An early analysis of Apple’s Fiscal Q3 2010 seems to indicate that Apple is on tap to significantly beat analyst estimates yet again. Last quarter was one of the biggest blowouts I’ve ever seen Apple report, and if major upward revisions don’t start rolling in, it appears that Q3 can give investors another staggering halt-trading type blowout. The current consensus estimates as published by Thompson Financial apparently do not in any way contemplate sales of the iPad. Seasonally speaking, Q2 is generally Apple’s weakest quarter and so naturally one would expect Q3 to outperform. And while the consensus does in fact reflect this point in the revenue estimates, analysts seem to believe that Apple will see a sequential decline in EPS from earning $3.33 in Q2 to $2.98 in Q3. Something I find to be highly unlikely unless we see a massive collapse in Apple’s gross margin. Yet, even though the bump up in the consensus revenue estimates from $13.499 billion in Q2 to a forecasted $14.37 billion in Q3 contemplates a more favorable seasonal quarter, it doesn’t seem to take into account the 3 million iPads Apple is likely to sell this quarter, and the 9.3 million iPhones that Apple is on track to sell as a result of massive demand for the iPhone 4.
Personally, I think the consensus estimates as an average of analyst forecasts have little to no predictive value. Analysts seemingly have significant trouble in giving any realistic picture of Apple’s earnings and are always behind the curve in judging fundamentals. They recommend that you sell Apple at $80 and then to buy at $280. While analyst estimates by nature must be conservative so as to not overestimate, they generally fail to find a middle ground and consistently get beat by too large of a margin. After a cursory look into Apple’s Q3, I’m looking for Apple to report earnings of $3.78 on $15.371 billion in revenue versus the consensus of $2.98 in EPS on $14.37 billion in revenue. That’s a $1 billion beat on the top line, and an $0.80 beat on the bottom line. I see higher revenue driven by strong iPad sales, and higher than expected resilience in iPhone sales going into the iPhone 4 refresh. I’m seeing the bottom line beat to be driven primarily by much stronger than expected gross margins in the face of a stronger dollar as domestic iPhone 4 sales prop up any weakness in overseas Macintosh ASPs.
In terms of the revenue breakdown from Apple’s primary operations, I am looking for Apple to produce $1.950 billion in iPad Revenue, $3.906 billion in revenue from Mac sales, $1.6 billion in iPod sales, $5.58 billion from iPhone Sales, and a total of about $2.335 billion in revenue from iTunes, Software & Peripherals. This is a first look at Apple’s Q3 2010 and my final estimates (likely to change) will published as we get closer to earnings seasons. Once I get full NPD date, initial sales of the iPhone 4, and firm data regarding June iPod, iPad, Mac and iPhone sales, I’ll revisit and revise these estimates.
Fiscal Q3 2010 Earnings Forecast by Bullish Cross Compared to Apple’s Guidance (in Millions except for EPS)
|
Line Item
|
Apple’s Forecast
|
Consensus Estimates
|
Bullish Cross Forecast
|
Earnings Beat
|
|
Revenue
|
$13,400
|
$14,370
|
$15,371
|
$1,001
|
|
Cost of Goods Sold
|
$8,576
|
-
|
$8,761
|
-
|
|
Gross Margin
|
(36%) $4,824
|
-
|
(41.5%) $6,379
|
-
|
|
OpEx
|
$1,830
|
-
|
$1,850
|
-
|
|
Operating Income
|
$2,994
|
-
|
$4,529
|
-
|
|
OI&E
|
$45
|
-
|
$50
|
-
|
|
Net, before taxes
|
$3,039
|
-
|
$4,579
|
-
|
|
Taxes
|
(27%) $820
|
-
|
(23.4%) $1,072
|
-
|
|
Net Income
|
$2,219
|
-
|
$3,507
|
-
|
|
Earnings Per Share
|
$2.39
|
$2.98
|
$3.78
|
$0.80
|
|
Outstanding Shares
