Apple's $35.3B June quarter: What the analysts are sayingJuly 24, 2013: 5:57 AM ET
Pleased by iPhone, worried about iPad and China, anticipating new product launches.
In any event, we got a bumper crop of analyst's reports Wednesday morning, which we'll process in batches, putting new ones on top.
UPDATE: We got a new crop after lunch, which we've added to the push-down stack. So far, nobody has changed his or her price target.
Colin Gillis, BCG: Haiku.
iPhones sales were great
but the rapid price drop shows
the changing market.
Toni Sacconaghi, Bernstein: Strong iPhone Sales Reflect Positive Elasticity; China Worrisome; New Offerings Remain Key Bet. "Stepping back, we note that Apple's overall revenues were only up 6% YoY adjusting for inventory drawdowns (and are forecast to be essentially flat this quarter) and EPS materially declined, reflecting what appear to be increasingly mature core markets (high end iPhones; tablets). As CEO Tim Cook noted on the call, growth at Apple will ultimately be determined by new product offerings and their ability to drive incremental revenues and profits for the company – a bet we are willing to make, particularly given Apple's prevailing valuation. A bet on Apple remains a bet on the company's innovation prowess – if Apple can bring to market new offerings that create new markets and/or expand its addressable TAM, EPS will improve and the stock represents a very attractive value at current levels (<7x EV/FCF). If not, the stock could continue to be range-bound. We note that our models do not include a lower price iPhone introduction (which we believe is likely before year end), or any new product categories (converged offering, TV, watch/wearable devices, etc.).
Peter Misek, Jefferies. Results Better Due to Buyback and iPhone Units, but Light Guidance. "CQ2 EPS beat expectations mainly due to lower share count with iPhone strength offsetting iPad weakness. iPhone shipments of 31M (JEF 26M, St 26.4M) beat but with lower ASP and mix shift, confirming our high-end smartphone saturation fears. Guidance is below consensus estimates but implies a Sep iPhone launch due to lower iPhone inventory draw. We still see risk to CQ4 based on a likely lackluster iPhone 5S reception."
Ben Reitzes, Barclays: iPhone carries the quarter. "In short, June quarter results likely represent a sigh of relief for investors since the most important product, the iPhone, showed resiliency in non-Asia markets, and margins seem relatively stable. As expected, September guidance of about $7.45 was below consensus, but seems achievable in a transition quarter. While iPad and Mac trends are a concern, we believe shares are still at the lower-end of a range valuation-wise given new product launches lie ahead. We still believe that new software and services are more important to the product cycle this fall and look forward to hearing more at an event in September."
Keith Bachman, BMO: Gross Margin Guidance Helps, Moving to Outperform. "The most important metric for us was that consolidated gross margins were guided to 36%-37%, even with new products being introduced in the September quarter. While we still have some concerns about December- quarter margins, we believe that the September-quarter gross margin guidance plausibly supports our view that the new mid-range iPhone will be in the ~$450 price range with approximately 38% to 40% gross margins."
Ittai Kidron, Oppenheimer: On the clock. "Apple reported largely in-line results and provided good enough guidance in our opinion to keep investors engaged until the new iPhone launch. But even with a potential Sept. iPhone launch ahead the overall picture is still a mixed bag. Margins and ASP remain at risk as iPhone and iPad mix moderates (much of the June iPhone upside appears to be iPhone-4/4S driven, partly from international growth but mature markets are moderating too). Apple's on the clock and needs to deliver a surprise with its fall products to convince us the moderation can be slowed."
Alex Gauna, JMP: Upside iPhone Results and Share Repurchases Propel EPS Beat. "Shares of Apple traded up >4% in aftermarket response to the iPhone upside that looks all the more impressive alongside evidence of the Samsung Galaxy SIV shortfall. While the results are an encouraging step in the right direction after the disappointment last quarter, they were not so strong as to convince us the company is out of the competitive and gross margin squeeze woods yet, and we are maintaining our fundamentally neutral view on the stock pending better visibility or confidence in new earnings growth drivers."
