Apple 1Q16 Earnings Preview
Investor anxiety heading into Apple's upcoming earnings report is at a multi-year high. Fears surrounding slowing iPhone 6s and 6s Plus sales have morphed into broad questions about the iPhone's long-term viability. While investors are looking for answers that won't likely be provided this week, management has a very clear goal with its 1Q16 earnings report and conference call: set expectations for 2016.
Overall
My 1Q16 estimate reflects a record quarter for Apple with all-time highs for revenue, operating income, earnings per share, iPhone sales, and Apple Watch sales. My full estimates are highlighted in Exhibit 1.
Exhibit 1: Above Avalon Estimate for Apple's 1Q16
iPhone
On Apple's previous earnings call, Tim Cook discussed his expectation that iPhone sales would increase year-over-year during 1Q16 on a both a revenue and unit sales basis. Since this unofficial guidance was provided nearly one month into the quarter, it would have taken quite the unexpected slowdown in iPhone shipments for Apple to report anything less than 74 million units. As seen in Exhibit 2, my expectation range is for Apple to report between 75 million and 79 million iPhones with the mid-point of that range representing my 77.2 million estimate.
Exhibit 2: iPhone Unit Sales Expectation Meter
iPad/Mac
The iPad category still faces significant structural headwinds despite the iPad Pro going on sale two months ago. With 1Q14 being the last quarter that Apple reported iPad unit sales growth, expectations for the iPad category continue to be at all-time lows with few expecting near-term growth. Exhibit 3 highlights my narrow 17 million to 19 million expectation sales range for iPad and my expectation for Apple to report modest Mac sales growth.
Exhibit 3: iPad and Mac Unit Sales Expectation Meters
Apple Watch
Apple sold approximately six million Apple Watches during the first five months on the market from April 2015 through the end of September. Judging by the Watch's expanded retail distribution during the holiday quarter, including $100 promotions at Best Buy and Target, Apple Watch was one of the top gifts of the holiday season. Apple lumps Apple Watch sales in with Other Products. As seen in Exhibit 4, approximately $5 billion of Other Products revenue would convert to my 5.5 million Apple Watch unit sales estimate. Every $500 million increment in Other Products revenue is equal to one million Apple Watches.
Exhibit 4: Apple Watch Unit Sales Expectation Meter
Guidance
Apple's 2Q16 may end up representing the weakest quarter of the year. Accordingly, it should not be a surprise if Apple guides to a year-over-year decline in revenues. Given that Apple beat its 2Q15 revenue guidance of $52 billion to $55 billion by a sizable amount last year, that same range may end up being a realistic target for Apple's 2Q16 revenue guidance. Along with revenue guidance, Exhibit 5 contains my expectations for margin guidance. Apple continues to be in a positive margin cycle with no near-term signs that margins are at risk of experiencing significant deterioration.
Exhibit 5: Guidance Expectation Meters
Additional Earnings Commentary and Perspective
Over the past week, I published additional commentary and perspective on Apple's upcoming earnings, including the reasoning and logic behind my product unit sales estimates. The following analyses was sent to Above Avalon members:
- January 18th - iPhone Sales Estimates (a discussion of the major themes guiding iPhone sales)
- January 19th - Apple Watch, iPad and Mac Sales Estimates
- January 21st - ASP, Revenue and Margins
- January 25th - Threading the AAPL Expectations Needle (thoughts on 2Q16 guidance)
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