Apple's Long And Winding Road

There's no question Apple faces big challenges in the months ahead. Apple's reported revenue of $98.115 billion in the first six months of the current fiscal year represents a year-over-year revenue growth rate of 14.73%, well off the 66.35% revenue growth rate in the first six months of the prior fiscal year. 

Additionally, Apple's revenue growth reliance on the iPhone and iPad lines is creating challenges in light of the success of the Pad mini and the corresponding drop in average selling prices for the line. In this article I will explore the factors that have compromised Apple's recent rates of growth and the opportunities available to the company as it continues on a long and winding road of recovery. 

Apple's Current Revenue Mix

Over the first six months of the current fiscal year nearly 75% of Apple's reported revenue was sourced from the iPhone and iPad lines. The chart below illustrate the high concentration of revenue in Apple's two most popular device lines. 

It's interesting to note Apple's recently recast iTunes/Software/Services revenue segment now delivers more recognized revenue than the iPod device line and the Accessories revenue segment combined. The Macintosh line represented 11.2% of revenue in the first six months of the current fiscal year versus 14.8% of revenue in fiscal year FY2012 that ended in September. 

The chart below illustrates the rates of revenue growth for each of Apple's revenue segments for the six-month period ended in March. 

In the first two quarters of the current fiscal year, iPad revenue rose 29.18% on a 55.47% rise in units sales to 42.337 million units. The iTunes/Software/Services segment was Apple's second-fastest growing segment with a 26.01% growth rate to $7.801 billion. 

Negative revenue growth delivered by both the iPod and Mac lines in the first half of FY2013 contributed to the rising revenue dependency on the iPhone and iPad lines for aggregate revenue growth for the company. 

Apple: There And Back Again

On April 23rd, Apple released the company's results for its second fiscal quarter of 2013. Reported revenue of $43.60 billion represented a March quarter record and the third highest quarterly revenue performance in the company's stored history. However, March quarter earnings per share fell to $10.09, down 18% year-over-year. In today's article I will review Apple's March quarter performance, the recently announced cash distribution plan and the ways in which Apple is setting a firm foundation for future growth. 

Apple: There and Back Again

The graphs below illustrate Apple's recent rates of revenue and earnings per share growth compared with the quarterly rates of growth since the first quarter of FY2010.

In the March-ending period, Apple reported its slowest rate of quarterly revenue growth in years. Since the third quarter of FY2012, quarterly revenue growth has slowed to a pace last seen in FY2009 and the peak of the Great Recession. In the March quarter, Greater China, previously Apple's fastest-growing revenue region, reported only 7.54% revenue growth. That was below the 11.27% revenue growth for the company as a whole. For the current June quarter, Apple has guided to revenue of between $33.5 billion and $35.5 billion and hinted at the possibility of a negative revenue growth quarter. In the June quarter one-year ago, Apple reported revenue of $35.023 billion.

Despite the fact Apple will almost certainly report yet another successive year of record revenue, the company's performance is overshadowed by expectations of flat earnings growth this fiscal year and present-day market preoccupation with the company's massive amounts of cash.

In the March quarter, Apple reported its second consecutive negative eps growth quarter and its first negative net income growth quarter in years. In the recent December quarter, earnings per share fell 0.4% with a modest $14 million rise in net income. In the March quarter, earnings per share fell 17.9% to $10.09 from $12.30 in the prior-year period with a corresponding drop in net income of $2.075 billion. 

Apple has returned from a three-year cycle of extraordinary rates of revenue and earnings growth following the Great Recession that was fueled by strong geographic expansion, the introduction of the iPad and fast rates of growth in the global smartphone market. This is an end to a chapter, not the end of Apple's long-term growth story. 

Apple, iOS Devices and the Precipice of Success

On August 11th, I published my updated AAPL 12-month price target of $950 per share. Since that date, AAPL has moved from $620.73 to $700.09 per share. On Friday the shares set an all-time intraday high of $705.07 as the rollout of the iPhone 5 began in the US and select markets around the globe. Apple's newest iPhone handset is an early and unqualified success. 

