’t true, such an intense focus on services is leading to a lack of attention being given to the incredible growth seen with Apple’s wearables platform and the turnaround story underway with the iPad business.

Historically, Apple’s FY3Q (April to June) earnings have proven to be more of a wildcard as FY4Q revenue guidance is heavily dependent on product launch timing in September. This produces a situation in which light guidance can be explained away more easily than in any other quarter.

Ahead of Apple’s 3Q19 earnings release, I am publishing four expectation meters:

  1. iPhone revenue

  2. Non-iPhone revenue

  3. Products vs. Services revenue

  4. 4Q19 revenue guidance

Estimates

The following table contains my overall Apple 3Q19 estimates.

A detailed discussion of these estimates, including my methodology and perspective behind the numbers, is found in my Apple 3Q19 earnings preview available here (first half) and here (second half). Above Avalon membership is required to read my earnings preview. To become a member, visit the membership page.

iPhone Revenue

We know that iPhone sell-through demand improved moving from March into April and May. The question is, to what degree was iPhone demand in June impacted by U.S./China trade tensions? Given that roughly two-thirds of 3Q19 iPhone sales were already in the books prior to June and FY3Q is historically Apple’s weakest quarter for iPhone sales, any potential slowdown in demand will have a more modest impact than the sales implosion Apple experienced at the end of 2018. In addition, Apple has undertaken a number of initiatives in an effort to streamline iPhone upgrades, including lowering prices outside of the U.S. to neutralize demand headwinds related to foreign exchange.

My expectation is that Apple will report $25.3B of iPhone revenue, a 14% decline from 3Q18. An iPhone revenue number that exceeds $26.0B would be considered strong while a number less than $25.0B would be on the weak side.

Non-iPhone Revenue

Apple’s non-iPhone business includes revenue from the following line items:

  • Services

  • iPad

  • Mac

  • Wearables / Home / Accessories

My expectation is that Apple will report $27.7B of non-iPhone revenue. A revenue number north of $28.0B would be considered strong while a number less than $27.0B would be on the weak side.

Products vs. Services

In order to reflect Apple’s revised financial disclosures, the following expectation meter is being introduced for the first time. Apple’s revenue is broken out into two categories: products (i.e. hardware) and services.

4Q19 Revenue Guidance

Consensus expects Apple to report $61B of revenue in 4Q19. This seems on the light side. My estimate is for Apple to announce 4Q19 revenue guidance in the range of $62B to $64B. Light revenue guidance can easily be explained away by a flagship iPhone model or two being delayed into October while strong guidance may reflect an easier year-over-year compare as the iPhone XR launched in 1Q19.

Additional thoughts and perspective on Apple’s earnings and 4Q19 guidance are available in my 3,800-word earnings preview, which includes two parts:

  1. Setting the stage / overall expectations / estimates for the iPhone business

  2. Estimates for the non-iPhone business / 4Q19 guidance / access to my updated earnings model / final thoughts

Above Avalon membership is required to read my earnings preview. To access the earnings preview and have my Apple earnings review sent directly to your inbox when published, sign up at the membership page.