Apple Q4 2014 Earnings Preview

  • Apple is set to report its Q4 and FY 2014 earnings on Oct 20th after market close.
  • Increased iPhone sales driven by iPhone 6 will drive topline growth while profit margin expansion will be fuelled by higher ASP’s for the latest models.
  • Our Apple stock analysis assigns a buy rating to the stock, with strong topline and earnings growth expected over the next year.

Apple Q4 2014 earnings preview

Apple (NASDAQ:AAPL) is scheduled to report its last quarter and FY 2014 earnings update after the market close on October 20th, Monday. With a market cap of close to $600 billion, Apple Inc. is among the largest corporations in the world. It is no surprise that Apple earnings updates are eagerly awaited and the huge excitement ahead of Apple’s earnings call is understandable. Our preview of Apple Q4 2014 and what to expect in the upcoming earnings release.

Apple Q4 Will See Solid iphone Sales

Apple’s biggest event in Q4 2014 was undoubtedly the unveiling of its new products. Among the new products, the iWatch will only go on sale in early 2015 and will not be impacting Apple financials prior to that. The Apple payments platform will increase its presence as the latest model iPhones and subsequent updates replace the current devices in the market. Therefore, the only product to have an immediate impact on Apple’s Q4 2014 financials will be the latest versions of the iPhone.

The iPhone 6 and 6 Plus have been selling like hot cakes, with over 10 million units sold on the launch weekend alone. The latest numbers on the iPhone unit sales will be indicative of the impact of the iPhone6 and iPhone 6 plus models on Apple financials in FY 2015. The chart below displays the iPhone unit sales over the last three years.

Statistic: Global Apple iPhone sales from 3rd quarter 2007 to 3rd quarter 2014 (in million units) | Statista
Find more statistics at Statista

According to a post on appleinsider.com, the latest iPhone models are expected to push the iPhone unit sales to over 37 million units, implying a YoY growth of 11.6% over Q4 2013.

The iPhone has consistently overshadowed Apple’s other products in terms of revenue contribution. The product contributed close to 55% of Apple’s last twelve month revenues and over 40% in each of the last three financial years. The iPhone will continue to be the leading device sold in Q4, helped along by the latest launches.

Apple profit Margins Will Expand

As mentioned in our preview of Apple’s Q2 2014 earnings, the sales mix of Apple products has been tilting in favor of the latest models. This trend in iPhone sales will further accelerate in Q4 2014; driving iPhone average selling price (ASP) and Apple profit margins higher. Hence, investors should expect profit margin expansion in Q3 largely on account of the higher ASP of the new iPhone models.

Apple Q4 Earnings - Consensus Estimates and Management Guidance

The current consensus estimate for Apple Q4 2014 is earnings per share (EPS) of $1.3 on revenues of $39.9 billion. The analyst estimates and expected YoY change is summarized in the table below.

Analyst estimates

Revenue ($, in millions)

EPS ($)

Analyst consensus

39894

1.3

Expected YoY change

6.5%

10.2%

Source: Estimize

The current consensus revenue estimate lies close to the higher end of Management’s guidance range of $37 billion to $40 billion. The management’s guidance range is modeled in the table below.

Management guidance (in billions of $, except per share numbers)

Low end

Average

High end

Revenue

37

38.5

40

Gross profit

13.69

14.45

15.20

Operating expenses

4.75

4.80

4.85

Operating Income

8.94

9.65

10.35

Other Income

0.25

0.25

0.25

Income before tax

9.19

9.90

10.60

Provision for taxes

2.40

2.58

2.77

Net Profit

6.79

7.31

7.83

Current number of shares outstanding

6

6

6

Earnings per share (EPS)

1.13

1.22

1.31

The average estimate derived from Management guidance is an EPS of $1.22 on revenue of $38.5 billion.

Based on the latest iPhone sales data and other product segments, coupled with historic movements in fundamentals, we expect the company to surprise the street with earnings of $1.39 on revenue of $40.4 billion.

Conclusion

The current consensus estimate is on the higher side of the Management guidance. We expect the company to report a solid earnings surprise driven by iPhone 6 and 6 plus sales and higher ASP for the iPhone product mix. The company is poised to see margin expansion, which will translate into earnings growth well ahead of topline growth. We re-iterate our long term bullish outlook on Apple, which is reflected in our Apple stock analysis.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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