I've mentioned several times in prior articles I expect the iPhone 5 to sell on a scale not seen before even by iPhone standards. Apple's early September announcement of a September 12th iPhone event essentially froze the domestic smartphone market while competitors scrambled to ship product to carriers before the iPhone 5's release on September 21st. Through at least the holiday quarter, there isn't a competing handset on the market that will generate anywhere near the iPhone 5's global appeal. 

In addition to the release of the iPhone 5, the iPhone 4 is now available on AT&T, Sprint and Verizon at a post-subsidy price of $0. This is the first time all three major domestic carriers have an iPhone available at that pre-tax price. The iPhone 4 at its new price will deliver a boost to unit sales over the next four fiscal quarters. 

Just prior to the iPhone 5's retail availability, Apple released iOS 6, the company's latest iteration of its operating system for the iPhone, iPad and iPod touch. No matter the early complaints about Apple's first major effort at mapping services, iOS 6 downloads and installations can be counted by the tens of millions. With all of the attention lavished on the iPhone 5, it's the iPhone and iPad combined that is driving the company's share price and market cap significantly higher.

iOS Devices As A Global Franchise

At my Posts At Eventide web presence I provide graphs and table data illustrating and detailing unit sales by quarter for each of Apple's major product lines. Today I am publishing a chart-based overview of iPhone and iPad sales to illustrate Apple's high rates of revenue and earnings growth depend on more than the iPhone alone. iOS devices have become a global franchise. Because Apple does not break out the unit sales of the iOS-based iPod touch, I am including only the iPhone and iPad product lines in today's analysis. 

The graph below illustrates the growth in iPhone and iPad sales over an eleven-quarter period beginning with the first quarter of FY2010 (fourth calendar quarter of 2009):

From a low of 8.737 million iPhone units sold in FQ1 2010 prior to the original iPad's release, to a high of 52.478 million iPhone and iPad units sold two years later in FQ1 2012, in seven of the eleven quarters covered, year-over-year unit sales growth reached or exceeded 100%. The accompanying table data is available at Posts At Eventide through the link posted above.

Apple's Unrelenting Mac Attack On The PC Market

In Apple's most recent fiscal year ended in September, the company's Macintosh line of personal computers generated revenue of $21.783 billion, representing 20.12% of Apple's $108.249 billion in reported revenue. The Mac's $4.304 billion gain in revenue during the fiscal year represented 10% of Apple's $43 billion in revenue growth. 

Although the $21.783 billion in revenue generated from Mac sales in FY 2011 represented only 20.12% of the company's revenue total, it exceeded Apple's total reported revenue of $19.315 billion in FY 2006, just five years before. In FY 2011, revenue generated from Mac sales exceeded the revenue generated from iPad sales by $1.425 billion. 

Apple's Unrelenting Mac Attack On The PC Market

The graphs and table data in this article illustrate and delineate Apple's unrelenting Mac attack on the PC market. For over five consecutive years the rate of growth in Mac unit sales has exceeded the rate of unit sales growth for the PC industry as a whole. In only one quarter of the most recent twelve fiscal quarters has Apple experienced a year-over-year unit sales decline. In FY 2011 Macintosh unit sales rose about 22.5% to 16.735 million units following a 31% rise in unit sales in FY 2010. 

In the current quarter ending in December, Macintosh unit sales may reach 5 million units for the first time in the company's history, breaking the unit sales record of 4.894 million units sold in the recent September quarter. 

Apple's First $100 Billion Year

During the twelve months that ended in late June, Apple reached an important milestone. It was the first 12-month period in which the company's reported revenue exceeded $100 billion. Apple's fiscal year ends in late September, but the trends revealed in the four fiscal quarters that ended in late June provide important insights into the company's current rates of revenue growth and the dynamic nature of Apple's revenue mix.

