Apple Quarterly Earnings Preview: Q3 2014

  • Apple is set to report its Q3 2014 earnings today (July 22) after market close.
  • Increased iPhone sales will drive topline growth with a favorable sales mix leading to margin expansion in Q3 2014. The Q4 2014 guidance will be critical as it will provide a view into Apple's upcoming product line-up
  • Our Apple stock analysis reiterates our positive long term view on Apple, in anticipation of the upcoming product line-up to be unveiled in Q4 2013.

Apple Q2 2014 earnings preview

Apple (NASDAQ:AAPL) is scheduled to report its Q3 2014 results after the bell on July 22nd, Tuesday. One of the corporations in the world, with a market capitalisation of $566 billion, the excitement ahead of Apple’s earnings call is understandable. We take a relook at the events through the quarter, leading up to the ER and also their potential impact on the Q3 numbers.

China Mobile and NTT Docomo deals to drive Apple revenue

Apple announced a deal with NTT Docomo at the end of May, and with its devices going on sale through Docomo’s distribution network, the sales could have a significant incremental addition to Q3 2014 numbers.

Q3 is historically the slowest quarter of Apple’s calendar year, which is evident from the chart below. However, what is more concerning is that the general trend at Apple over the last two years is slower growth rate as the company finds itself in the elusive search for the next ‘disruptive’ product.

Apple revenue and revenue growth trends

The iPad has failed to replicate the success of iPhone as the iPhone continues to be the leading device to be sold among Apple’s portfolio of products. This quarter will be no different with the Apple-China Mobile deal boosting the iPhone sales. The iPad numbers will also get a boost on account of the Docomo deal announced in May. Analysts polled by Forbes were bullish on the YoY growth in iPhone sales while seeing a decline in the iPad sales. The consensus estimate is Q3 2014 iPhone sales of 35.88 million, a 14.85% YoY growth while the iPad sales consensus at 14.43 million units implies a 1.3% YoY decline.

Favorable sales mix to drive Apple profit margins

According to a report from Consumer Intelligence Report Partners, Apple’s Q3 2014 iPhone sales will include a higher percentage of flagship model (iPhone 5S) sales as compared to flagship model sales in Q3 2013(iPhone 5), as evident from the chart below.

iPhone Q3 2014 sales by models

The same is the case with the iPad sales with iPad air (52%) claiming a higher percentage of the total shipments as compared to iPad retina sales in Q3 2013. The same is clear from the chart below.

Q3 2014 iPad sales by models

The current price differential between the two top end iPad models is $100 according to prices on Apple’s store. Using the consensus estimates and the sales mix of iPad models, we can put iPad air sales in Q3 2014 at 7.5 million units. The iPad retina display accounted for 4.7 million units of iPad sales in Q3 2013. The result is an incremental gross profit of $280 million due to the improved iPad sales mix.

Similarly, using the consensus estimate for iPhone sales and the sales mix of iPhone models, we arrive at Q3 2014 iPhone 5s sales of 22.24 million against Q3 2013 iPhone 5 sales of 16.24 million. Assuming a price differential of $150 on the top end models, against the current price differential of $200 between the 5S and 5C models, we arrive at incremental gross profits of $900 million from the iPhone sales.

The total incremental additions to the Apple’s gross profits, based on the product mix, could thus be close to $1 billion. This will be a good move away from Q3 2013, when the company saw its gross profits decline on a YoY basis.

An earnings beat is on the cards, but Q4 2013 guidance will post results stock price movement

The Q3 2014 analyst consensus estimate is an EPS of $1.22 on Q3 2014 revenues of $37.8 billion, which is well above the firm’s average guidance of 37 billion. We think Apple is all set to deliver an earnings beat on the back of solid growth in iPhone sales driving topline growth even as the favourable product mix will drive profit margins higher. The combination of topline growth and profit margin expansion will lead to Q3 2014 earnings growth, which will go down well with investors compared to a decline in EPS in Q3 2013.

However, while Apple looks set to deliver a strong earnings report, investors will be keen on the Q4 2013 guidance. The guidance for the September ending quarter will give a hint of Apple’s upcoming product line, which Apple’s Eddy Cue has claimed is the best Apple product line-up he has seen in the last 25 years. The Q4 2013 guidance will, in large part, drive and determine the Apple stock price movement post the results. Our earlier posts on Apple look into the upcoming products and why Apple is a buy over the long term. Our current Apple stock analysis rates it 3.8/5 reflecting our long term positive outlook on Apple’s stock.

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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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