AAPL 4Q13 Preview; Expect a Beat

Revenue: $37.6 billion (AAPL guidance: high end of $34-37 billion range/Consensus: $36.8 billion)

• I expect Apple’s revenue to increase 4% year-over-year.

Gross Margin: 37.1% (AAPL guidance: high end of 36-37% range/Consensus: 36.9%)

• I expect Apple’s margin to increase sequentially to 37.1% from 36.9% last quarter, reflecting a modest boost from the newest iPhones. Management’s margin guidance is approximately 300-400 basis points less than the 40.0% margin reported in 4Q12.

EPS: $8.20 (Consensus: $7.93)

• I expect Apple to report a 5% yoy EPS decline. I am including a 908 million share count (implying around $8 billion of buyback).

Product Unit Sales and Commentary

Macs: 4.4 million (10% yoy decline)

• Mac sales continue to slow as tablets and smart phones satisfy many consumers’ computing needs. I assume 10% declines in both desktops and portables.

iPad: 12.4 million (12% yoy decline)

• I expect Apple to report weak iPad sales ahead of the iPad refresh in October. With modest channel inventory fill, I expect iPad sell-through to stay somewhat consistent with 3Q13, reflecting some benefit from back to school shopping.

iPod: 3.7 million (30% yoy decline)

iPhone: 34.4 million (28% yoy growth)

• I ordered my gold iPhone 5s online seven minutes after launch and my phone didn’t ship until September 30, two days after quarter end, so it’s clear that a large number of iPhone 5s launch sales will be pushed into 1Q14. Partially offsetting delayed 5s launch sales was solid 5c supply. My 34.4 million iPhone number assumes 13-14 million units of iPhone 5s and 5c and 20 million units of legacy iPhone (5, 4S and 4) selling at roughly the same weekly sales pace seen in 3Q13 (2.6 million).

I expect Apple to beat consensus EPS on Monday. In terms of 1Q14 guidance, I am expecting approximately $55-58 billion of revenue and 37.5-38.5% margins (which would equate to EPS of approximately $14.50, or a 5% increase from 2012, marking the first quarter with earnings growth since 4Q12). The Street is nearly complete with the Great Apple Expectations Reset of 2013. Heading into 2013, most (including myself) were thinking Apple annual EPS was running around $60. The iPad mini’s lower ASP and margin along with high-end smart phone market saturation resulted in EPS closer to $40. Expectations now appear to be closer to reality as consensus EPS for 2014 now stands at $43. I am around $41-$42, which reflects no China Mobile announcement (I will include the additional $3-$4 when the deal is announced), no change in margins (most likely conservative given the new iPhone lineup), 11% unit growth in iPhone, and 15% unit growth in iPad.