Apple is scheduled to release its March quarter results on Wednesday, April 23, and if it maintains its usual practice will provide guidance for the next quarter in its press release. After running my Apple model for the June quarter and comparing it to the Street projections for revenue and EPS I believe that the company’s guidance could be significantly below expectations. This could lead to another significant drop in the shares post earnings. (Note that my family and I own Apple shares but am evaluating the positions based upon this outlook).
Revenue guidance could be between $33 to $35 billion
The Street is currently estimating June quarter revenue of $38.3 billion, which has come down slightly from $38.7 billion two weeks ago. The $38.3 billion is a 12% decline from the Street’s March quarter revenue estimate of $43.6 billion (Apple’s guidance is $42 to $44 billion for the March quarter and I am projecting $43.3 billion).
I believe that Apple’s guidance from last year for a 19% to 23% quarter over quarter revenue decline is more likely vs. the Street’s current 12% projection.
In 2011 and 2012 Apple guided to June quarter revenue declines of 7% and 13%, respectively, from the March quarter. However, both those years benefited from the iPad 2 and iPad 3 launches in late March each year. In 2013 Apple did not have the benefit of an iPad launch and guided to the 19% to 23% revenue decline and the actual result was 19%. Note that the actual revenue of $35.2 billion was at the high end of its guidance range of $33.5 to $35.5 billion.
So it will partially depend on what the March quarter’s actual revenue is but if the Street is correct at $43.6 billion for the March quarter and if Apple provides a range similar to last year then the March quarter revenue guidance could be $33 to $35 billion vs. expectations of $38.3 billion. When I do my bottoms up revenue projection based on unit sales and average selling prices for iPhones, iPads, Macs, iPods, iTunes and Accessories my June quarter revenue estimate is $33.7 billion.
I am projecting 28 million iPhones for the June quarter
After selling just over 51 million iPhones in the December quarter and an estimated 37.4 million for the March quarter I am expecting iPhone units to decline 23% sequentially for the June quarter. This would be a greater decrease than the 19% Apple experienced in 2012 with the 4S when normalized for channel inventory changes which I believe is more relevant than 2013’s 13% decline with the iPhone 5 that had a larger screen size.
While China Mobile and NTT DoCoMo will help since this will be the first June quarter that they will be selling iPhones I believe there is so much buzz about the iPhone 6 that Apple will be very conservative on the number they assume they will sell when calculating guidance.
iPads should also be weak sequentially
iPads should also experience a weak June quarter since Apple has changed its product release cycle to the holiday timeframe. In June 2013 iPads declined 15% from the March quarter and I am assuming a 17% drop this year (18 million in the March quarter to 15 million in the June quarter). While the Microsoft announcement that Office is available for the iPad is positive in the long-term I don’t think there will be a rush to buy iPads based upon this in the June quarter.
Gross margins typically decline in the June quarter
In June 2012 gross margins declined 460 basis points sequentially and in 2013 it declined a reported 60 basis points but would have been about 160 basis points when normalizing for an additional warranty charge that was taken in the March 2013 quarter. If you assume a 37.0% gross margin for the June quarter that would only match the low-end of the company’s 37%-38% guidance for the March quarter and the 37% could be higher than what the company announces next week for June quarter guidance.
EPS guidance could be $1 less than the Street is expecting
While Apple doesn’t provide exact EPS guidance it does provide all the inputs to determine a range. When I use $34 billion as the mid-point of revenue guidance along with a 37% gross margin, similar operating expense trends for the past few years and a share count of 864 million (down 37 million from the December 2013 quarter) I arrive at an EPS of $7.28.
While some sell-side analysts are warning about June quarter guidance (Keith Bachman at BMO Capital is at $7.47 and Bill Power at Baird is at $8.17 vs. the Street at $8.51) I don’t believe a large number of analysts and investors have fully baked in the downside for the quarter.
Since Apple gives a range for revenue, gross margin and expenses I would not be surprised if the low-end of EPS guidance starts with a $6.
A large addition to the buyback program could offset the disappointment
The “saving grace” part of EPS will be how many shares Apple buys back and if it announces a large increase to its buyback program. I would say it has to be at least an additional $25 billion and more like $50 billion. I don’t think the company can increase its dividend enough to offset a guidance shortfall since it is limited by the amount of U.S. cash it generates on a yearly basis.
If it does announce a larger buyback program with some positive verbiage about new products it may limit what I believe could be a downdraft in the shares the day after earnings are announced.