Expectation Meters for Apple's 1Q20 Earnings
My expectation is for Apple to report good 1Q20 results as the company benefits from a wearables platform that is gaining momentum with consumers around the world. Apple wearables are positioned to be the top story when the company reports 1Q20 earnings tomorrow.
Apple’s 1Q20 results and 2Q20 guidance may contain some financial noise. Accounting related to Apple's TV+ promotion and AirPods Pro supply issues will likely result in some revenue being pushed off to subsequent quarters. Meanwhile, anxiety surrounding coronavirus may add some complexity when it comes to Apple’s revenue guidance range for 2Q20.
My 1Q20 Estimates
The following table contains my estimates for Apple’s 1Q20 and revenue guidance for 2Q20.
An in-depth discussion of these estimates, including the methodology and perspective behind the numbers, is found in my 3,900-word Apple 1Q20 earnings preview available here. Above Avalon membership is required to read my earnings preview.
In what has become a quarterly tradition at Above Avalon, I publish expectation meters ahead of Apple's earnings. Expectation meters turn single-point financial estimates into more useful ranges that aid in judging Apple's business performance.
Ahead of Apple’s 1Q20 earnings, I am publishing three expectation meters:
iPhone Revenue
Wearables / Home / Accessories Revenue
2Q20 Revenue Guidance
iPhone Revenue
In each expectation meter, the number found in the white shaded box reflects my official single-point estimate. A result that falls in the gray shaded area would be considered near my estimate. This signifies that the product or variable being measured is pretty much performing as expected. A result that falls in the green shaded area denotes strong performance and the possibility of me needing to raise my expectations for that particular item going forward. Vice versa, a result falling in the red shaded area denotes the possibility of needing to reduce my expectations going forward.
As shown below, my expectation is for Apple to report $51.9 billion of iPhone revenue for 1Q20. A result within $51.5 billion to $52.5 billion of revenue would be considered near my expectation. An iPhone revenue result that exceeds $52.0 billion would signal the iPhone business has officially returned to growth after four quarters of revenue declines.
Wearables / Home / Accessories Revenue
Apple’s “Wearables / Home / Accessories” catch basin stands to be the most intriguing product category when it comes to 1Q20 results. The category includes revenue from AirPods, Apple Watch, Beats, Apple TV, HomePod, iPod touch, and various Apple-branded and third-party accessories.
There are three primary revenue growth drivers in this segment (in the following order): AirPods, Apple Watch, and accessories. Each driver looks to have had a good 1Q20.
In what ends up saying a lot about today’s Apple, the “Wearables / Home / Accessories” category is well-positioned to be the top driver of the company’s year-over-year revenue growth (+$4 billion), exceeding Services year-over-year revenue growth (+$2 billion) by a wide margin.
As shown below, my expectation is for Apple to report $11.3 billion of revenue in “Wearables / Home / Accessories” with AirPods and Apple Watch responsible for the vast majority of that revenue.
2Q20 Revenue Guidance
Sell-side consensus expects Apple to report $62.5 billion of revenue in 2Q20. My estimate is for Apple to announce 2Q20 revenue guidance in the range of $57.5 billion to $60.5 billion. This range is a bit low as it includes a $2 billion negative impact from coronavirus in China. One near-term risk facing Apple in China is coronavirus resulting in less customer demand due to the various travel restrictions and reduction in retail foot traffic. While there are ways of mitigating those potential headwinds, Apple may not be able to escape without some impact.
Close attention to management commentary will be required when it comes to assessing whether or not guidance reflects coronavirus risk factors. In the event that Apple sees no discernible impact from coronavirus, having the low end of management’s 2Q20 revenue guidance end up closer to $60B would be considered a good result.
My full 3,900-word Apple 1Q20 earnings preview, along with my working Apple earnings model (an Excel file that also works in Numbers), are available here. Above Avalon membership is required to read the earnings preview. Access to my Apple earnings model is available to Above Avalon members at no additional cost.
My earnings review will be sent exclusively to Above Avalon members after Apple reports. To have the review sent directly to your inbox on Wednesday morning (ET), sign up at the membership page.