AAPL 1Q12 Estimate

Revenue: $39.4 billion (AAPL guidance: $37 billion/Consensus: $37.9 billion) 

I expect iPad and iPhone to represent nearly 70% of Apple’s quarterly revenue.  My projected revenue is 38% higher than any previous quarter (closest was $28.6 billion revenue reported in 3Q11). 

GM: 41.3%  (AAPL guidance: 40%/Consensus: 41.6%)

Apple’s margin in 2011 ranged from 38.5% to 41.7%.  A higher iPhone mix during 1Q12 (including 3GS and 4 models) should benefit overall GM with component pricing remaining largely unchanged from previous quarters. 

EPS: $10.50  (AAPL guidance: $9.30/Consensus: $9.72) 

I expect Apple to report 63% yoy earnings growth.

Product Unit Sales and Commentary

Macs: 5.2 million (25% yoy growth)

Mac experienced 22% yoy growth in 2011 (34% growth in portables and 1% in desktops) and I expect similar growth during 1Q12 as consumers flock to the MacBook Air.  Apple will continue to take market share from Windows (early stages of 5-10+ year trend). As the PC market struggles to grow (thanks in part to the proliferation of smartphones and iPad), I view long-term Mac growth near 10% as very respectable. 

iPad: 14.7 million (100% yoy growth)

iPad supply/demand returned to equilibrium during 4Q11 with Apple reporting an average weekly sales rate of 925,000 iPads.  My 14.7 million iPad estimate assumes an average 1.1 million iPad weekly (13 weeks) sales rate (higher than 4Q11 due primarily to holiday shopping). I am not forecasting any significant change to the iPad channel.  While there have been many rumors and reports indicating softening iPad demand, I think some of that is the reduction of overly optimistic iPad expectations towards a more conservative consensus expectation.  I think iPad will remain a top holiday gift. My 100% yoy growth does contain some conservatism when compared to 334% yoy iPad growth reported in 2011. 

iPod: 16.5 million (15% yoy decline)

Continued strong iPod touch sales will partially offset the continued decline in Apple’s other iPod models.  Apple refreshed the iPod line-up in 4Q11 and iPods do make great stocking stuffers, so my 15% yoy decline is slightly higher than the 20% and 27% yoy declines registered in 3Q11 and 4Q11, respectively.

iPhone: 28.4 million (75% yoy growth)

iPhone 4S sales are off to a fast start with 4 million devices sold during opening weekend, a 1-2 week backlog on Apple’s online store (my iPhone 4S ordered from Apple took 15 days to arrive), and continued extended shipping waits at mobile carriers. It is clear that iPhone 4S supply/demand is not in equilibrium. iPhone 3GS (and iPhone 4) price reductions should also benefit 1Q12 sales. Apple’s largest iPhone quarter prior to 1Q12 was 20.3 million sold during 3Q11 (average of 1.7 million per week). My 28.4 million estimate reflects an average 2.2 million per week sales rate, but I admit that sales will be limited to Apple’s iPhone production levels. Another way to conceptualize my estimate: I am assuming 4 million iPhone 4S devices sold during opening weekend and then a subsequent 2 million units sold each following week (not out of the question given continued stockouts and the impact from 3GS and 4 models). 

Questions can be addressed to me through twitter. 

AAPL 4Q11 Earnings Cheat Sheet

AAPL Orchard Estimates (change from previous estimate in italics)

Revenue: $32.6 billion (up $600 million) (guidance: $25.0 billion/consensus: $29.0 billion)

GM: 40.5% (down 40 basis points) (guidance: 38.0%/consensus 39.6%).

EPS: $8.55 (up $0.10) (guidance: $5.50/consensus: $7.16).

Product Unit Sales Estimates 

Macs: 4.8 million (up 100,000)

iPad: 11.8 million (up 700,000)

iPod: 7.2 million (unchanged)

iPhone: 23.3 million (unchanged)

I remain confident in my initial quarterly estimates, published July 26, making only modest tweaks to a few variables. I raised my iPad sales estimate 700,000 units to reflect a higher production yield. I am maintaining my iPhone sales estimate (which I initially thought was too high) as the iPhone 4S is pushed out to 1Q12 and iPhone 4 supply draw-down did not occur to any major extent in 4Q.