Rob Cihra, Evercore: Improving Setup into New Products. "We think Sep-qtr guide implies new product timing in line w/ our expectation iPad 5 refreshes Sep while new iPhone 5S and low- cost iPhone ramp more likely early Oct. This said, now 8 months since a major refresh, new flagship product cycles should help restart growth into a better Dec-qtr. We see iPhone 5S sustaining the market's unique high-end via new fingerprint sensor and 64 bit A7 driving new iOS 7 software look+feel (translucency, animations) back in front of the competition. We see 9.7" iPad 5 revamping to thin/light design just 1lb (30% lighter than current) migrating to narrowed mini-like bezel and also new 64bit A7."
Brian Colella, Morningstar: Apple's Core iPhone Business Remains Solid: "Although many were concerned that premium smartphone growth has stagnated, we think Apple's results are in line with our long-term thesis that the high-end of the market isn't dead just yet. iPhone average selling prices, or ASPs, fell 5% sequentially, a bit more than expected. However, given that ASPs typically fall as Apple's products age, we're Profile not overly alarmed."
Mark Moskowitz: J.P. Morgan. Gross Margin Hangs Tough. "We expect shares of OW-rated Apple to exhibit a relief rally in the near term. The company's Sep-Q outlook requires another reset to consensus estimates ahead of new product launches this fall. The reason we think the stock reacts favorably, though, is Jun-Q iPhone units were better than expected and gross margin results and outlook were better than investors feared. The slowdown in China remains an issue, as sales to the region slowed dramatically in Jun-Q. As for the numbers, we expect consensus estimates to decline in coming days, but the magnitude will be less than in the prior two quarters. Next potential catalysts: whether lower-priced iPhone and iPad mini with Retina Display arrive ahead of the holiday season."
Glen Yeung, Citi: iPhone Impresses but Questions Persist. "We expect Apple's many bulls to focus on the company's above consensus iPhone unit shipments (31M vs. 26M) and better gross margin results (36.9% vs. 36.7%). However, we point out that even after adjusting for inventories, Apple's iPad, iPod, and Mac sales all declined y/y such that, despite a 22% y/y increase in iPhone, total Apple units grew only 5% y/y (versus tablet industry units growth of 91% y/y and smartphone industry units growth 67% y/y). Meanwhile, based on guidance, gross margin is expected to decline for the 6th quarter in a row, leading us to model our FY14 GM's well below consensus (36.5% vs. 37.2% consensus). We acknowledge that Apple's upcoming products hold some promise for investors, limiting downside, but in light of the view that smartphone sales are decelerating, we reserve our enthusiasm. "
Kulbinder Garcha, Credit Suisse: Stabilizing, recovery to follow. "The June quarter results marked the first time in several quarters where Apple exceeded expectations across all key metrics (revenues, GM, EPS). We adjust our FY13/14 EPS to $39.22/$48.22 and see the recent results release as reassuring. Fundamentally, with a structural advantage in the compute market and upcoming product launches, Apple could deliver EPS power of $50 in CY14 and return to growth."
Andy Perkins, Societe Generale: Strong iPhone volumes but will new products rescue margins? "Apple reduced its channel inventory for iPads and iPhones, an encouraging move ahead of the new launches. However, given strong sales of older models there appears to be little need for an increased focus on this measure unless there is a new low- end product in the pipe. Apple generated a further $7.8bn in cash and now has a balance of over $117bn despite some $19bn returned to shareholders in the quarter. Geographically, Apple still showed a good performance in territories including the US, Japan and the UK. However, China proved weak with sales down 14%, although most of this was explained by inventory adjustments and weakness in HK rather than mainland China, perhaps ahead of new product releases."
Stuart Jeffrey, Nomura: iPhone surprise offsets raft of disappointments; new products seem unlikely to turn the tide. "iPhone sales surprised positively, allowing Apple to hit the top end of its guidance range. However, iPad, Mac, iPod, iTunes and Accessory sales all disappointed. As did a 43% sequential decline in sales in China and uncharacteristically poor working capital management... We get the sense that there is a consensus positive trade into Apple's upcoming new product launches. The consensus nature of this trade combined with our view that new products are unlikely to raise expectations leads us to remain on the sidelines for the rest of this year."
