AAPL 3Q12 Estimate

Revenue: $41.3 billion (AAPL guidance: $34.0 billion/Consensus: $37.4 billion) 

• I expect iPad and iPhone to represent approximately 75% of Apple’s quarterly revenue.  

GM: 45.5% (AAPL guidance: 41.5%/Consensus: 43.3%)

• Apple’s margin jumped to 47.4% last quarter, from 40.5% in 2011. Weaker iPhone sales should serve as a headwind for sequential quarterly GM expansion in 3Q12, although attractive component pricing will continue to provide support for yoy improvement (Apple reported 41.7% margin in 3Q11). 

EPS: $12.30 (AAPL guidance: $8.68/Consensus: $10.34) 

• I expect Apple to report 58% yoy EPS growth. 

Product Unit Sales and Commentary

Macs: 4.7 million (19% yoy growth)

• I expect Mac shipments to show continued strong yoy growth following updates to the laptop lineup at WWDC. Pent-up demand and early back-to-school purchases should help offset MacBook Pro with Retina display shortages.

iPad: 21.3 million (130% yoy growth)

• Apple will report record iPad sales for 3Q12. My iPad estimate assumes approximately 1.8 million iPads sold per week (including iPad 2 sales), which compares to the approximate 1.2 million weekly run rate during the last holiday quarter. Management commentary regarding continued iPad supply/demand imbalance bodes well for record iPad sales. Anecdotally, iPad 2 sales in education and business appear robust following the price cut, while lower component and manufacturing pricing should help to limit margin compression.

iPod: 6.6 million (13% yoy decline)

iPhone: 29.5 million (45% yoy growth)

• My estimate reflects an average 2.5 million weekly iPhone sales run rate. At the end of 2Q12, Apple reported 8.6 million iPhones in the channel inventory, a sequential increase of 2.6 million units. Backing out the inventory build, Apple reported an average 2.7 million weekly sales run rate last quarter. With supply/demand in balance and rumors of the new iPhone building, I expect the weekly sales run rate to decline into the fall.

When Apple releases earnings on July 24, iPad and iPhone sales, along with reported margin, will represent investor’s primary focal points. Apple’s prior commentary foreshadows a strong iPad quarter, surpassing the 15.3 million units sold in 1Q12. Any iPad sales number solidly above 17-19 million units will be looked at positively by the Street. With iPhone supply/demand having been in equilibrium for some time, Apple will not benefit from any significant inventory build this quarter, although carrier and country distribution expansion will result in solid yoy growth. Sell-side iPhone sales estimates have been set at somewhat realistic levels and one should not be surprised with sales between 25-30 million units, although iPhone sales estimates become somewhat irrelevant as we get closer to the new iPhone launch.

Siri's Been Busy

"Customers love [Siri]. It’s one of the most popular features of our most popular phone. But there’s more that it can do. And we have a lot of people working on this. And I think you’ll be really pleased with some of the things that you’ll see in the coming months…we’ve got some cool ideas about what Siri can do...[w]e’re doubling down on it.” - Tim Cook at D10

13 Days later:

Siri introduces WWDC 

Siri learns sports

Siri learns restaurants

Siri learns movies

Siri learns how to launch apps

Siri learns more languages

Siri learns how to tweet

Siri learns how to Facebook

Siri learns how to help you on your iPad

Siri learns on how to accompany you in your car

Siri’s been busy. 

AAPL 2Q12 Estimate

Revenue: $40.6 billion (AAPL guidance: $32.5 billion/Consensus: $36.0 billion) 

• I expect iPad and iPhone to represent approximately 75% of Apple’s quarterly revenue.  

GM: 42.9%  (AAPL guidance: 42%/Consensus: 42.7%)

• Apple’s margin jumped to 44.7% last quarter, from 40.5% in 2011. Continued strong iPhone sales should benefit overall GM in 2Q12,  with attractive component pricing providing additional support. 

EPS: $11.45  (AAPL guidance: $8.50/Consensus: $9.81) 

• I expect Apple to report 79% yoy EPS growth, which is slightly less than the 83% yoy EPS growth observed in 2011.

Product Unit Sales and Commentary

Macs: 4.3 million (14% yoy growth)

• With no Mac updates during the quarter, I expect Mac shipments to show continued yoy growth, albeit at a slower pace than 1Q12. iPad cannibalization is also picking up as consumers bypass Macs for lower-priced iPads. 

iPad: 12.0 million (155% yoy growth)

• Apple sold three million new iPads during opening weekend (includes pre-orders that shipped for the 12 days leading up to the March 16 launch, but not iPad 2 sales).  My iPad estimate is primarily based on weekly sales run rates, using Apple’s new iPad opening weekend sales as a benchmark between slower iPad sales in January and February and the supply/demand imbalance at the end of March. Unlike last year’s iPad launch, Apple seemed to have a better handle with new iPad supply, as online shipment waits did not reach 2011 levels, even with a more extensive international rollout. My estimate assumes approximately 6 million new iPads sold during the last 3.5 weeks of March and an additional 6 million iPads sold in January, February, and the beginning of March. 