|
928
|
-
|
928
|
-
|
Revenue Breakdown & Product Summary for Q3 2010 (Revenue in Millions)
|
Product
|
Unit Sales
|
ASP
|
Revenue in Millions
|
|
iPads
|
3,000,000
|
$650.00
|
$1,950
|
|
iPods
|
10,000,000
|
$160.00
|
$1,600
|
|
Macintosh Computers
|
3,100,000
|
$1,260.00
|
$3,906
|
|
iPhone Sales
|
9,300,000
|
$600.00
|
$5,580
|
|
iTunes
|
-
|
-
|
$1,225
|
|
Peripherals
|
-
|
-
|
$480
|
|
Software
|
-
|
-
|
$630
|
|
Total
|
-
|
-
|
$15,371
|
Apple’s Quarterly Earnings & Projections FYE 2010 (in Millions Except for EPS)
|
Q1 2010
|
Q2 2010
|
Q3 2010*
|
Q4 2010*
|
FYE 2010
|
|
Revenue
|
$15,683
|
$13,499
|
$15,371
|
|
|
|
Cost of Goods Sold
|
$9,272
|
$7,874
|
$8,761
|
|
|
|
Gross Margin
|
$6,411
|
$5,625
|
$6,379
|
|
|
|
Operating Expenses
|
$1,686
|
$1,646
|
$1,850
|
|
|
|
Operating Income
|
$4,725
|
$3,979
|
$4,529
|
|
|
|
OI&E
|
$33
|
$50
|
$50
|
|
|
|
Net, Before Taxes
|
$4,758
|
$4,029
|
$4,579
|
|
|
|
Taxes
|
$1,380
|
$955
|
$1,072
|
|
|
|
Net Income
|
$3,378
|
$3,074
|
$3,507
|
|
|
|
Earnings Per Share
|
$3.67
|
$3.33
|
$3.78
|
|
|
|
Diluted Shares
|
919,783
|
922,878
|
927,878
|
|
|
Disclosure: At the time of this writing, the author holds no position in the equity markets. The information contained in this blog is not to be taken as either an investment or trading recommendation, and serious traders or investors should consult with their own professional financial advisors before acting on any thoughts expressed in this publication.
Hi Andy,
I am wondering how the stock will react to a report like you state? Do you think a stock split will occur?
To Anonymous:
You know I don't know if its easy to tell right now how the stock would react to such results. its just too far out to tell. As I'm sure you may know, whether Apple moves on its earnings release depends on so many factors. The most important of which are the current market conditions at the time Apple reports, and how the market is generally treating other companies that significantly beat earnings. I've seen Apple drop 8-10% on outstanding earnings before and I've also seen Apple skyrocket on what I thought were somewhat meager results.
So really, it just depends on where the market is at at the time Apple reports. Also, another thing you need to consider when trying to determine how the stock will react to earnings is whether the whisper numbers and upward revisions make it so that the beat really isn't that impressive. As we get closer to earnings, I'm sure there will be some pretty high whisper numbers and I'm sure analysts will revise their estimates.
Here's what I've learned about Apple in the several years I've watched the stock. Apple always makes its biggest moves in the market when nothing is going on with the company. I've seen Apple make 100% moves on no news mid-quarter. Sure, you could get a big 1-5 day move on earnings, but the biggest moves happen when nothing is going on.
So yea, I think its too hard to tell how the stock would react to these earnings at this point. I know that last earnings report, we got a huge move up due in large part to the staggering beat that not even bloggers as myself was able to call. Sure we might have done better than the analysts, but we didn't call it perfectly because Apple just decimated those results. Hope that helps.
Andy, in the table you indicate a tax forecast rate of 31% (in parenthesis). But the actual numbers show that to be a forecast of 23.4%. While that is close to the Q2 tax rate, you had mentioned in your blog post Q2 earnings that the tax rate was one of the factors why you were off – was the 23.4% forecast for this quarter intentional? As you know, it can have a huge impact on EPS.
