Apple's Q2: Another shoe to drop

From friend-of-the-blog (and occasional Forbes contributor) Chuck Jones: Apple’s March Quarter Guidance Is More Likely To Disappoint Than Bring Relief:

The average sell-side analyst revenue estimate for the March quarter [according to Thomson Reuters] is now at $59.3 billion and EPS is $2.65. I believe most analysts are expecting gross margin guidance to be a range of 38.0% to 38.5%, which is what it has been for the past five quarters.

However, there can be a difference between the published Street estimates and what investors are expecting. The reasons for this include Street estimates lagging expectations as sell-side analysts don’t want to change their estimates when there is an upcoming earnings announcement and historically sell-side analysts don’t cut deep enough or raise projections enough when there is a significant announcement, while investors are more willing to get in front of conditions getting worse or better.

Revenues typically decline over 30% from the December to March quarters... Over the past three years Apple’s revenue has declined over 30% from the December to March quarters. It was four years ago that the decline was less than that (22.2%), but that was when the iPhone 6 and 6 Plus were not able to satisfy demand in the December 2014 quarter.

Previous December quarter to March quarter revenue declines:

  • December 2014 to March 2015: Down 22.2%
  • December 2015 to March 2016: Down 33.4%
  • December 2016 to March 2017: Down 32.5%
  • December 2017 to March 2018: Down 30.8%
  • Average of the past three years: Down 32.2%

The average Apple’s March quarter revenue is $59.3 billion, which would be a decline of 29.4% from $84 billion. While this would still be a substantial drop, given the demand issues the company is facing it feels like this won’t be enough. To match the 32.2% average decline of the past three years revenue would come in at $56.95 billion, which would be lower than what I believe most investors are expecting...

This may turn out to be a situation where what a company announces is disappointing on the surface but the stock reacts positively. However, I believe that the type of shortfall Apple experienced in the December quarter is not a one-time event and usually there is another shoe to drop.

My take: The Apple 3.0 consensus (see below) implies a 29.6% quarter-to-quarter drop, which is in the historical ballpark.

consensus Q2 2019


  1. Aaron Belich said:
    All the more reason to toss quarterly results. Provide annual guidance and offer revisions to it throughout the year if/as required.

    While it appears to offer some accountability for some, anyone thats producing constant revenue and profits like Apple should be able to rise above such requirements. When a company truly starts to falter, they can be placed on a quarterly reporting “probation” by shareholders – simple majority, voting via brokerage apps. #dreamon

    January 26, 2019
    • David Drinkwater said:
      Sadly, at least in my experience in my factory, I see accountants getting more and more *monthly* in their thinking, and screening weekly metrics nad so on. I understand the importance of some of them (the metrics), and I also track metrics of my own choosing, but to expect businesses to chase metrics at the expense of focusing on doing business in insanity.

      This, of course, *supports* what you are saying, Aaron, but makes it much less likely to achieve.

      January 26, 2019
  2. Michael Gabrys said:
    I usually like Chuck’s articles for his insight. This one is pretty tough for me to see as insightful. Most of Q1’s revenue miss was attributable to Greater China. Performance in many established markets was very strong. It is just as easy to expect that rest of the world could have some better than expected results to offset the seasonal decline.

    There are so many factors that go into both of these numbers. You would need a fairly thorough model to be able to provide insight. Some factors over those four years: The pull forward of the China launch and production constraints used to shift sales. Now you have the average age of the install base getting longer and the rise of ASPs.

    A detailed model would be more interesting to use to form an opinion.

    January 26, 2019
  3. Gregg Thurman said:
    I’m in agreement with Mr. Jones.

    My March quarter revenue estimate is $57.468 Billion generating EPS of $2.48. That’s based on historic December to March quarter declines using $85.233B as December quarter revenue (my estimate). I then worked backward using historic guidance to performance ratios to arrive at a revenue guidance range for the March quarter of $56.5B to $58.5B. Any guidance above that range should be accepted positively in my opinion.

    Another way to calculate March quarter results to look at what percentage of full-year results each quarter generates. Using the same 3-year average results I find that the December quarter is responsible for 34.13% of full-year results, followed by March quarter at 23.17%, June quarter at 19.85% and September quarter at 22.85%.

    At $85.233B, December quarter implies full-year revenue of $249.696B. March quarter then will generate $57.846B, June quarter will generate $49.566B and September quarter will generate $57.052B.

    Note that neither method relies on unit sales.

