With Apple earnings due after the bell, investors are concerned: will the company disappoint again as a result of China weakness, and report another weak quarter, or will it justify the rebound that its stock is pricing in? According to JPM, it may be time to moderate expectations.
In a report released overnight, JPM analyst Rod Hall said that “we remain cautious heading into Apple’s FQ3 results as we believe that iPhone expectations are still high for the second half of CY16. Our revenue estimate for the September QTR (FQ4) is 1.5% below sell-side consensus as we remain concerned about weaker consumer demand driven by macro conditions. We believe this could be exacerbated by consumers delaying upgrades this Fall in favor of a reported large form factor change in 2017. Partially offsetting this is our view that consensus expectations for the quarter and guide are low heading into this report.”
Here are the highlights from the report:
- Still below consensus for FQ4. Our FQ4 revenue estimate for Apple is ~1.5% below consensus. Note that our revenue estimate was 1.8% below consensus when we published our sector preview on Jul 19 (click here for our sector preview and here for our early June deep Apple analysis). Sell-side consensus revenue for FQ4 has declined by 0.3% since July 19 and by ~1.6% over the last two months.
- US Consumer indications weak: Although headline US retail sales remain strong, we note that, directionally, US Electronics sales worsened in Q2. We acknowledge that tougher comps from H1’15 may not be helping US Electronics in H1’16, but the direction of change in Electronics sales increases the macro demand concerns we outlined in our June analysis (see Figure 1).
- Build plans largely unchanged: We believe that iPhone build plans for the Sept-QTR are largely unchanged at 41-42m units, although mix might have shifted more towards the smaller screen iPhone SE. Our current estimate is for iPhone shipments of 39m units in FQ4.
- iPhone ASP and group gross margin: We are currently forecasting a 2% Q/Q decline in iPhone ASP in FQ3 to $630 and our Gross margin forecast of ~38% is largely inline with the company’s guidance. We will be focused on the potential impact of iPhone SE on gross margins in FQ3 and FQ4.
- Mac’s market share flat Y/Y: According to Gartner, Q2 Global PC shipments declined by 5% Y/Y, but the US grew 1% and Canada grew 3% while all other regions declined. On a Y/Y basis, Apple’s global units share remained relatively unchanged at 7.1%. We aren’t yet convinced that PC demand has bottomed but we do expect Apple to benefit from the typical back to school seasonal cycle in the
September quarter. - FQ3’16 estimates/consensus/guidance: We are looking for FQ3 total revenue of $42.0bn (cons: $42.1bn, guid: $41-43bn), GAAP gross margin of 37.8% (cons: 37.9%, guid: 37.5-38.0%), GAAP opex of $6.0bn (cons: $6.0bn, guid: $6.0-6.1bn), GAAP EBIT margin of 23.4% (cons: 23.8%), and GAAP EPS of $1.36 (cons: $1.39).
- FQ4’16 estimates/consensus: We are forecasting FQ4 total revenue of $44.9bn (cons: $45.6bn), GAAP gross margin of 38.0% (cons: 38.4%), GAAP opex of $6.3bn (cons: $6.2bn), GAAP EBIT margin of 23.9% (cons: 24.8%), and GAAP EPS of $1.50 (cons: $1.60).
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