Things to look for:

iPad Sales. Apple may provide an iPad sales update at next week’s iPhone event. Apple was successful in increasing iPad production in 3Q11 and many will look for continued gains in 4Q11. While my estimate calls for 11.8 million iPads, Street consensus may actually be slightly higher. I think iPad sales greater than 10 million will be deemed okay by the Street, while more than 13 million iPads will be considered strong.

iPhone Sales. With the iPhone 4S launch pushed out to 1Q12, I don’t think we will see too much of a drop-off in iPhone 4 demand, especially considering iPhone 4 was recently brought to new carriers and countries. Apple may still get a pass if iPhone sales are on the weak side as analysts will simply blame iPhone 4S ramifications such as pent-up demand. iPhone sales greater than 20 million will be deemed good, while more than 25 million will be considered strong. iPhone 4S launch weekend sales figures may also be shared on the call (although it is just as possible that the iPhone launch will occur after October 18 or Apple will choose to not disclose initial sales).

Guidance.  Similar to previous quarters, investors will look for Apple’s 1Q12 guidance for evidence of any economic impact or weaker iPad/iPhone production plans. Unfortunately, management’s conservative nature will make it very difficult to reach solid conclusions.  My initial 1Q12 EPS estimate is $10.00 (Street consensus is $8.83) on $39.7 billion of revenue.  I would consider EPS guidance around $7.00, with revenue in high $20s billion, as solid.

Two other scenarios may occur: 1) Apple may announce extra conservative EPS guidance due to economic concerns or 2) iPhone supply concerns related to the iPhone 4S launch. I think extra conservative EPS guidance would be something like $5.50, which compares to Apple’s reported $6.43 in 1Q11 (one could make the argument that Apple will put guidance at least above last year’s $6.43 EPS).

If Apple delivers a blow out 4Q11 quarter, chances are good Apple may run with extra conservative 1Q12 guidance as analysts won’t necessarily increase 1Q12 estimates, but would still maintain Apple target prices due to the 4Q11 beat. Accordingly, expectations wouldn’t be raised too high and Apple will be in a good position for another solid holiday quarter.

Thoughts on Facebook F8

1) Replacing the World Wide Web. Facebook is focused on replacing large swaths of the web.  We got to see Facebook’s plan for sharing media, and I suspect we will hear Facebook’s take on other web functions, such as commerce, search, and utility, in the future.

2) Facebook Hates Privacy. Privacy remains Facebook’s major roadblock as web-replacement initiatives don’t look as appealing if Facebook users flock to high privacy safeguards. Although society has grown more comfortable with sharing information on the web; users’ ability and willingness to share will only strengthen Facebook’s intentions. 

3) An Alternative. Facebook is presenting an alternative to Apple’s app model in terms of how users access and use third-party content.  By no means is Facebook’s app model guaranteed to succeed, but it is clear that Apple’s native app model will have some form of competition. Apple has made an effort to point out the billions of dollars in app revenue returned to developers and I think Apple will reinforce this point, arguing app innovation should continue to flock to the iOS platform because developers actually get paid. 

4) Changing Landscape.  We are in the beginning stages of a changing tech landscape where the hardware battle will be won by economies of scale and uniformity, while the software battle is won by seamless integration between the social network and third-party content. Apple is in a prime position to reap competitive advantages from its manufacturing and supply chain economics of scale, while iPhone and iPad popularity may soon result in 100s of millions of iDevices in the wild.  Meanwhile, I believe Facebook has already won the social network race and will now work on increasing and improving third-party content utilization. Apple and Facebook are in prime position to control the tech landscape. 

AAPL Orchard's AAPL 4Q11 Estimate

Overall Quarter Metrics

Revenue: $32.0 billion (AAPL guidance: $25 billion/Wall Street consensus: $28.6 billion) 

I expect iPad and iPhone to represent nearly 70% of Apple’s quarterly revenue. Remarkable.

GM: 40.9%  (AAPL guidance: 38%/Wall Street consensus: 39.3%)

Apple’s margin in 2011 has ranged from 38.5% to 41.7%.  Management explained the 41.7% margin experienced in 3Q11 included some one-time warranty benefits and guidance of 38% for 4Q11 is primarily driven by the product mix. I don’t buy it. I don’t see many reasons for Apple’s margin to set a new low for 2011 in 4Q due to more iPhones (mostly iPhone 4 and 3GS) and iPads being sold.  I expect attractive component pricing trends will offset any modest impact from back-to-school promotions (Macs and certain iPods are discounted). Timing issues surrounding the next iPhone may very well push margin pressure out to 1Q12.  I would expect more bullish estimates to have GM closer to 41.5%. 

EPS: $8.45  (AAPL guidance: $5.50/Wall Street consensus: $6.95) 

I expect Apple to report 82% yoy earnings growth. While 82% growth is down from 122% yoy growth seen in 3Q11, I would not make much of this decline. Most of the difference is related to the ramp up in iPhone unit sales in 2010. 

