Apple's March Quarter Nothing To Get Excited About

Apr 14 2014, 12:12pm CDT | by

Apple is scheduled to release its March quarter results after the close on Wednesday, March 23. It appears from my modeling that Apple is on track to be just above the mid-point of its revenue guidance and at the high-end of EPS when using its various guidance metrics and before it bought back $14 billion in shares in late January and early February. (Note that my family and I own Apple shares).

Apple disappointed the Street in January when it fell short to iPhone shipments and March quarter guidance was below expectations. I have modeled iPhones and iPads to decline sequentially more than normal which are partially offset by gross margin a bit above the mid-point of guidance and share count decreasing more than what I believe Apple management was using since they didn’t know they would be buying back such a large amount of stock in the quarter ($14 billon for almost 28 million shares).

Revenue should be about flat year over year

Apple guided revenue to come in between $42 and $44 billion vs. $43.6 billion a year ago. I am estimating that the company generated $43.3 billion in revenue, down less than 1% year over year, and the Street is at $43.6 billion.

The biggest unknown is the China dynamic. In December 2012 Apple launched the iPhone 5 in China Telecom and Unicom in mid-December, which meant they had significant sales in the March 2013 quarter. However for the iPhone 5c and 5s they were launched at those carriers in September 2013 on the first day of availability which will lead to lower sales in the March 2014 quarter compared to a year ago.

Helping to offset this to some degree is China Mobile selling the iPhone for the first time in January and NTT DoCoMo having it available in a March quarter for the first time. For the month of March NTT DoCoMo’s iPhone sales consisted of 43.6% for the 5s and 3.0% for the 5c. Both of these data points are lower than the share experienced at KDDI (51.4% and 6.4%) and Softbank (59.2% and 7.5%) for the month.

NTT DoCoMo’s share for the 5s did increase substantially from 35.5% in February while the 5c experienced a small decline from 4.0%. On a combined basis the carrier increased its iPhone sales from 39.5% to 46.6% in the course of one month and it was only 30.8% in the month of December. This is one indication that NTT DoCoMo helped Apple’s March quarter and could ramp its iPhone sales through the year.

Gross margin may have stabilized

Apple increased its gross margin guidance from 36.5%-37.5% for the December quarter (actual of 37.9%) to 37%-38% for the March quarter. With iPhones representing 53% of my total projected revenue, which was the same as a year ago, I am expecting gross margins to decline sequentially by 20 basis points from 37.9% to 37.7%. Note that last years’ March quarter’s gross margin would have only declined by 10 basis points if Apple did not have additional warranty accruals (impacting gross margin by about 95 basis points or almost 1% of margin). The wild card for gross margin is will Apple add any warranty charge versus what it has been accruing the past year.

EPS should come in at the high-end of guidance

When Apple bought back $14 billion of its shares in late January and early February I estimate that it added about $0.20 in EPS for the quarter. I am projecting that the share count will decrease by almost 28 million shares or all the shares bought by this tranche. Since they were bought part way in the quarter I am assuming the company bought additional shares in the quarter to account for the timing of the large purchase since they would not all be applied to the diluted share count in the quarter.

From the original guidance I estimate that its unofficial EPS guidance range is $9.42 to $10.33. The Street is at $10.15 and I am estimating $10.30 vs. an actual of $10.09 a year ago. The Street is at $10.15 and has been creeping up about a penny a week the past two weeks. While EPS is projected to increase year over year the company’s operating income is projected to decline from $12.6 billion to $12.0 billion in the just completed quarter.

iPhone units should be about flat from a year ago

As discussed earlier in this note the dynamics between the three China carriers and NTT DoCoMo will have a large impact on the company’s results. I am estimating that Apple sold 37.4 million iPhones in the quarter, which is essentially flat from last year and down 27% quarter over quarter. They should generate revenue of $23 billion or 53% of total revenue and also be flat year over year.

Two of the other bigger unknowns is how many consumers held off buying an iPhone since the rumor mill on the iPhone 6 is already in high gear and how much the carriers more restricted upgrade timeframes impacted sales (which Tim Cook brought up on the last earnings call). From the analysts estimates I have seen so far it looks like the Street is expecting between 37 to 38.5 million iPhones to have been sold.

iPad units could also be flat year over year (when adjusted for channel inventory)

iPad sales in the December quarter were the highest ever recorded by Apple at 26 million, up 14% year over year and 85% sequentially. However the record was helped by channel fill of about 2.1 million units and wound up within the company’s targeted 4 to 6 weeks of inventory./>/>

The previous two years iPad unit sales have decreased by 23% and 21% when adjusted for channel inventory. I am expecting iPad sales to decrease 25% quarter over quarter to 18 million based on not having any channel unit changes which would mean units are flat year over year when adjusted for channel inventory but down 9% on reported results. It appears the Street is expecting between 19 and 21 million units for the quarter.

Microsoft’s announcement that Office will be available on iPads will help Apple in the long-run but didn’t impact the March quarter and it will be a slow ramp for this to materially help Apple.

Mac sales could stay relatively strong

Mac sales rebounded nicely in the December quarter at 4.8 million, up 19% year over year. I’m expecting 4.4 million for the March quarter, up 11% year over year and down 9% from December. The new Mac Pro will help some but it still has a 4 to 6 week delivery timeframe and typically accounts for a small percentage of total Mac sales. The bulk of the Street’s estimates I have seen are between 4.1 to 4.4 million with one down at 3.7 million.

Follow me on Twitter @sandhillinsight. You can find my other Forbes posts here.

 
 

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