Ben Reitzes, Barclays. iPhone Upside, while Other Segments Lower. "It seems that Apple's F3Q guidance revenue and EPS guidance is once again conservative – and probably expected ahead of an important transition quarter. We believe key topics to be addressed on Apple's conference call include Apple's views on new product timing, pricing trends of the iPhone 5 at carriers vs. older models, demand trends within the disappointing iPad segment, the potential opportunity from the trade-in program, and the progress of iOS 7. The other major topics should include channel inventory levels for major products ahead of new launches and what the long-term gross margin should be. Net, net it seems this report helps ease concerns since iPhone is healthy – and gross margins are above 36%."
T. Michael Walkley, Canaccord: Elastic iPhone unit upside offsets softer iPad salees & channel inventory draw down. "Consistent with our global wireless surveys indicating resilient iPhone unit sales driven by price elastic demand for lowered iPhone sell in prices globally, Apple reported iPhone unit sales well above consensus estimates with lower ASPs. We believe the strong demand for the more affordable iPhone 4 demonstrates the sizable TAM potential for a new lower-priced iPhone SKU likely to launch later this year. We maintain our belief that Apple has a strong product pipeline, including a refreshed iPhone 5S, mid-tier iPhone, and iPad lineup that should result in solid earnings growth during F'14."
Edward Parker, Lazard: Mostly as expected, mostly. "June quarter results were respectable, especially given growing fears of weakening end markets. September numbers are headed lower again, but there's been ample talk of this in the market including a growing consensus that F3Q is the last shoe to drop. Unfortunately, commentary on new products was anything but illuminating, meaning that investors will have to hold on a bit longer before getting a clear picture of what the next product cycle means for the model. We think valuation remains reasonable (10x F2014E EPS) on our essentially unchanged numbers and view current levels as a good entry point."
Avi Silver, CLSA: What smartphone saturation? " For the first time since Mar-12 earnings, we are raising estimates for Apple - albeit slightly - following a big iPhone beat more than offsetting an iPad miss and stabilizing gross margin. With Apple shares trading at 6.7x CY14 EPS (net of cash), we believe estimate stabilization is all it takes to drive the stock back to $500. We calculate the shares are discounting operating margin of 19-20% versus the reported (trough) quarter at 26%."
Katy Huberty, Morgan Stanley: Raising Estimates on iPhone and Gross Margin Upside. "With an iPhone beat and better than feared September quarter guidance, consensus estimates are likely bottoming out for the first time in five quarters. We see near-term share price upside on the back of positive supply chain data points ahead of the fall product launches. Strong iPhone sales point to stickiness of ecosystem as Y/Y unit growth accelerated to 20% (from 7% in March Q) despite a channel inventory reduction. US, Japan, and UK all grew iPhone sales north of 50%."
Walter Piecyk, BTIG: Does Apple's Guidance Imply a September Product Launch? "We don't think that Apple can hit its newly issued revenue guidance for the September quarter unless it launches new products. After delivering $35 billion in revenue in the June quarter, management guided to $34-$37 billion next quarter. Revenue would more typically drop multiple billions if the company had no new products planned. With September quickly approaching, this could be the start of a string of new product announcements that increase investor confidence in Apple's ability to return to EPS growth next year."
Gene Munster, Piper Jaffray: What Has Changed In Our Thinking. 1. The iPhone franchise is in better shape than we previously believed, albeit at a lower ASP. We estimate that iPhone unit growth for the high end version was 10% y/y, up 5% for the mid priced version, and up 50% for the low end version. We see this as evidence that the lower to mid priced phone market is significant in size and can move the needle for Apple despite the negative impact of ASPs which were down 5% q/q. We estimate ASPs on the iPhone 5 and 4S were unchanged and ASPs were down 15% on the iPhone 4 in emerging markets triggering the spike in demand. 2. The gross margin guidance of 36-37% was ahead of our expectations of 35-36% implying signs of stability for the first time in 5 quarters due in part to more favorable pricing on LCDs outweighing the negative impact of higher DRAM pricing. 3. iPad missed Street unit estimates by 14% and was down 3% y/y (both adjusted for channel fill). While iPad did have a hard comp from last year's iPad 3 first full quarter in Jun-12, the shortfall was a disappointment. There is a large market for tablets, but it appears part of the challenge beyond the difficult comp is that the market is becoming more price sensitive than we previously expected.
