North America

Earnings Preview: Apple Q2 2018 (AAPL)

By: Craig Bowles

Overview

Apple, Inc. (AAPL) is slated to report 2Q 2018 earnings after the bell on Tuesday, May 1st. The earnings release is expected at approximately 4:30 p.m. ET with a conference call to follow at 5:00 p.m. that is webcast through Apple Investor Relations. Aside from Apple, look to the major US equity index futures, ETF’s, component providers, and competitors to move off of the upcoming results.

Outliers & Strategy

Key measures:

  • Earnings Per Share (EPS): Apple normally reports a “clean” number for comparison. The current Street estimate is $2.69 (range $2.51 to $2.80) (Source: Yahoo! Finance). Consensus was $2.91 three months ago.
  • Revenues: Company guidance is for $60.0 bln to $62.0 bln. Analysts expect an 15.3% increase y/y to $60.98 bln. Consensus was $67.68 bln three months ago.
  • Gross Margin: Company guidance is for 38.0% to 38.5%. (Press release only gives dollar amount to be divided by sales for the percentage.)
  • iPhone Shipments: Analysts expect 52-53 mln.

Revenue Guidance:

  • 3Q 2018 Revenue Guidance: Analyst consensus is a 14.6% increase y/y to $52.04 bln (range $49.00 bln to $56.98 bln).
  • Apple’s trailing P/E of 16.7 compares to a five-year average of 14.1; Price/Book of 5.9 compares to a five-year average of 4.8; Price/Sales of 3.5 compares to a five-year average of 3.1; Price/Cash Flow of 13.1 compares to a five-year average of 10.1.
  • Analysts view Apple with 31 (42 two qtrs. ago) Buy, 15 Hold, and 1 Sell ratings. (source: MarketBeat.com)
  • Insiders sold 510,955 shares in the last three months and 2,499,483 shares over the past year (source: NASDAQ.com). In April 2016, a 2-year plan was announced to spend $250 billion on stock buybacks and dividends. Another buyback announcement is due.
  • Apple shares have a 1-day average price change on earnings of 4.14%. Options are pricing in an implied move of 3.49%.

Recent News

  • 4/24: Austrian chipmaker AMS AG issued a similar warning as semiconductor giant Taiwan Semi. Mirabaud Group believes that major product changes and product transitions blamed are “all Apple, specifically iPhone X” and added that “phasing down iPhone X has taken the supply chain by surprise.” Taipei-based research firm Trendforce, estimates that overall iPhone production volumes grew slightly to 54-56 million units in the March quarter but iPhone X’s production volume fell by 50% in the first quarter compared to the fourth quarter, according to a post on zerohedge.com.
  • 4/23: European regulators will launch an in-depth investigation of Apple’s planned $400m purchase of Shazam, the music recognition app developed in the UK, according to a post on BBC.com.
  • 4/22: Apple could launch a new iPhone with a bigger screen this year for as little as $550 (iPhone SE 2 may be announced at June WWDC event), according to a post on Businessinsider.com.
  • 4/20: Morgan Stanley sees Apple reporting an in-line March quarter but lowers the June quarter iPhone unit estimate to 34 million from 40.5 million versus the nearly 43 million average forecast. Cites poor checks with Apple’s iPhone suppliers and weaker-than-expected data from China, according to a post on CNBC.com.
  • 4/19: Bank of America Merrill Lynch warned of a potential 5 million short fall for Apple’s Q3 iPhone sales after Taiwan Semiconductor Manufacturing (TSMC) cited “weak demand” in high end smart phones and gave disappointing revenue guidance, according to a post on CNBC.com.
  • 4/18: Neither Apple nor any of its usual accessory partners have made battery cases for its iPhone X and iPhone 8 (Samsung’s latest Galaxy S9 phone had a case available 1 day after release.), according to a post on qz.com.
  • 4/17: Apple is planning to launch its own premium news subscription service, according to a post on Techcrunch.com.
  • 4/16: UBS believes Apple’s dominance in China is over. In 2015, China was 25% of iPhone shipments. But its market share has since fallen to 19%. On top of that, the Chinese smartphone market is slowing down, according to a post on Businessinsider.com.
  • 3/28: Goldman Sachs slashed its Apple iPhone sales estimates for the first two quarters of the year citing demand indications. iPhone sales are now seen at 53 million units in the March quarter and 40.3 million units in the three months to June, according to a post on CNBC.com.
  • 3/22: Apple trialing 2018 iPhone production in Q2 in an effort to avoid supply bottlenecks that plagued iPhone X ramp, according to a post on 9to5mac.com.

Summary

The iPhone X and iPhone 8 disappointed, so Apple will release an updated iPhone X and an X Plus along with a cheaper 6.1 LCD iPhone this year.  The iPhone 7 was basically the same as the iPhone 6, according to Apple co-founder Steve Wozniak. Slowing demand for high-end phones has analysts more worried about Q3 than Q2. Increased stock buybacks have helped support the stock price and another announcement is due. Given $252 billion in potential repatriation, another hefty buyback should be on the way to scare the short sellers away. Insider selling continues. Analysts are less bullish with expectations for revenue growth to slow to 3.7% in FY2019. The company has beaten earnings estimates by an average of 10c the previous four quarters. Estimize consensus for an EPS of $2.73 on revenue of $61.678 bln compares to analyst consensus of $2.69 on revenue of $60.98 bln. iPhone shipments and revenue guidance relative to expectations will be factored into the market reaction.

 

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