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October 17, 2006

Apple September Quarter Earnings Preview

While Apple Computer (AAPL) shares are always volatile around earnings, I think the set up heading into this quarter is unusual. On the one hand, it is AAPL. The expectations are high and the company might receive more scrutiny than any other. The stock has rallied 50% from the summer lows following the excellent June quarter report that showed that Mac sales were finally taking off. So, based on history, AAPL probably needs to beat and raise to juice the stock.

On the other hand, the stock has largely sat out the recent rally as it is just barely higher than its early September level. Furthermore, there has been lots of cautious commentary about iPod shipments and the likely fourth quarter guidance. So, maybe just an inline report with as expected guidance will be good enough for the bulls.

For the September quarter, which is 4Q06 for AAPL, consensus calls for EPS of 51 cents and revenue of $4.66, up 34% and 27%, respectively. Growth will be driven largely by increased shipments of Macs, especially notebooks....

Analyst estimates look to be close to 1.5 million units, producing revenue of just short of $2 billion. There is lots of anecdotal evidence of strong Mac sales for back to school as the new MacBooks were a must have item. A small uptick in desktop sales is possible as the company introduced an Intel-based system. Desktops are more likely to get a boost when Adobe upgrades its software early next year. Overall, Mac sales are the story this quarter. Look for lots of excited comments if the company passes 1 million units in notebooks this quarter.

iPod sales are tougher to gauge. As with last quarter, as the quarter moved on expectations fell. I have seen estimates for units of 8.2 million up to about 8.7 million. Last year, the September quarter saw units of 6.5 million, so growth is still around 30%. ASPs will probably be down about $10 from last year’s $188.

The bigger question for iPod sales, and for AAPL shares, surrounds the December quarter. Seasonally it is a big quarter. iPods are a popular holiday gift item but last year the company completely blew away estimates with 14 million units. Sequential unit growth last year was 115% with ASPs rising $13. My long standing fear for AAPL shares has been that this comparison would lead to a miss for iPods and a return of the bear thesis that AAPL is blowing it again. My sense is that current estimates call for iPod shipments of 17 million units for sequential growth of 100% and year over year growth of 20%. Plus last year’s fourth quarter had an extra week that added 1 million units. Normally unreliable indications from the supply chain suggest AAPL might be preparing to ship as many 21 million units this year.

What worries me is if the figure comes in at 15-16 million. This would be accompanied by lots of stories about the end of the iPod phenomenon and how music phones are replacing iPods. In the end, I suspect that December iPod shipments won’t fall short as music players will get a boost as a category from the new product introductions from Apple, Microsoft, and Sandisk. So one more big Christmas for the category will likely occur.

Analysts will get a sense of iPod shipments for December from AAPL’s guidance. Presently, consensus estimates are for EPS of 57 cents on revenues of $6.45 billion. I hope that AAPL’s guidance is close to these figures. I think it will be because I expect MacBooks to be an extremely popular Christmas item. Remember that Macs have an ASP 7 times an iPod at a higher margin. A 1 million unit shortfall in iPods is made up by an additional 133,000 Mac units in terms of revenue and fewer in terms of operating profits.

I am long AAPL and as usual nervous ahead of the quarter. I remain steadfastly bullish over the next couple of years as I think the market share gain in PCs is for real and has lots of upside. Additionally, I am optimistic that additional revenue streams will develop from phones or smart phones or the iTV device or software. Apple remains a long-term growth stock regardless of quarterly fluctuations. There aren’t many real growth stocks with market caps as big as AAPL so I am willing to tolerate the volatility surrounding quarterly results.

Posted by Steve Birenberg at October 17, 2006 01:42 PM in AAPL