In the four fiscal quarters ended in late June, the company reported revenue of $100.322 billion, a year-over-year increase of 75.73%. In this four-quarter period the Apple iPhone and the Apple iPad represented 60.98% of revenue and 88% of the $43.233 in revenue growth over the corresponding prior year four-quarter period. 

The Impact of the Apple iPhone and Apple iPad

The iPad's sales presence in all four quarters of this twelve-month period significantly boosted revenue growth. However, iPhone revenue growth of $23.936 billion exceeded total iPad revenue of $16.282 billion during the four fiscal quarters. The iPhone's particularly strong June quarter performance was due in part to Apple's decision to handle this year's iPhone transition on a different timetable than in the past.

The iPhone remains Apple's flagship product and is the primary catalyst for Apple's frenetic rates of revenue growth. Apple's decision to push the transition to the iPhone 5 well beyond the start of the September quarter has merit provided sufficient product supplies are available at the time of the product's release.

The graph and table data below illustrate and delineate the sources of revenue in this four-quarter period that fueled the 75.73% rate of revenue growth and the revenue total that topped $100 billion.

Posts At Eventide AAPL FQ2 Estimates

Posts At Eventide AAPL FQ2 Estimates

As an independent AAPL analyst and moderator of the Apple Finance Board I've witnessed the continuing transformation of Apple from primarily a one product company at the beginning of this millennium to a newly claimed position as a global technology leader offering an array of popular and award-winning products. 

My estimates rely heavily on Apple's recent quarterly results and I actively track trends that emerge on a rolling basis over the most recent eight fiscal quarters. For more information on the data I compile and the results I track, please see the Posts At Eventide Resource Guide.

FQ2 Revenue and Earnings Estimates

For the March quarter my models forecast revenue of $25.256 billion and earnings per share of $6.30. This represents anticipated revenue growth of 87% over the prior-year period and eps growth of 89%.

This extraordinary pace of revenue growth is due in part to an accelerating rate of iPhone unit sales boosted by the iPhone on the Verizon network and a lessening of iPhone supply constraints. In the March quarter I anticipate revenue growth from iPhone unit sales to be greater than the total revenue generated from iPad unit sales activity.

In year-over-year comparisons I expect a slight reduction in gross margins. Apple has become more aggressive on product pricing in pursuit of increasing unit sales. iOS-based devices (the iPhone, iPad and iPod touch) are designed to deliver post-purchase revenue activity over the economic life of each unit sold. Offsetting the moderation in gross margins is the reduction of operating expenses relative to revenue. For the second consecutive quarter I anticipate operating expenses consuming less than 10% of reported revenue. For an analysis of the growth in operating expenses relative to growth in revenue, please see my February post titled Apple's SG&A Expenses Versus Revenue. 

Posts At Eventide FQ2 AAPL Estimates

	Revenue Segment	Units FQ2 '11	Units FQ2 ’10	Unit Growth	FQ2 Revenue
	Macintosh	3,625,000	2,943,000	23.2%	4,585,625,000
	iPhone	18,125,000	8,752,000	107.1%	11,563,750,000
	iPod	10,000,000	10,885,000	-8.1%	1,800,000,000
	iPad	6,750,000	N/A	100%	4,320,000,000
	Peripherals				565,000,000
	Software, Services				762,500,000
	Other Music				1,658,750,000
	Revenue Total				25,255,625,000
	Cost of Sales	60.2%			-15,203,886,250
	Gross Margin	39.8%			10,051,738,750
	Operating Expenses	9.5%			-2,400,000,000
	Operating Income	30.3%			7,651,738,750
	Other Income				125,000,000
	Income Before Taxes				7,776,738,750
	Provision For Taxes	24%			-1,866,417,300
	Net Income	23.4%			5,910,321,450
	Earnings Per Share	937,503,000	Shares		6.30

Posts At Eventide FQ1 AAPL Estimates

Posts At Eventide AAPL FQ1 Estimates

As an independent analyst and moderator of the Apple Finance Board I enjoy the opportunity to prepare estimates of Apple's anticipated performance on a quarterly basis.