Anonymous said…
Andy, in the table you indicate a tax forecast rate of 31% (in parenthesis). But the actual numbers show that to be a forecast of 23.4%. While that is close to the Q2 tax rate, you had mentioned in your blog post Q2 earnings that the tax rate was one of the factors why you were off – was the 23.4% forecast for this quarter intentional? As you know, it can have a huge impact on EPS.
Reply: Yes it was intentional. That's the tax rate I'm modeling for. Its actually one of the most reliable numbers in my model I think. Apple is modeling for 29% but I just don't see it. Last quarter they reported 24% and as far as the eye can see, Q3 has a more favorable tax rate than Q2. So just by looking at the trend, one can see how Q3 will be lower than Q2 right? Also, if you look at the margin by how much of a difference there is between Q3 and Q2, its usually in the order of 100 basis points.
I'm estimating only 60 basis points because I've seen quarters where it was lower than a 100 basis point difference. You know, the reason we're getting very favorable tax rates this year is due in large part to sales overseas. Because the effective tax rate in certain countries in Europe is very favorable to Apple. That's how we end up with these rates. It does in fact have a major impact on EPS. The tax rate could have anywhere from $0.01 to $0.30 difference.
"Anonymous: Andy, in the table you indicate a tax forecast rate of 31% (in parenthesis). But the actual numbers show that to be a forecast of 23.4%. While that is close to the Q2 tax rate, you had mentioned in your blog post Q2 earnings that the tax rate was one of the factors why you were off – was the 23.4% forecast for this quarter intentional? As you know, it can have a huge impact on EPS."
Ohhhhhhhh. I see exactly what you're saying. I have no idea why its stated like that. I must have been very tired when posting this. THe tax rate is indeed 23.4%. That's just a typo. Nice catch. I don't know how or why I put 31% lol. That doesn't even make any sense. Will fix it.
It's interesting how you noted that Apple's stock can move when nothing is going on? When actually something is going on!
Steve Jobs takes the stage to give his keynote and the press and media usually downplay the announcement as predictable.
Everone reads their articles including market movers and all interested investors.
All of this is liken to a pastry chef mixing his secret recipe and shoving the cake in the oven.
Then the cake begins to bake and the smell and the aroma releases itself and techies and the public get a chance to take in what they have just heard and witness with their own eyes Steve Jobs delivering his keynote and catching up with it as they watch it on quicktime unfolding days and weeks after the event.
By this time the day traders, institutions and individual investors have a change of heart and race to secure a position with Apple. A quiet discussion erupts all around the water cooler and a frenzy develops. This is when your article says nothing is happening. Apple's site gets hit by millions of the curious and the cake that is in the oven is almost ready to come out!
Boom! The cake comes out of the oven everyone gets a scent of its fragrance and forms a line 3 blocks long and orders on line blow out all expectations.
Apple stock jumps, earnings are released, the reports are in the iPod, the new iMac, the new iphone, iphone 3G, iphone 3Gs and now the iphone 4 are a surprise hit all the while the naysayers are shaking their heads in disbelief!
Anonymous said…
It's interesting how you noted that Apple's stock can move when nothing is going on? When actually something is going on!
Steve Jobs takes the stage to give his keynote and the press and media usually downplay the announcement as predictable.
Everone reads their articles including market movers and all interested investors.
All of this is liken to a pastry chef mixing his secret recipe and shoving the cake in the oven.
Then the cake begins to bake and the smell and the aroma releases itself and techies and the public get a chance to take in what they have just heard and witness with their own eyes Steve Jobs delivering his keynote and catching up with it as they watch it on quicktime unfolding days and weeks after the event…."
Yea. What I meant by that is, I've seen Apple move when there was no media event to release some new product in the works or no earnings or any real news to drive the stock in the immediate term. For example, look at March to May of 2009. Look at March to May of 2008. Look at July 2006 to January 2007. Sure there were earnings releases etc. But the point I'm making is, that inbetween those media events, when nothing was going on for like 1-2 months at a time, Apple was moving like 50%.
Andy, looks like you changed it from 31% to 24.6% – another typo? Should be 23.4%.