Product Unit Sales and Commentary

Macs: 4.7 million (22% yoy growth)

I expect MacBook Air and Mac mini updates to contribute to another solid Mac quarter. Apple will continue to take market share from Windows (early stages of 5-10+ year trend). As the PC market struggles to grow (thanks in part to the proliferation of smartphones and iPad), I view Mac growth greater than a range of 10%-15% as very respectable. 

iPad: 11.1 million (165% yoy growth)

With iPad supply/demand still out of balance in a number of countries, I expect Apple to continue to expand the iPad channel during the quarter. While it remains to be seen if back-to-school purchases will include iPad, I don’t see many hiccups to stellar iPad demand during 4Q.  Rumors of a possible iPad Pro have been very sporadic and I don’t expect such rumors to impact mainstream consumer purchasing habits. As seen with 3Q iPad growth of 183%, Apple has expanded iPad production nicely and is capable of greater than 100% year-over-year unit shipment growth. 

iPod: 7.2 million (20% yoy decline)

I expect strong iPod touch sales to be offset by the continued decline in Apple’s other iPod models.  Going by historical trends, Apple will refresh the iPod line up near  the end of 4Q11, possibly at the same time as the expected iPhone refresh. I would not necessarily expect a large move in iPod shipments one way or another because of this refresh event, unless Apple moves forward with a plan for a low cost iPhone that includes changes to the iPod touch. 

iPhone: 23.3 million (65% yoy growth)

I expect Apple to unveil the new iPhone in September.  Traditionally, I would include a significant supply drawdown of the old iPhone model, followed by a slow ramp up of the new iPhone model to go along with an iPhone refresh, but last quarter’s amazing iPhone sales lead me to believe Apple will continue to post sequential quarterly iPhone unit growth. I expect Apple will continue to sell iPhone 4 (and possibly iPhone 3GS) into 2012, therefore I am not expecting a significant drawdown in iPhone shipments in the weeks leading up to the iPhone refresh as iPhone 4 roll-out continues to new carriers and countries. Additionally, I would expect pent-up iPhone (4s or 5) demand will continue to grow during the quarter. Similar to the iPad 2 supply debacle, I expect the next iPhone to experience the same craziness and supply shortages in its first few months of sale, which will only help Apple’s 1Q12 iPhone numbers.

Similar to other sell-side analysts, I will most likely be revisiting my estimates following the end of the quarter. At this point, I would attribute any significant differences to my EPS estimate to differences in iPhone unit shipments. Questions can be addressed to me through twitter. 

RIMM Observations

After the market close, RIMM reported fiscal 1Q12 earnings. A few things stood out to me.

1) RIMM will begin a headcount reduction.  As millions of consumers switch to smart phones from feature phones, RIMM is cutting back. While it is understandable for a company to remove redundancies and waste, the writing is on the wall; RIMM had invested for a much bigger company compared to what it now sees itself as going forward. Can things change?  Sure. Will things change? Not likely.  Fixed costs can sure be a killer when your products sit on store shelves.  

2) RIMM shipped 500,000 Playbook tablets.  Keyword being shipped.  The difference between shipped and sold?  When a product leaves the factory (in a boat, plane, car, truck, mule), the product is characterized as “shipped”.  No consumer has purchased the unit.  RIMM’s 500,000 Playbook number is largely related to RIMM filling the Playbook inventory channel (the location between factory and consumer).  It’s one thing when you ship a product that people are buying (iPad), but when you are shipping a product that no one is buying, you have the classic channel stuff. 

3) Management wants to buyback RIMM stock.  While RIMM’s business is falling apart on all sides, management wants to spend part of its precious cash chest ($2.9 billion) on buying back its tanking stock. While buying back stock can carry a lot of different meanings, largely depending on which industry a company is operating in, stock buyback in the technology industry does not carry a positive connotation.  Instead of using money to better your position to innovate, buying back a stock that finds itself on a slippery slope screams desperation and a ploy to show Wall Street that management holds confidence in the future (Wall Street rarely cares - quickly seeing through the action like swiss cheese). 

4) Guidance gives perspective. In the matter of a few weeks, RIMM cut its annual guidance by 30%.  Given RIMM’s size, cutting guidance by 30% in such short order is not caused by one bad product launch, or by economic concerns impacting your consumer base.  A 30% guidance cut is evidence of stuffing the inventory channel with a ton of product and finding out that no one was actually buying your product.  A 30% guidance cut is evidence that your fixed cost base is quickly eroding profits as your new product lineup is delayed and your old product line up is stagnant. A 30% guidance cut for a mobile phone company during the age of the mobile revolution should speak volumes for the amount of trouble RIMM is facing. 

Going forward, look for liquidity to be a front and center issue for RIMM. For management to have any chance of a comeback, it needs ample cash, and a $2.9 billion war chest contains only limited opportunities.