    January 26, 2019
    • Gregg Thurman said:
      I should point out that if one were to calculate as I have done above, but do so by region, a more accurate picture is likely to emerge.

      I’m not willing to work that much harder just to get about .5 % or so more accurate than I already am.

      January 26, 2019
  4. Gary Morton said:
    In Tim Cook’s prepared and other remarks regarding their FYQ1 2019 miss, he emphasized that the company was caught off guard by the iPhone slowdown in Greater China and that they had little time to respond to the tectonic shift in demand in the world’s second largest economy. He also emphasized several times that they are making adjustments and will make more adjustments to address what is happening. Should investors bet on these adjustments having a material impact by fiscal Q2? I don’t know the answer to that, but some usage data for iPhone models is showing very strange patterns over the last two weeks. If the data is accurate, it indicates that many millions of old model phones were activated. Far more than the expected trend. There has been some chatter about clearance sales on iPhone SE and then a second set of sales on the SE. In the US we generally only have access to what is happening in our market. Apple seems to be doing great in the US. Perhaps the “adjustments” are having significant unit volume impact outside of the US. Great teams typically respond well when tested by unexpected events.

    If this usage data is indicative of a deliberate shift to emphasizing lower cost iPhone models to the “sub-prime” customers in China/India/etc it appears to be having a significant impact, at least in terms of units. Regardless, the buyback program is undoubtedly in overdrive. The company and its stock will do very well over the long term.

    January 26, 2019
    • Robert Paul Leitao said:

      The market for pre-owned iPhones has been growing globally at double digits rates. The resale value of pre-owned iPhones, through both formal and informal channels, supports Apple’s pricing strategy on new iPhones.

      What’s noteworthy about last model year’s rise in the iPhone’s ASP is that it wasn’t matched by an increase in gross margin as a percentage of revenue. In my view, Apple is pricing new iPhones close to the rising costs of design, engineering and manufacture. In other words, Apple hasn’t been padding profits at the expense of consumers. The company is pricing new iPhones for the cost of innovation.

      I don’t know if the data you referenced which indicates high activation levels for older model iPhones is due to Apple clearing out iPhone SE inventory, continued demand for pre-owned iPhones or a combination of the two. What we do know is the installed base of iPhone owners is continuing to grow.

      I agree with your view the share price is likely to perform quite well over the long-term.

      January 27, 2019
  5. Gianfranco Pedron said:
    “Clearance sales” are but one of the many weapons in Apple’s arsenal which it can use to address downmarket demand without diluting its premium brand value.

    When it wants to, if it wants to, Apple can address the more price sensitive demographics by offering lower performance devices based on older, completely amortized technology, built on tooling which has already paid for itself, both at the component and the assembly levels. The benefit to the consumer, but mostly to Apple is that these devices can access much of the same iOS ecosystem the premium devices can.

    Additionally, the brand’s premium allure also attracts merchants willing to include Apple products in their catalog as loss leaders without necessarily causing Apple to bear the entire brunt of a gross margin hit.

    One such sales channel, I was surprised to find, was my bank’s credit card rewards program which offered, for a limited time, the Apple Watch 3 at a 25% discount for a brand new device delivered in retail (i.e. not refurb) packaging, shipped directly from Apple. The caveat was that it was not returnable and non refundable and that at least one third of the cost had to be paid by exchanging rewards points.

    Hardly one to be able to resist a good deal, I now finally own an Apple Watch or, more accurately, my wife now has the Apple Watch she had been wishing for. Double win. (Triple win if you include Apple’s success at selling me a Watch.) Yay!

    January 27, 2019
    • Gregg Thurman said:
      In your example of using frequent flyer miles to partially offset the cost of an Apple Watch Series 3, Apple Is getting full price for the Apple Watch, while the sponsoring airline is buying back frequent flyer miles at a discount, in effect reducing the number of free seats given up to frequent flyers. Brilliant.

      January 27, 2019
      • Gianfranco Pedron said:
        Hi Gregg,

        Just to be clear, the price of the watch was actually 25% off the retail price in Apple’s store. THEN, at checkout, I got to choose whether to pay the discounted price for the Watch in part or in full with rewards points.

        Yes, the points I used to pay for roughly 1/3 of the invoice were redeemed at roughly a 35% discount with respect to their value had I purchased travel with them. So the rewards program did make up for some of the deficit. I suspected as much but hadn’t bothered doing the math.

        January 27, 2019

Leave a Reply