iPod: 6.8 million (25% yoy decline)

• Representing only 2.7% of estimated 2Q12 revenue, the iPod is a footnote. 

iPhone: 36.4 million (95% yoy growth)

• My estimate reflects an average 2.2 million weekly sales run rate and the addition of approximately 6 to 8 million iPhones into the distribution channel (approaching Apple’s desired 4 to 6 week range). For some perspective, Apple saw a 1.6 million weekly iPhone sales run rate during 2Q11 (pre-iPhone 4S).  My 2Q12 estimate assumes 38% yoy growth in the weekly run rate, which I think is reasonable given  the iPhone 4S and increased iPhone penetration at newer carriers (including Verizon and Sprint) and countries (China). 

When Apple releases earnings on April 24, many will look at iPad and iPhone sales as an indicator for continued strong consumer demand. I suspect Apple may be allowed some breathing room on iPad sales given the supply/demand imbalance and trickiness surrounding a new product launch. Meanwhile, iPhone lacked any significant interferences during the quarter, with results dependent on demand, and to a lesser extent, the number of units added into the distribution channel. 

Thoughts on the new iPad

Software and Hardware

Why has iPad been so successful?  Intriguing software?  Gorgeous hardware?  After using iPad 2 for a year, my connection with the device has been formed by the seamless interaction between software and hardware.  The iPad form factor seemingly disappears as I interact with iOS apps. Meanwhile, iPad competitors have focused on only one aspect of the software & hardware duplex; either shipping okay software (“okay” can be an overstatement) with mediocre hardware, or okay hardware (again, I am being generous) with buggy software. The new iPad’s improved hardware features, along with new apps, combine to form a package that can appear to be “magical” to the user. 

Motorola RAZR Syndrome

One of the bigger risks Apple faces is the “Motorola RAZR Syndrome”, or reliance on your current success at the detriment of your future success.  After three generations of iPads, it is clear that Apple understands its biggest competitor is Apple. The new iPad’s biggest competition will come from iPad 2, while the original iPad was iPad’s 2 biggest competitor. Even though the original iPad sold well, Apple continued to push the envelope with iPad 2, and now the same can be said with the new iPad. Cameras, a Retina display, faster guts, amazing software, improved battery life, and 4G LTE, all at the same $499 entry-level price point.  

iPad 2 Price Drop  

Although Apple devoted only a brief minute to iPad 2’s new $399 price, consumers will give the $100 price drop much more attention.  For many, price remains king.  While $399 is still a lot of money, consumers are starting to compare iPad to regular laptops, in which the $399 price tag doesn’t look nearly as steep. Similar to the iPhone 3GS and iPhone 4 being bought by former feature phone owners, the iPad 2 will continue to sell well as laptop owners look at iPad for the first time. 

More iPads in the Wild?

Up to now the iPad had been looked at as largely an “inside the home” device, confined to the living or play room.  With the original iPad not having any cameras, using an iPad at a social event, such as a family occasion, picnic, or concert, was questionable.  Apple’s new video and picture software (and improved cameras) will give people a greater incentive to bring iPad to different gatherings and events.  While iPad is still no where near as convenient to transport as iPhone, it is easier to transport than any other computing device.  As more iPads find their way into the wild, a whole new marketing realm will kick in.  While advertisements can be effective, seeing friends or family enjoy their iPad outside the confines of their home represents a brand new marketing angle. 

Jony Ive and New Product Form Factors 

The new iPad’s form factor has subtle differences from iPad 2 (the minor variances might even be hard for a normal consumer to see or feel). While Apple’s SVP of Industrial Design, Jony Ive, is intimately involved in any form factor change, no matter how minuscule, my gut tells me we might see some interesting new form factors for most, if not all, of Apple’s product lines over the next year. I think this is what Tim Cook hinted at at the end of the new iPad’s unveiling when he said, “Across the year, you’re going to see a lot more of this kind of innovation. We are just getting started.” What is the point of changing form factors that seemingly don’t need to be fixed?  How much can you change a phone or tablet form factor? Apple doesn’t settle. New product form designs will focus on greater functionality and feasibility, all while keeping design at the forefront. Dimension barriers will be dismantled. A new round of product design and manufacturing innovation is on the horizon and Jony is guiding the ship.

Not Everyone Copies Apple

"[Apple is] going to continue to make the best products in the world that delight our customers and make our employees incredibly proud of what they do."

- Tim Cook in his first email to Apple employees as Apple’s new CEO sent August 25, 2011

"The path [Sony] must take is clear: to drive the growth of our core electronics businesses - primarily digital imaging, smart mobile and game; to turn around the television business; and to accelerate the innovation that enables us to create new business domains."

- Kazuo Hirai in response to being appointed Sony’s new President and CEO on February 1, 2012

Apple: {best, world, delight, proud} vs. Sony: {growth, businesses, accelerate, domains}

Not everyone copies Apple.