There will be two ways to interpret Apple's 1Q17 earnings report. On an absolute basis, Apple is going to report its best quarter yet. Records will likely be broken when it comes to quarterly revenue, gross profit, iPhone unit sales, Apple Watch unit sales, and Services revenue. However, if judging Apple by year-over-year growth, Apple will report simply an OK quarter. Most line items will show only modest improvement from 2016 results.
The following table includes my 1Q17 Apple estimates.
My full perspective and commentary behind all of my estimates are available for Above Avalon members. (Click here to become a member and access the six parts of the earnings preview available here, here, and here.)
Items Worth Watching
There will be a few numbers holding extra importance when Apple reports 1Q17 results on Tuesday.
- iPhone ASP. There has been a notable amount of evidence from the past three months pointing to the iPhone 7 Plus selling well. This has major implications for Apple's iPhone strategy going forward as a strong-performing iPhone 7 Plus suggests there is demand for higher-priced iPhones driven by feature differentiation. In addition, Apple's new iPhone storage configurations likely boosted iPhone ASP. Given that the $399 iPhone SE was not on sale during 1Q16, an iPhone ASP close to or exceeding the $691 reported in 1Q16 would confirm iPhone 7 Plus popularity.
- Other Products revenue. Apple will likely report record Apple Watch sales. Similar to previous quarters, Watch results are expected to be lumped in with "Other Products" revenue. The major difference with 1Q17 results is that AirPods revenue will now be included in "Other Products" given the December 2016 launch. This will make it a bit trickier to back out Apple Watch revenue. Accordingly, one should expect a wider variation in Apple Watch sales estimates. In addition, the "Other Products" line item contains revenue from Beats headphones, a good seller during the holiday quarter. Taking into account AirPods and Beats revenue, "Other Products" revenue exceeding $4.5B will bode extremely well for strong Apple Watch sales (5M+ units).
- iPad unit sales. The iPad has turned the corner. While unit sales growth may still be out of reach, a unit sales number close to 15M would suggest that iPad fundamentals are continuing to improve.
- R&D expense. My suspicion is that Apple's Project Titan was the primary factor driving the significant increase in R&D expense beginning summer of 2014. With Apple making some modifications to the project in recent months, will this change be reflected in slowing growth when it comes to R&D expenditures?
- 2Q17 guidance. Since Wall Street is forward-looking, management's revenue and margin guidance will likely always have a place on a list containing important quarterly numbers. With a relatively strong year-over-year compare (i.e. 2Q16 revenue growth was weak), management's 2Q17 revenue guidance will likely point to continued top-line growth.
1Q17 Expectation Meters
Each quarter, I publish expectation meters for Apple earnings. These diagrams help add value to what is fundamentally a complicated estimating process. Quite a bit of modeling goes into each Apple financial estimate. Accordingly, there is room to turn single-point estimates into ranges in order to more accurately judge Apple's quarterly performance.
In each expectation meter, the grey shaded area is considered to be my expectation range. In most cases, a result that falls within this range would signify that the product or variable being measured is performing as expected. A result that lands in the green shaded box would denote strong performance, likely leading me to raise my assumptions and estimates going forward. Vice-versa, a result that lands in the red shaded area would have the opposite effect and lead me to reduce my assumptions going forward.
For Apple's 1Q17 earnings report, I am publishing three expectations meters: iPhone sales, iPad, sales, and 2Q17 guidance. My iPhone unit sales expectation range stretches from 77M to 81M iPhones. Any unit sales number within this range would be labeled "expected."
Turning to iPad, unit sales between 15M and 16M would fall within my expectations range. Unit sales in excess of 16.1M would signify the iPad has returned to unit sales growth.
When it comes to guidance, Apple management has displayed a tendency to not play the expectations game and provide artificially low guidance simply to report a big "beat." Accordingly, Apple looks to be in a good position to report a revenue guidance range that exceeds 2Q16 results, implying ongoing revenue growth.
The primary question facing AAPL (the stock, not the company) is, how much will Wall Street care about modest iPhone sales growth or declines? Attention has already shifted to what is being built up as a significant update to the iPhone line later this year. It remains unclear if such a shift in attention is masking a much broader development where Wall Street is focused more on earnings and cash flow stability than on unit sales growth. We will likely get some answers regarding this development in a few days.
Above Avalon members have access to additional commentary regarding my Apple 1Q17 estimates (six parts):
- Setting the Scene
- Services, iPad, Mac, Apple Watch
- 2Q17 Guidance
- Estimate Summary
- Apple and Wall Street Expectations
Members will also receive my exclusive earnings reaction notes containing all of my thoughts and observations on Apple's earnings. To access my Apple earnings preview and receive my earnings reaction notes, become a member by visiting the membership page.