On Saturday, December 27th, Apple’s first quarter of FY2015 drew to a close. While management has guided to revenue of between $63.5 billion and $66.5 billion in the period, the current Wall Street revenue consensus estimate of $66.46 billion is already pushing against the upper threshold of management’s revenue guidance range.
Apple’s Global Expansion
Apple manages its business on a geographic basis. The graph below illustrates the regional revenue mix for the fiscal year ended in late September.
Although in aggregate revenue rose a fairly modest 6.95% in the fiscal year, revenue growth by region varied widely with Greater China and Japan again delivering the fastest rates of growth. The graph below illustrates Apple’s revenue growth rates by region for the fiscal year.
Both Greater China and Japan delivered double-digit revenue growth rates in the period while Europe delivered revenue growth at a rate greater than the aggregate rate of growth for the company as a whole. The Americas region, Apple's largest revenue region, realized revenue growth of 3.95% in the fiscal year with negative growth in the Rest of Asia Pacific region.
Changes In Regional Revenue Reporting
Concurrent with the start of the December quarter (FQ1 2015), Apple is eliminating Retail as an independent revenue region. Results for the retail stores will be incorporated in the revenue totals for the geographic region in which the stores are located. For the year, Apple reported 437 retail stores of which 40% were located outside the United States. On a national basis with retail store revenue geographically assigned, the United States represented 37.7% of revenue and China represented 16.8% of revenue in FY2014. Japan may become a third national region to contribute 10% or more of Apple’s reported revenue.
Despite the company’s massive size, Apple remains a highly-dynamic enterprise. The current Wall Street revenue consensus estimate for the fiscal year ending next September is $211.08 billion, representing anticipated revenue growth of about 15.50%. However, analyst revenue estimates are continuing to rise.
On December 19th, Morgan Stanley analyst Katy Huberty reiterated the firm’s current $126 price target while noting very strong year-over-year demand for the iPhone in China and raising her firm’s iPhone unit sales estimates for 2015. In her note Ms. Huberty also mentioned the pent-up demand in North America for the new iPhone 6 handsets due to the aged installed base of iPhones and the new larger-screen handsets.
In Japan, the iPhone continues to be the most popular brand of high-end smartphone and the line consistently crowds the list of top selling handsets in the region. Although Apple’s rate of revenue growth in the Americas last fiscal year was just below 4%, the popularity of the new larger-screen handsets will be a primary driver of double-digit revenue growth in the region this fiscal year.
Regional Operating Income
On a regional revenue basis, Japan has consistently delivered the highest percentage of revenue to the regional operating income line. Despite the falling Yen and economic growth challenges, Japan may yet again deliver better-than-average operating income per revenue dollar in FY2015. The graph below illustrates the percentage of revenue delivered to the regional operating income line by segment over the most recent sixteen fiscal quarters.
Around the globe demand for higher memory configurations of the iPhone 6 handsets will increase the product line’s ASP (average selling price). Higher memory configurations generally deliver higher profits through higher gross margin. I expect gross margin to remain high throughout the fiscal year due in part to the popularity of the higher-priced and higher margin iPhone 6 Plus models and, in general, higher memory configurations on iPhone 6 handsets sold versus last year’s models. This will benefit operating income per revenue dollar this fiscal year across all revenue regions.
Regional Revenue Trends
While all of Apple’s revenue segments display seasonal cycles, the ongoing 4G/LTE rollout in China combined with continuing strong demand for iPhone 6 handsets on a global basis will deliver double-digit revenue growth throughout FY2015. The graph below illustrates the percentage of reported revenue delivered by each regional revenue segment since FQ1 2011.
Demand in Greater China for iPhone 6 handsets will continue well into the March quarter and ahead of Lunar New Year celebrations in February.
In a research report released on December 23rd, Piper Jaffray analyst Gene Munster noted continued strong demand of iPhone 6 handsets in the US as well as a surge in supply heading into the end of the December quarter. However, it’s likely Apple will need to complete its channel inventory fill to the target range of 5 to 7 weeks on a forward-looking basis in the March quarter.