My estimates rely heavily on Apple's recent quarterly results and I actively track trends that emerge over the most recent eight-quarter periods. For more information on the quarterly data I compile and the results I track, please see the Posts At Eventide Resource Guide for Independent AAPL Analysts. 

FQ1 Revenue and Earnings Estimates

For the December quarter my models forecast revenue of $26.425 billion and earnings per share of $6.27. This represents anticipated revenue growth of 68% over the prior-year period and eps growth of 70.8%.

I expect eps growth to slightly exceed revenue growth in the quarter due to lower tax rates and a drop in operating expenses relative to revenue. For a comparison of the rates of growth in Apple's revenue and operating expenses, please see my recent blog post titled Apple: Revenue Growth vs. Growth in Operating Expenses. The drop in tax rates and the drop in operating expenses relative to revenue will mitigate the impact of lower gross margins in the quarter versus the prior-year period. 

Apple has become more aggressive on product pricing relative to manufacturing costs. It's my view the moderation in gross margins seen in FY2010 and expected in the December quarter is intended to gain market share through higher unit sales and promote growth in post-purchase revenue from the sales of apps and digital content. The more units sold, the greater the growth in post-purchase revenue. 

Apple's Dynamic Revenue Mix

In late October I published blog post titled Apple's FY2010: A Retrospective. In that post I illustrated the contributions of each of Apple's revenue segments to the company's overall results. In the December quarter and throughout FY2011 the Apple iPad will continue to dramatically change the percentage of revenue contributions from each of Apple's major product lines. I estimate in the December quarter the Apple iPad will represent about 17% of Apple's reported revenue and represent almost 42% of the quarter's estimated growth in revenue. 

CY 2011 AAPL Price Forecasts and Price Targets

Please see my updated 12-month price forecasts and price targets posted February 7, 2011.


CY 2011 AAPL Price Forecasts and Price Targets

Yesterday I posted my preliminary estimates for Apple's revenue and earning performance in the December quarter (Apple FQ1 2011). I'm following up that post today with my early calendar year 2011 share price forecasts and price targets. By this time next year I expect AAPL to be trading above $500 per share. 

FY 2011 Revenue and Earnings Estimates

It's challenging to forecast Apple's revenue and earnings twelve months out from today considering the dynamic nature of the company's revenue mix. My early revenue and earnings estimates have a conservative bias. I expect to update these price forecasts and price targets on a periodic basis as we move through the fiscal year.

In FY 2010 (ended in September) Apple achieved revenue growth of 52% and earnings per share growth of 67%. The earnings performance benefitted from comparatively high gross margins in the first three quarters of the fiscal year and dramatic reductions in the company's effective tax rate to an average of 24.5% for the year. 

For  FY2011 I estimate Apple will achieve roughly a 60% increase in revenue to about $105 billion with a fairly commensurate rise in earnings per share to about $24. Although we will witness a reduction of operating expenses relative to revenue, lower gross margins and tax rates similar to the rates realized in FY2010 will moderate the rise in eps relative to revenue growth in FY2011.

The Apple iPad Factor

Although Apple achieved a 52% rise in revenue in FY2010, the Apple iPad (device sales and related accessories) represented 7.6% of the company's reported revenue for the fiscal year and contributed about 11.6% of the 52% growth in revenue. In other words, absent the Apple iPad from the revenue mix, revenue growth for the fiscal year from product lines in the marketplace at the start of the fiscal year was a little over 40.4%. In fiscal year 2011 Apple iPad-related activity will fuel revenue growth above FY2010's pace of growth and will represent between 17% and 20% of this fiscal year's reported revenue. Combined, the Apple iPad and the iPhone will represent over 60% of the fiscal year's reported revenue. 

