Sunday, July 17, 2011

Apple June Quarter Results: Numbers To Watch

On April 23, 2011 I published an article titled Posts At Eventide: AAPL June Quarter Trends To Track. In that article I mentioned several factors that will impact Apple's quarterly performances through the balance of the current fiscal year and throughout FY 2012 that begins in late September.
Today I'd like to revisit each of these factors ahead of the release of Apple's June quarter results on Tuesday and following the recent rise in the company's share price. I maintain a $590 price target on AAPL. On Friday the shares set a record closing high of $364.92. However, this recent rise in the share price has only been a retracing of ground since the previous all-time closing high of $363.13 set on February 16th. 
AAPL June Quarter Estimates
For the June quarter I'm estimating a 70% rise in revenue to $26.619 billion and a 90% rise in earnings per share to $6.67. During the first six months of the current fiscal year revenue rose 76.2% and eps 83.2% over the corresponding prior-year period. 
Declining Operating Expenses As A Percentage of Revenue
Due to the influence of the Apple iPad for the first time in prior-year comparisons, I'm expecting a slight moderation in the June quarter's rate of revenue growth. However, the continuing decline in operating expenses as a percentage of revenue will favorably impact the earnings per share results. The graph below illustrates the rates of revenue growth versus the rates of growth in operating expenses for the most recent ten fiscal quarters. I expect net income to reach above 23.5% of reported revenue in the June quarter versus the 23.33% of revenue that flowed to the net income line over the first six months of the current fiscal year. I also expect operating expenses to fall below 9.5% of reported revenue in the quarter. 
Factors That Will Positively Impact Apple's Performance Moving Forward
The Global Tablet Market: I've said several times outside of the Apple iPad, a global consumer market for tablet devices does not currently exist. While iPad unit shipments in the March quarter were below the expectations of most analysts due primarily to supply constraints, the tablet market is in a nascent phase of development. The Apple iPad will remain the undisputed leader in the tablet market well into CY 2012. The market can not at this time economically support a large number of potential competitors and Apple's global retail store presence is a competitive advantage competitors simply can not match. 

I estimate iPad unit sales in the June quarter of 8 million units, representing a 157% unit sales increase over prior-year sales. Constrained supplies of the iPad 2 will have a slight impact on the quarter's unit sales outcome. Moving forward into the September and December quarters, iPad supply constraints will evaporate leading to record revenue and earnings in the September quarter and FY 2011 revenue at or above $112 billion and eps for the fiscal year at or above $27.50.

The charts below illustrate the dramatic rise in Apple's revenue and earnings per share since FY 2005 and include my projections for revenue and earnings for the current fiscal year that ends in late September. I anticipate the rates of revenue and earnings per share growth realized over the first nine months of the current fiscal year to continue through the September quarterly period and the end of this fiscal year.
The Apple iPhone Reigns Supreme
The Apple iPhone is Apple's preeminent revenue product. In the recent March quarter sales of iPhone handsets and related products and services accounted for roughly 50% of reported revenue. Through FY 2012 the Apple iPhone will continue to dominate the global smartphone market capturing new revenue share as well as new market share. 
The iPhone 5, set to debut in the latter half of the September quarter, will be a success on a scale previously unseen even by iPhone standards. Within 90 days of release of the iPhone 5, Apple will ship in the range of 30 million iPhone handsets (all models combined) provided supply can keep pace with demand. The iPhone 4 will remain a hot selling smartphone and as it falls to the entry-level position in the product line will deliver strong unit sales over the coming year. 

For the June quarter I estimate iPhone unit sales of 18 million units. The prior-year results are a soft compare due to the a changeover of the product line before the end of the quarter. My June quarter estimate reflects an expected sequential drop in iPhone shipments from the March quarter and takes into consideration the first full quarter of sales to domestic customers on the Verizon network and suggests 115% unit sales growth in the three-month period. 
The Apple iPad Has A Definitive Halo Effect
The Apple iPad is a draw to Apple's retail stores. In the December quarter retail store revenue rose 95% and rose 90% in the March quarter. Since the release of the Apple iPad, retail store revenue growth has outpaced the pace of revenue growth of the company as a whole. Strong growth in retail store revenue will continue through FY 2012 as more stores are opened. In the September quarter the retail stores will sell more than one million Macintosh computers for the first time and welcome one-half million new customers to the Macintosh platform.  
The Apple Macintosh Has Now Reached More Than 10% Domestic Market Share
Both IDC and the Gartner Group estimate the Mac's domestic market share in the June quarter reached 10.7%. Both firms also rank Apple as the nation's number three PC vendor behind only HP and Dell. Apple is poised to return to the list of the world's top five PC vendors as early as the September quarter. 

For the June quarter I estimate total Mac shipments of 4.41 million units representing 27% unit sales growth following unit sales growth of 25.2% during the first six months of the fiscal year. The recently refreshed iMac line will reinvigorate Macintosh desktop unit sales in this quarter and the upcoming holiday quarter. 
The Apple iPod Touch Remains Relevant
No matter the declining unit sales and revenue contribution from the Apple iPod line, the Apple iPod touch, which represents over 50% of the revenue generated from iPod sales, contributes to the success of Apple's multi-device iOS product paradigm. 

For the June quarter I estimate iPod unit shipments of 8 million units, a decline of fifteen percent over the prior-year period. The popularity of the iPod touch is masking the sharp fall off in unit sales of single-use digital music players as consumers migrate to smartphones such as the iPhone with digital music player capabilities. 
FY 2012 Projections
Following the release of the June quarter results on Tuesday I will publish my first set of FY 2012 revenue and eps projections. The first 90 days the iPhone 5 is in release will include much of the holiday quarter (FQ1 2012) and the new smartphone handset will be a catalyst for strong revenue and earnings growth well into the new fiscal and calendar years. I maintain a price target of $590 on the shares. 
Disclosure: The author is long Apple shares
Robert Paul Leitao