AAPL Preview; It’s All About iPhone X Commentary
It’s All About iPhone X. Apple reports Sep-17 results on November 2nd. The focus of the call will be Apple’s commentary about iPhone X preorders which started on Oct 27th, and is set for launch on Nov 3rd. On the Nov 2nd earnings call, Apple will have almost a week of iPhone X preorder data. Based on our survey of 511 U.S. consumers in September, we expect Apple’s iPhone X preorder demand to be similar to or greater than iPhone 8 preorder demand. Another positive data point about iPhone X demand, two days after pre-orders began on the iPhone X, Apple is quoting 5-6 weeks lead times (factoring in production bottlenecks, we would have expected lead times of 4-5 weeks) compared to 1-2 weeks for iPhone 8 and 8 Plus. Our bet is that Apple will address the critical iPhone X demand question and direct investors to think about iPhone X demand as similar to iPhone 8. These comments should be a positive for the Apple story given most investors believe iPhone X will account for 15%-20% of FY18 iPhone units, when in fact iPhone X may account for closer to 25% of units.
Key Metrics For Sep-17: We don’t expect any surprises from the Sep-17 quarter. The three key numbers will be iPhone units of 46m (Street) up 1% y/y, 19% Services growth (compared to 22% in Jun-17), and 38% gross margin (compared to 38.5% in Jun-17).
Key Metrics For Dec-17 Guide: We expect the mid-point of revenue guidance will be 8% below the Street due to iPhone X production issues. The current 5-6 week lead times quoted globally for the iPhone X as of Sunday, Oct 29th, is further evidence that Dec-17 iPhone estimates will likely come down and those units will be entirely shifted to Mar-18. In the past month, Street iPhone unit estimates for Dec-17 have come down from 83m to 81m, suggesting revenue guidance below the Street is largely expected by investors.
iPhone (62% of revenue in FY17). Expect inline iPhone results for Sep-17, and Dec-17 revenue guidance that will imply iPhone units of closer to 75m vs. Street at 81m. The decline in Dec-17 iPhone estimates is attributed to iPhone X production, and will be shifted to the Mar-18 quarter, so full year FY18 EPS should not be impacted. The iPhone mix and ASP will be the biggest driver of AAPL shares in the next year, which we expect to be favorable to the story. At first take the $1000 starting price iPhone feels like a deal breaker. We think that’s a fallacy and consumers will take a step function jump in what they’re willing to spend on an iPhone given most buy their phones on installment plans. Last week we raised our estimates on AAPL with our updated model (here). For FY18, we’re now modeling for iPhone ASP of $740 (up 15% y/y) vs. Street at $722, revenue to $273 billion vs. Street at $265 billion, and EPS to $11.25 vs. Street at $11.05.
Services (13% of revenue). The Street’s expecting services growth of 19% in Sep-17, below 22% reported in Jun-17, and above 18% reported in Dec-16 and Mar-17. We’re modeling for services growth remaining in the mid to high teens for the next 4 years. One emerging wild card in services is original content spend. As Apple continues to invest in original content over the next few years (we estimate it will be around $800m-$1B in 2017), Services gross margin could decline by 3-5%, which would pressure overall Apple gross margin (currently at 38%) by around 0.5%.
Watch (3% of revenue). As a reminder, Apple does not break out Watch units, but gives enough data for the Street to back into the number. We believe the Watch was 3% of revenue in Sep-17, and will be 4% for FY18. Not surprisingly, the reason we’re more optimistic the Watch can add fractional growth to the Street estimates in FY18 is the Series 3 with LTE. For the Sep-17 quarter, the Street is expecting 3m units, compared to our 5.1m estimate. For Dec-17 the Street is looking for 6m units, compared to our 8.8m estimates.
Mac & iPad Non-Event (12% & 8% of revenue). We don’t expect much focus will be paid on either the Mac or the iPad. The Mac accounts for 12% of revenue, and has been stable with a growth rate of between 1-4% growth over the past three quarters. The iPad accounts for 8% of revenue and has no expectations from the Street. While iPad units grew by 15% in Jun-17, they were down the previous 13 quarters. We’re looking for 5% iPad unit growth in Sep-17, and a 3% decline in Dec-17%.
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