AAPL's Guidance Counseling
As Apple (NASDAQ:AAPL) prepares to announce its holiday quarter results onJanuary 27, investors and analysts will be paying particularly close attention to the company's guidance. Beginning with its January 2013 earnings report for the quarter ended December 2012, AAPL announced it had changed its guidance methodology. On Apple's F1 Q2013 earnings conference call, then-CFO Peter Oppenheimer stated:
"...we're changing our approach to how we provide guidance. In recent years our guidance reflected a conservative point estimate of results every quarter that we have reasonable confidence in achieving. Going forward we plan to provide a range of guidance that reflects our belief of what we're likely to achieve."
In addition, AAPL announced it would only provide the following guidance data points:
- Total Revenue Range
- Gross Margin Range
- Operating Expenses (OpEx)
- Other Income & Expense (OI&E)
- Tax Rate
AAPL's change to its guidance methodology effectively acknowledged its historical tendency to 'sandbag' guidance. Subsequent quarters after this change have proven that to be true.
A Closer Look at Fiscal Q1 Actuals versus Fiscal Q2 Guidance
Apple will post a monster holiday quarter (fiscal Q1) so one question from there is how much its revenue guidance drops for fiscal Q2. It is particularly in the spotlight this quarter after numerous reports of continued backlog and pent-up demand for the iPhones 6 and 6 Plus worldwide. There are two questions related to iPhone demand:
- How much 'direct' iPhone demand was unfulfilled at quarter's end?
- How much channel inventory fill will be needed to meet the company's new 5-7 week forward-looking target?
Due to the way Apple recognizes revenue, direct sales to individual customers that did not reach those customers by 11:59PM on December 27th will be deferred and recognized in fiscal Q2. Additionally, all shipments into the channel to fulfill the 5-7 week target will also be recognized in fiscal Q2.
These two factors should give analysts and investors additional reason to be confident that fiscal Q2 guidance should be stronger than in years past.
Here is how AAPL's historical fiscal Q2 revenue guidance has compared with its fiscal Q1 actual results:
As seen in the chart above, Apple has typically guided fiscal Q2 revenue down by about 25% from fiscal Q1 actuals. The guidance methodology change is 'clear-as-day' when you look at the red columns (what AAPL actually reported in fiscal Q2), where AAPL has reported very close (slightly ahead) to its guidance for the two years since the change was made. Prior to the methodology change, AAPL significantly exceeded its fiscal Q2 guidance.
What are the Experts Predicting?
Yahoo! Finance has revenue estimates from 38 analysts for both the December-2014 (FQ1-2015) and March-2015 (FQ2-2015) quarters:
These analysts appear to be slightly more bullish on fiscal Q2 than Apple has historically guided to. The high and mid estimates expect an 18.5% and 19.6% revenue drop-off, respectively. The low estimate appears to align much closer with AAPL's historical guidance reporting with an anticipated revenue drop-off of 25.8%.
Given the extremely large revenue base we expect Apple to report for fiscal Q1, pent-up iPhone demand (both direct and channel) that the company pushed into fiscal Q2 could swing guidance. For example, if Apple reports $70 billion in revenue for fiscal Q1 and guides to a 20% fall-off ($56.0 billion), as opposed to its historical 25% ($52.5 billion), that equates to an incremental $3.5 billion in revenue which could change analyst and investor sentiment.
What's $3.5 billion to a company the size of AAPL? Not much. But just remember what happened last year when iPhone units were 3 million units short of expectations.