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:
Products vs. Services Revenue
iPhone vs. non-iPhone Revenue
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:
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.
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.
Above Avalon Podcast Episode 152: Let's Talk Wearables
Apple is the undisputed leader in wearables, and they are pulling away from the competition. In Episode 152, Neil discusses how Apple’s wearables business can be thought of as a train gaining momentum. Competitors face declining odds of being able to stop the train. Additional topics include Apple’s wearables performance in 3Q19, wearables as a percent of overall Apple gadget unit sales, Apple wearables revenue, the factors behind Apple’s wearables success, and why wearables represent a paradigm shift in computing.
To listen to episode 152, go here.
The complete Above Avalon podcast episode archive is available here.
Apple Deserves More Credit for Wearables
The wearables era at Apple began years ago. However, Wall Street and Silicon Valley are only now slowly starting to pay attention to what Apple has been building. Apple is the undisputed leader in wearables, and they are pulling away from the competition. Given how Apple’s wearables strength continues to be underestimated, the company deserves more credit for what it has achieved and where it is headed.
The Data
A takeaway from Apple’s recent 3Q19 earnings was that we are witnessing the wearables era continue to unfold at Apple. Segmenting Apple’s quarterly revenue growth into product categories is one way of highlighting wearables momentum. Both an accurate financial model and close following of Apple clues over the past four years are required to accurately estimate Apple Watch and AirPods unit sales and average selling prices (ASPs). Therefore, this exercise has not been practiced by many.
The preceding totals represent the change in revenue from 3Q18 to 3Q19.
Apple Revenue Growth Drivers (3Q19)
Services: $1.5 billion
Wearables: $1.2 billion
Home / Accessories: $0.6 billion
Mac: $0.6 billion
iPad: $0.4 billion
Note: These totals do not represent revenue totals but instead the change in revenue between 3Q18 and 3Q19.
The revelation from the preceding data is riveting. Wearables nearly exceeded Services in 3Q19 as Apple’s top revenue growth generator when looking at absolute dollars. Consensus was not expecting this to occur as Services was positioned as Apple’s growth engine. It is clear that consensus spent too much time on the Services highway and ended up missing the exit for wearables.
In taking a closer look at wearables revenue growth, it becomes evident that Apple is benefiting from both higher ASPs for Apple Watch and AirPods as well as continued strong unit sales growth. For AirPods, unit sales growth is nothing short of spectacular at 80%.
Speaking of unit sales, one out of five gadgets that Apple sells is now a wearables device. Exhibit 1 highlights the growing share that wearables represent when looking at overall Apple device unit sales.
Exhibit 1: Wearables Share of Apple Device Unit Sales
Exhibit 2 depicts wearables’ growing share of gadget sales relative to Apple’s other product categories. Apple is currently selling approximately 70M wearable devices per year. This includes 30 million Apple Watches and more than 30 million AirPods.
Exhibit 2: Apple Gadget Unit Sales
On a revenue basis, Apple’s wearables business is now at a $16 billion annual run rate growing at 55% to 60%. At the current pace, wearables will surpass both the iPad and Mac near the end of 2020 to become the third largest product category behind iPhone and Services when looking at revenue.
The Wearables Train
One way of thinking about Apple’s wearables business is that it’s a train gaining momentum. Competitors face declining odds of being able to stop the train.
The Apple wearables train is boosted by three items that no other company has the luxury of utilizing or leveraging:
A massive installed base of iPhone users (925M globally).
Core competencies and a company culture built on making technology more personal, intuitive, and easy to use.
A thriving platform of multiple wearables products.
Apple is leveraging its ecosystem of users and devices to give its wearables business an ideal launching pad for success. While there are handful of companies with more than a billion users, no other company has an ecosystem of a billion users and nearly 1.5 billion devices (nearly 90% of which are running the latest software). The lack of a self-sustaining ecosystem is one of the primary factors driving Fitbit’s gradual fade into irrelevancy. This limitation manifests itself in new products like the Fitbit Versa smartwatch failing to catch the needed traction.
Design, or the lack thereof, is proving to be another high barrier for many companies to get over in terms of wearables. Silicon Valley continues to focus too much on technology and not enough on design, or how we actually use technology. Google’s ineptitude when it comes to wearables is partially due to the company not having a clue as to how to get people to wear wearable devices. Management thought consumers would want to wear Pixel earbuds because the devices had real-time translation. In reality, consumers don’t want to be seen in public wearing wireless headphones that don’t reflect aspiration and coolness. A keen understanding of how to play in the luxury and fashion realms while simultaneously appealing to the mass market is tricky.
Flying Under the Radar
In assessing why Apple’s wearables business has received so little attention to date, one doesn’t have to look much further than the iPhone. Preoccupation with trying to find a singular product capable of replacing iPhone made it difficult for many to see how a platform of wearable devices is the answer for what can eventually serve as a viable iPhone alternative.
A cellular Apple Watch paired with AirPods is already able to handle a number of tasks currently given to the iPhone. Add a pair of smart glasses to the mix, and mobile devices like the iPhone and iPad stand to lose even more use cases.
It doesn’t help that new Apple products are also graded on a curve next to iPhone. If a new product is unable to move Apple’s financial meter out of the gate, the product is looked at as a flop, toy, or mere iPhone accessory.
Guardrails
For competitors, the bad news is that there is evidence that Apple is still applying some breaks to its wearables train. In some ways, Apple is holding things back. An iPhone is still required to set up an Apple Watch. A truly independent Apple Watch that doesn’t require an iPhone would grow the device’s addressable market by three times overnight.
In addition, Apple currently only offers wearables devices for two pieces of real estate on the body: our wrists and ears. A compelling argument can be made that the most prized piece of wearables real estate, our eyes, remains untapped.
Looking Ahead
We are witnessing wearables usher in a paradigm shift when it comes to how we use and interact with technology. Apple deserves more credit for not only choosing to ride the wearables wave, but also playing a crucial role in getting wearables off the ground.
Apple is well on its way to having Apple Watch and AirPods installed bases of 100M people each. The company is more than half way there with Apple Watch and is quickly approaching the same level with AirPods despite the product being sold for half the time.
Apple also finds itself in the midst of a major investment phase to expand its wearables platform. There is an opportunity to bring more utility, in addition to clearer vision, to the eyes in the form of smart glasses. Such a product would be a precursor to a pair of AR glasses.
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