Preliminary AAPL FQ1 Estimates

Update: Please see the Posts At Eventide AAPL FQ1 Estimates Posted January 2, 2011


Preliminary AAPL FQ1 Estimates

As an independent analyst and moderator of the Apple Finance Board I'm posting preliminary FQ1 estimates for Apple as a catalyst for discussion of anticipated December quarter results. These estimates are subject to change and most likely will be revised in the coming weeks as we approach the end of the quarter. These estimates are being published at roughly the half-way point in the 13-week fiscal period.

FQ1 Revenue and Earnings Estimates

For the December quarter my current models forecast revenue of $26.221 billion and earnings per share of $5.80. This represents an expected 67% jump in revenue and a 58% rise in earnings per share.

The pace of eps growth trails revenue growth due to the estimated 37% gross margin this December versus the 40.9% gross margin in the prior-year period. This nearly 400 basis point drop in the gross margin ratio has a material impact on the relationship between revenue and earnings growth. 

Apple has become more aggressive on product pricing relative to build costs. It's my view the moderation in gross margins is intended to promote growth in after-purchase revenue from the sales of apps and content. The more units sold the more future revenue generated from units sold. 

Apple's Dynamic Revenue Mix

Two weeks ago I posted an FY2010 retrospective that illustrated the percentage revenue contributions from each of Apple's major product lines. Apple's overall revenue mix remains dynamic and changes by the quarter. The emergence of the Apple iPad will again change the percentage of revenue contributions from each product line to Apple's reported results. In the December quarter I expect the Apple iPad's revenue contribution to approach 16% of reported revenue. Each revenue dollar from Apple iPad sales in the December quarter is a gained revenue dollar relative to prior-year comparisons. My estimates suggest the Apple iPad will represent more than 50% of the estimated growth in revenue for the period. 

AAPL FY2011 Estimates and Forecasts

AAPL FY2011 Estimates and Forecasts

In late July I posted a preliminary Apple FY2011 revenue forecast of $100 billion. Following the September quarter results I'm beginning my first set of estimate revisions. In reviewing my unit sales numbers following the September quarter I've become more emphatic about my current AAPL price target of $450 per share. I will be revising my revenue and earnings forecasts for FY 2011 over the next two weeks with a bias toward increasing the revenue forecast. Below are the factors by product line that are influencing the outcome of my work:

Mac Unit Sales

In FY 2011 I expect Mac unit sales growth to moderate from the 31% growth rate in FY2010. I expect Mac sales to growth a rate at least 2x the pace of growth of the industry. In fact, I expect Mac PC unit sales growth to represent more than 50% of the growth seen in the domestic market.

In my view tablet products such as the Apple iPad will force a continued deceleration of PC industry growth in the domestic market and increasing revenue share of all PC sold for Apple. Rising enterprise adoption, aggressive product pricing and Apple's efforts at refreshing the Mac product lines more frequently are counter-weights to unit sales growth falling below 25% for the fiscal year. I expect Apple to at least maintain its current 20.7% share of consumer PC sales in the domestic market.

iPod Unit Sales

In the 4th fiscal quarter of FY2010 both unit sales and revenue for the iPod line fell below prior-year levels. I expect this trend to continue into FY2011. For now I anticipate a 10% to 12% fall in unit sales for the fiscal year with the iPod touch partially offsetting a commensurate fall in revenue from the line. 

iPhone Unit Sales

To the surprise of all analysts, iPhone unit sales growth in the September quarter roughly matched the pace of growth for the first nine months of the fiscal year. I expect this strong pace of 90% growth in unit sales to continue through FY2011. Apple ended the September quarter with only 3.2 million iPhones in the global channel, representing about 2.5 weeks of expected unit sales in the quarter. As supply reaches demand, the FQ1 numbers will benefit from an increase in channel supply as Apple exits the quarter with more iPhones in the channel than when the quarter began.