Outlook For FY2015
Also on December 23rd, Oppenheimer analyst Andrew Uerkwitz raised the firm’s revenue estimates to $221 billion in FY2015 and $235 billion in FY2016. This was matched with an eps estimate of $7.85 for FY2015 and $8.58 for the following fiscal year. The firm now anticipates revenue growth of 20.90% for the current fiscal year and an eps growth rate of 21.7%. These numbers are above the current Street consensus for revenue and earnings per share. The firm’s positive sentiment is based on strong iPhone unit sales expectations as well as expectations for the successful launch of the Apple Watch in the spring of 2015.
In a surprising move early in December, Alex Gauna of JMP Securities raised his firm’s share price target from $135 to $150. In support of his new price target Mr. Gauna referenced very strong uptake of the iPhone 6 handsets in China and the US as well as what he viewed as solid consumer demand for the iPad 2 early in the holiday sales season. In raising his price target he also cited fading competition in the high-end smartphone market with Apple gaining market share in the December quarter. His revenue estimate for the quarterly period is $67 billion.
The iPhone and The Mac
In FY2014 the iPhone line delivered 55.80% of Apple’s reported revenue. The graph below illustrates iPhone unit sales on a quarterly basis since FQ1 2009.
Over this multi-year period we see the unit sales influence of expanded carrier relationships particularly in Greater China and Japan. The iPhone has a steadily rising unit sales trajectory. The 4G/LTE rollout in China as well as pent-up demand for larger screen iPhone handsets in the US will propel strong unit sales growth throughout the current fiscal year. The March quarter will benefit from continuing global demand for iPhone 6 handsets, millions of units to be reported as sold as Apple brings its global channel supply within the target range of 5 weeks to 7 weeks on a forward-looking basis as well as staggered upgrade activity now occurring in the United States.
The Macintosh is Apple’s oldest and most enduring product line. Although the product line debuted in early 1984, 30 years later it is producing record unit sales performances. The graph below illustrates Macintosh unit sales on a quarterly basis since FQ1 2009.
Accounting for 13.17% of Apple’s reported revenue in FY2014, the product line is poised to deliver yet another series of quarterly unit sales records throughout FY2015. While analysts are cautious on the outlook for iPad unit sales this fiscal year, rising Mac unit sales will “fill the revenue gap” from any declines in iPad units sales. Mac revenue may be on par with iPad revenue this fiscal year.
The Ever-Changing World of Apple
Apple’s revenue growth remains highly dynamic due to the introduction of new products and the company’s ongoing geographic expansion. Yet again this fiscal year the company’s geographic revenue growth rates will be in flux. Due to pent-up demand for larger-screen iPhone handsets, the revenue growth rate in the Americas region (in particular the US) will again reach well into the double digits. Greater China will continue to be a regional growth leader for Apple while Japan sustains strong year-over-year iPhone unit sales growth.
In Europe, currently Apple’s second-largest revenue region, the larger-screen iPhone handsets combined with the inability of competitors to keep pace with Apple’s approach to product innovation will push iPhone unit sales and the corresponding revenue in the region much higher on a year-over-year basis.
I reiterate my expectation for revenue in FY2015 of $225 billion. What will mark FY2015 as noteworthy is the rise in revenue across all of Apple’s geographic revenue segments. The Americas, Greater China and Japan will deliver very strong year-over-year revenue growth with Europe also delivering revenue growth above 10%. As Apple folds the results of its retail stores into the results of the regions in which the stores are located, we will get a more accurate measure of the underlying growth rates in each of the company’s five remaining revenue regions.
The renaissance of the Mac is of particular interest. The product line today is the best proxy for what I call the “Apple product mutual halo effect.” As much as the Mac is drawing new buyers through the success of the iPhone and iPad lines, the forthcoming Apple Watch will arrive in the market to high demand with immediate sales of millions of units. Similar to the unit sales of the iPhone each year immediately following the release of new handsets, Apple Watch unit sales at launch will be governed by supply, not issues of consumer demand.
Robert Paul Leitao
Disclosure: The author is long Apple shares