Mac sales reach record high as unrelenting iPad slide continues

28 Oct 2015 | Author: | No comments yet »

Apple’s record fourth quarter: What the analysts are saying.

This long-time bear, who has repeatedly growled about overly optimistic expectations for iPhone 6 sales, upgraded the tech titan to Overweight from Sector Weight, arguing that “long-term value offsets remaining near-term risk.” Expectations for the 6s cycle have fallen and we see March as the low point for growth.

With Cook & Co. forecasting year-over-year iPhone unit growth off Herculean comps in the December quarter with China remaining white hot, we believe last night was a major step in turning the positive tide around the Apple AAPL 1.51% story. Chief Executive Officer Tim Cook attributed the forecast to customers upgrading to the latest iPhone models, converts switching over from Android handsets and continued growth in China.

While there will continue to be worries around FY16 growth during this 6s product cycle as the “iPhone 6 hangover” thesis remains a lingering cloud over Cupertino’s head, we believe this quarter and guidance proves yet again how much fuel is left in the iPhone engine. But beyond the numbers, this is the day where Apple has to disclose a bit more about itself than it does on any other day, outside of a product-launch event. Between the numbers it releases and the discussion on its hour-long call with financial analysts, there are usually some interesting tidbits that indicate where Apple’s going and what its management team is thinking. We see Apple as a sustained share gainer in that market with pricing that is likely to remain protected by Apple’s brand, ecosystem and the extraordinary utility of the iPhone. Late yesterday, Apple posted fiscal Q4 EPS and revenue that easily beat the Street’s expectations, but forecast revenue for this quarter slightly below estimates.

Over the past week, the commentary from U.S. operators about declining phone upgrade rates was starting to concern us, but apparently China continues to chug along unabated, with mainland units growing 120% during the quarter. As we learn more about phone upgrade programs, we agree with management’s assessment that the benefit might actually be larger in future years than what they are seeing now. On March 9, CA$1549 was worth about $1221, so the two prices were roughly in sync, though profit margins would be a little bit lower in Canada than in the U.S.

December quarter guidance implies iPhone unit and revenue growth on the back of 1) strength in emerging markets, including China, 2) continued upgrade cycle, with 69% of users yet to upgrade to larger screens, 3) record Android share gains, and 4) ASP uplift. In some cases we have realigned prices, particularly when we launch new products, we tend to do that in a number of countries where the foreign exchange moves have been particularly extreme. The point is, a strong U.S. dollar can be difficult for international businesses like Apple, especially those that are trying to grow aggressively in some international markets. While tough Y/Y iPhone compares still could make for an air pocket or two in 1H C2016, we are modestly lifting our growth estimates due to 1) sturdy ASPs, 2) accelerating converts, 3) potential of shortening replacement cycles with the advent of upgrade programs, and 4) more favorable mix due to increasing effects of services.

While our eyes bug out at that $11.1 billion profit number, analysts will always be more concerned over Apple’s guidance for next quarter’s earnings and the hope for continued future growth. This is just how stock prices work: Expectations about how well Apple will do are already built into its stock price, so Tuesday’s results won’t do much to affect it. When asked about future growth–by an analyst who was a little spooked by, you guessed it, Apple’s foreign-exchange headwinds–Apple CEO Tim Cook gave some specific examples of why he was optimistic about Apple’s potential for growth. We think there are several tailwinds that should benefit AAPL across both revenues and EPS – 1) ~1/3 of the install base has migrated to the 6 product line, 2) Android switch rate at 30% suggests further gains likely, 3) tailwinds in China from LTE expansion and further uptake of AAPL products, 4) ASP’s should sustainably ramp higher given memory uptake and 5) gross-margins could see upside given leverage and cycle efficiency.

The iPhone is obviously a hugely successful product, but that oddly makes it a topic of concern for investors who aren’t convinced it has much room to grow. Maynard Um, Wells Fargo: The Good. 1) iPhone sales of $32.2B exceed our $31.6B (Street $31.4B) on stronger ASPs of $670 (our/Street: $645/$649), 2) iPhone channel inventory was below target range, which should help the Dec/Mar quarters, 3) iPad channel inventory also fell below target range, 4) Gross margin of 39.9% was above our/Street’s 39.7%/39.3%, 5) Watch units increased sequentially, 6) FQ4 EPS of $1.96 was above our/Street’s $1.95/$1.88, 7) implied F16 EPS of $3.08-$3.29 vs. our $3.15 and Street’s $3.22.

Those are people who haven’t upgraded yet, but probably will, meaning there are a whole lot of future iPhone sales just waiting to happen in the next year. “We feel like we have a very open field in front of us,” he said. And again, something that wouldn’t seem to be good news–a low market share in those markets–is actually an advantage when you’re talking about growth. Revenues were slightly ahead while EPS benefited from better margins. iPhone shipments were inline with estimates of 48mm but ASP of $670 was significantly higher. Cook also pointed to the low penetration of high-speed LTE networks into emerging markets as a good sign, because as those faster networks arrive, Apple will be prepared to compete for people upgrading their phones to take advantage of the new networks.

Yes, China is a big deal for Apple when it comes to growth, but it’s not just China. “I was really impressed last quarter with our progress in Vietnam and Indonesia and India among others,” Cook said. Although the company continues to perform well, we think stock performance remains tied to iPhone shipments, which face tough compares over the next couple of quarters making it difficult for the stock to work. As Cook put it, “Apple TV is off to a great start, Apple Watch is just getting going, the App Store hit a new record again last quarter, and the growth seems to be really great there. So sort of everywhere I look, I see significant opportunity.” Conventional wisdom says that computers are boring and smartphones are everything, and yet here goes Apple setting the record for the most Macs sold in a single financial quarter, with 5.71 million new Macs.

It’s not a business that will make you faint away dead when you see the numbers like the iPhone will, but it’s a business that has generated $6.4 billion in revenue for Apple in the past 12 months. This is sort of a running thing these days, where at some point during every quarterly analyst call, Cook will reiterate how important he feels China is to Apple’s business. As he did last quarter, Cook went out of his way to say he wasn’t worried about the fundamentals of China’s economy, and he did the same Tuesday. “If I were to [ignore news reports] and just look at how many customers are coming into our stores regardless of whether they’re buying, how many people are coming online, and in addition looking at our sales trends, I wouldn’t know that there was any economic issue at all in China,” he said. “So we’re very bullish on it, and I would point out that we’re investing in China not for next quarter or the quarter after, we’re investing for the decades ahead. And as we look at it, our own view is that China will be Apple’s top market in the world.” The new game to play may be when Apple will first book more quarterly revenue in China versus the U.S. market. We really didn’t get much more than Cook referring to the watch as a future path for growth that’s “just getting going.” No, really, that was pretty much it.

The silence on the topic was so deafening that finally Cook himself, completely unprompted, said, “Y’know, even, nobody’s asking me about iPad on the call.” Then he tossed out that 68 percent of iPad sales in China have gone to people who have never bought a tablet before, which was a good stat, but you definitely got the sense that Cook wanted to tell everyone again about how bullish he is about the iPad, and nobody wanted to take him up on it. In his prepared statement at the beginning of the call, Cook could’ve announced a more specific release date for the product, but all he said was “next month.” All the people who can’t wait to get their hands on the iPad Pro, the good news is that November’s less than a week away.

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