Amit Daryanani, RBC: Better Than Feared, Focus Remains On Product Cycle. "Bears will point to i. decline in China revenues, ii. Lack of gross-margin expansion, iii. Lack of innovation and iv. Concerns gross-margins trend lower. The bulls will focus on: i. strong iPhone sales, ii. Attractive FCF generation, iii. Revenue catalysts – iPhone 5s, Low-end iPhone, iPad mini refresh, iPad 5 and new carrier relationships (China Mobile)."
Charlie Wolf, Needham: Apple reports third quarter results exactly in line with guidance. "The Apple story continues to be "What have you done for me lately?" After a whirlwind of new product introductions in the fall of 2012, Apple has been virtually silent on the product introduction front for nine months. That should change beginning in September/October with the launch of the next-generation iPhone and iPad. We do not anticipate products for new categories this year. However, it's no secret that Apple is working on wearable devices and has progressively increased the content available on Apple TV. These initiatives suggest that Apple should once again begin to enter new product categories in 2014, although it is difficult to imagine that they will be the revenue producers that the iPhone and iPad have turned out to be. The ongoing risk in the Apple story continues to be whether the company can innovate at the same pace and with the same disruption that occurred during the Steve Jobs era. We are approaching a point when an answer might be forthcoming."
Beau Skonieczny, Technology Business Research: Emerging markets are key to growth. "Apple continued to achieve relative success in emerging markets, supported largely by its entry-level iPhone products and the company's focus on offering more affordable pricing options for customers in these markets. Apple had considerable success in India and the Philippines, which saw unit sales up over 400% and 140% year-to-year, respectively. Apple also made gains with iPhone in Eastern Europe, with sales in Poland and Turkey both up over 60% year-to-year."
Brian Marshall, ISI: Giving AAPL some benefit of the doubt again. "Despite two significant hardware advancements (e.g., LTE connectivity and a slightly larger display), iPhone 5 adoption has not been quite as robust as many hoped. In part, this is due to the need for an even larger screen. However, we also believe a lack of software enhancements (e.g., stale user interface [UI], Maps and Siri disappointments, etc.) have been responsible for Android closing the user experience gap. While the iPhone 5S could be another disappointment (assuming no change in screen size), we believe AAPL's iOS7 "extreme makeover" could satisfy the demand for a fresher UI and give AAPL's traditionally loyal installed base enough reason to wait for a larger-display iPhone model. As we have written in the past, even though AAPL's urgent need is for better iPhone hardware (namely a larger display), creating greater "stickiness" to the iOS platform is the more difficult task and we believe iOS7 is making important strides (e.g., improved built-in apps, iTunes Radio, enhanced Siri/iCloud, etc.) in that regard."
Chris Whitmore, Deutsche Bank: No clarity until new products arrive. Positives: iPhone units drive margin and EPS upside. "iPhones units grew 20% Y/Y to 31M and iPhone revs beat our model by 10% despite lower ASPs. In addition, corporate GMs of 36.9% and OMs were ahead of our model as iPhone units supported profitability. Mgmt guided GMs of 36-37% for the Sept Q, which was in-line with Consensus and better than feared. Separately, AAPL declined to comment on the widely anticipated iPhone transition which in conjunction with the better margin guidance could raise concerns of a potential iPhone launch delay into October (new product transitions are typically dilutive). Negatives: iPhone mix, iPad & Mac misses and China stalls. iPhone ASPs declined 4% Y/Y to $581 which suggests relatively strong uptake of the lower priced iPhone 4 (vs. iPhone 5) in developing markets. In addition, iPad revs were 3% below our model as both units and ASPs came in light as iPad revenue declined 27% Y/Y. China was a disappointment as Revs contracted 14% Y/Y (vs. +8% Y/Y in the March Q and +67% in the Dec Q) as the economy slows and Apple feels the heat from recent PR problems and lower priced & larger screen Android devices."