Apple Preview: Story Is Intact Despite Near-Term Risk
Apple reports on Tuesday, May 1st. Here’s what we expect:
- Modest risk (about 3%) to the Street’s Jun-18 revenue estimate based on negative comments from two suppliers. Jun-18 revenue guidance of $48-$51B vs. Street at $52.2B.
- The company to announce an increase in the buyback by $70B over the next 3 years, a 15% dividend increase, and a one-time cash dividend of about $12B.
- Mar-18 iPhone units of 53m, in line with the Street, and Services growth consistent with last quarter at 18%, also in line with the Street.
- The Apple story is intact. Near-term, investor optimism will rise going into the summer as anticipation grows ahead of 3 new iPhones in the fall. Long-term, Apple’s loyal active base of ~800m iPhones should yield a predictable 215-225m in annual iPhone unit sales that will drive Services growth of 13-15%. Allocation for share repurchases should increase annually, and lastly, the company is a safe haven in terms of protecting user privacy.
Here are 3 key topics, in order of importance:
- Jun-18 Guidance. Why it’s important: Recall that Mar-18 guidance revealed demand for iPhone is declining. This is the 3rd time in the last 4 cycles (5S, 6S, 8+X) the iPhone tail has disappointed investors. Current investor thinking: Nervous based on TSMC 3% guide down and cautionary comments from chipmaker AMS. What Loup expects: Revenue guidance of $48-$51B. This implies the high end would be 3% below the Street at $52.2B. This should be good enough, given investor expectations are generally low. Rationale: TSMC’s and AMS’s comments.
- Mar-18 iPhone Units. Why it’s important: iPhone revenue will be about 64% of sales in Mar-18. Apple already set the tone for the downward slope of the iPhone X and iPhone 8 cycle. Current investor thinking: 53m units, up 5% y/y, compared to down 1% in Dec-17. This is in-line with the Street. What Loup expects: 53m units. Rationale: 53m iPhones is effectively the midpoint of Apple’s Mar-18 guidance. The Street is at 53m iPhones with a $735 ASP, which implies $61B in revenue compared to guidance of $60-$62B. In the past 6 quarters, Apple has essentially met the high end of revenue guidance every time.
- iPhone ASP. Why it’s important: Higher ASPs yield higher margins and, more importantly, show a willingness of the iPhone base to pay more. Current investor thinking: $735, up 12% y/y. What Loup expects: $753, up 15% y/y. Rationale: We have the same iPhone units as the Street for Mar-18, but we are modeling a higher ASP based on higher iPhone X mix. We believe iPhone X will account for 29% of the mix in Mar-18.
Other, less important topics:
- Services. Why it’s important: Services revenue will be about 14% of sales in Mar-18. Given the weak tail of the iPhone X cycle, Services revenue is increasingly important. Current investor thinking: $8.3B in Services revenue, up 19% y/y. What Loup expects: $8.4B, up 19% y/y, compared to 18% in Dec-17. Rationale: Services growth has been relatively predictable. Over the last 9 quarters, Services have grown between 19-26%, and between 18-22% over the past year (excluding one time benefits).
- Gross Margin. Why it’s important: Stating the obvious, gross margin is always important given it’s a read on iPhone demand, strength of brand, and manufacturing efficiencies. Current investor thinking: 38.3% for Mar-18, in-line with Dec-17 at 38.4%. What Loup expects: 38.4%. Rationale: Apple guided gross margin for Mar-18 to be between 38-38.5%. The company has reported gross margin at the high end of guidance in 5 of the past 6 quarters.
- Mac. Why it’s important: Mac revenue will be about 9% of sales in Mar-18. Current investor thinking: 4.2m units, flat y/y. What Loup expects: 4.2m units. Rationale: The Mac number could disappoint given that it is going up against a tough comp vs. Mar-17.
- iPad. Why it’s important: iPad revenue will be about 6% of sales in Mar-18. Current investor thinking: 9.1m units, up 1% y/y. What Loup expects: 8.9m units, flat y/y. Rationale: iPad has grown units for the past 3 quarters by an average of 7%, after being down for 13 consecutive quarters. We see the iPad as a replacement business, and we’re modeling for 1% growth for the next 3 years.
- Watch. Why it’s important: Apple does not break out Watch but we estimate Watch revenue to be 3% of sales in Mar-18. Current investor thinking: 3.0m units, up 20% y/y. What Loup expects: 3.3m units, up 30% y/y. Rationale: Apple Watch is going up against a difficult comp in Mar-18 given the spike in Watch growth in Mar-17. We expect unit growth to moderate in Mar-18 to 30%, down from about 50% over the previous 3 quarters. We continue to expect Watch to grow around 20% y/y for the next 3 years.
Repatriation impact. In January, Apple announced that they’re paying $38B in repatriation taxes, which implies they’re bringing $215B back to the U.S. If there was no tax holiday Apple would have paid about $80B in repatriation taxes, compared to the $38B they are actually paying. At the same time, Apple announced $30B in capex investment over the next 5 years, including a new Apple campus for technical support.
What to expect from capital return update. On the Mar-18 earnings report, we expect Apple to increase its buyback over the next 3 years by about $70B. We also believe Apple will announce a one-time cash dividend of $12B. Lastly, we anticipate a 15% annual dividend increase that will cost Apple about $10B over a 4 year period. We believe most of this is already priced into AAPL shares. As a point of reference, last year Apple added $35B to its buyback plan and increased its dividend by 10%.
Two negative data points from supply chain. As mentioned, we expect Apple to guide 3% below the Street for Jun-18. This is based on negative comments from two Apple suppliers, TSMC and AMS. That said, negative supplier comments are nothing new to the Apple story. Our level of concern jumps if three suppliers give a cautionary outlook and, to date, only 2 have given warnings:
- Taiwan Semiconductor (TSMC). Taiwan Semi is Apple’s supplier of A10 and A11 chips used in iPhone 7, 8 and X. Apple accounts for about 20% of TSMC sales. Last week the company revised its full-year revenue target to the low end of its earlier forecast. Specifically, revenue for 2018 is likely to grow 10% rather than the earlier forecast of 10-15%. TSMC highlighted the downtick was due to softer demand for smartphones, as well as uncertainty in the cryptocurrency mining market.
- AMS. AMS produces 3D sensing modules for iPhone X. The company reported first-quarter sales toward the lower end of its guidance range on Monday and warned of a downturn related to weaker orders from one of its main customers. While AMS would not discuss the specific customer, we believe there is a greater than 50% chance that customer is Apple.
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