Introduction

And suddenly, all is well in Apple-land! For now. More or less. 😁

How can I be so sure? Well, the current hand-wringing - Apple's legitimate, "fix this yesterday" software issues aside (with a heaping side of Spectre/Meltdown hardware issues) - is all about how well iPhone X will sell over the March quarter. The December 2017 quarter? No one has any doubt it'll be a solid one financially speaking.

Sure, the iPhone X supply chain rumors beyond FQ1 2018 (and you know what Tim Cook thinks about supply chain rumors) are cast as something worrisome. But when you look more closely at the numbers, one rumor du jour works out to "20M iPhone X orders for the quarter ending March 31, 2018."

The implication, of course, is that it represents a deep, distressing production cut from...uh...40M units or so. 😱

Until you realize:

• that Apple sold 50.7M iPhones in what's more or less the year-ago quarter (FQ2 2017)

• 20M units would make iPhone X a stunning ~40% of iPhone mix assuming flat unit growth, and

• aside from 20M iPhone X in FQ2 2017/~CQ1 2018 being a very respectable number of iPhone X units in any quarter, we're talking a ultra-high-end, inherently-demand-limited smartphone with a class ASP of...uh...comfortably over $1,000.

So...yeah. Even the "bad news" seems pretty good to me.

The only real "problem" on the medium-term (financial) radar this year is perception-related. And no, I don't mean Apple's software screwups, which definitely needs improvement as soon as possible. I mean Wall Street's potentially unreasonable expectations for Apple's fiscal year, which I've called out before, and will discuss later on in the post.

In one well-worn disclaimer paragraph, we’ll be back to the familiar format:

(1) check guidance and analyst expectations for the to-be-reported quarter;

(2) throw a entertainment-purposes-only horseshoe toss for FQ1 2018 with some quick, humble home game commentary on major revenue categories; and

(3) wrap up this series hardly anyone reads with a quick note on the quarter of most interest — the in-progress FQ2, which apparently has bulls nervous and some bears sharpening their metaphorical claws, given "fresh concerns" that ... um ... asking Apple to grow revenues 25% or more year-on-year in the March quarter might be asking a bit much. Given Apple's scale...ya think?

(IMPORTANT NOTE: Please refer to this About + Disclaimer message from my old blog. You won’t ever find actionable investing/trading advice here, just a humble home gamer in his corner of the Web trying to understand Apple and tech a bit better. As you know, no one has any clue what AAPL stock will do from day to day, quarter to quarter, year to year, even if earnings “seem good enough”. Performing your own due diligence is an absolute must.)

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Apple’s FQ1 2018 Guidance, Plus Wall Street’s Consensus [as of late January]

>>> Apple’s Guidance

Here’s the FQ4 guidance from Apple:

• revenue between $84 billion and $87 billion

• gross margin between 38 percent and 38.5 percent

• operating expenses between $7.65 billion and $7.75 billion

• other income/(expense) of $600 million

• tax rate of 25.5 percent

Plenty bullish enough guidance, considering that the guidance range, unadjusted for the 14th week in FQ1 2017, implies YOY revenue growth between 7.2% and 11%. The implied net income guide is $18B - $19.25B, compared to the all-time FQ1 2015 record of $18.024B, making it "all but certain" that Apple will rather easily mint a no-asterisks-required all-time-record quarter.

Gross margin guidance is identical to that given for FQ1 2017, implying that iPhone X, typical of truly new iPhones, has a variable cost curve to work through as the fiscal year progresses.

Meanwhile, OpEx (of which, of course, R&D expense is a major part) has made a fairly significant "stair-step" move upward, compared to the overall ~$6.5B - 6.8B OpEx actual range from FY 2017.

>>> The Wall Street Consensus (Jan. 30, 2018)

The Thomson Reuters consensus (29 analysts) as tabulated by Yahoo! Finance calls for FQ1 2018 revs of $87.06B, exceeding Apple's top-end guide by a "slight" $60M. That consensus number is around $1B higher than three months ago, as analysts awaited Apple's FQ4 2017 results.

Full-year FY 2018 expectations...? Up around $7B from late October 2017, to $272.17B.

18.7% YOY rev growth...for a company the size of Apple? Casually vaulting over the ionospheric quarter-trillion revenue level with around $20B to spare? Really?

Uh...wow. We'll see where that number goes as we get closer to FQ4.

Now we move on to my “entertainment purposes only” complete wild guess for FQ1 2018. I've decided to make things mildly interesting with my "estimate" this time around.

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The AAPL Tree “Cracked Crystal Ball” Horseshoe Toss for Apple’s Reported FQ1 2018 Numbers

Just so we can have something to share laughs over later, I mean discuss 😅, here's my home gamer take on the Big Holiday Quarter:

Over $89B in revenue? EPS of nearly $4? A $20B+ net income quarter?!

Clearly, I'm taking a rather bullish (overbullish? 😄 ) stance relative to the crowd for this quarter. I'll discuss both the how and why, so we can test my "Apple thesis" against actual results in a couple of days, and adjust from there.

As usual, we’ll start with iPhone and end with Services. (Watch and Other Products will be “discussed” simultaneously, since Watch isn’t reported separately.)

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iPhone

Last 16 fiscal quarters of year-over-year unit growth/decline, GAAP sell-in reporting basis (FQ1 2014 — FQ4 2017): 7%, 17%, 13%, 16%, 46%, 40%, 35%, 22%, 0.42%, -16%, -15%, -5%, +5%, -1%, +2%, +3%

86M iPhones. About 10% unit growth, which is something close to 18% unit growth if you normalized the year-ago quarter to 13 weeks.

I'll be the first to admit, this seems like a very controversial position to take. There is, however, at least one "mitigation", and a counterbalance built into my iPhone "assumptions".

The "mitigation"? When iPhone X's release date was announced in late September, there was a significant amount of chatter that the notch-screened iPhone would be severely supply-contrained, even into 2018. That prediction turned out to be more than a little inaccurate, as shipping estimates worked their way down from the usual 6 weeks or so to in stock by mid-December. While not exactly comparable, that was a vast improvement in supply situation over what happened with the iPhone 6 Plus, which, far as I could tell, still needed 7-10 days ship time around two months post-launch.

Since iPhone X met supply-demand balance ahead of expectations - and all of the relative gloom over demand hasn't really hit until just this past week - that also means Apple had a small window near the end of December to begin iPhone X channel fill. It's extremely doubtful Apple, particularly after FQ2 2016, would actually get iPhone X channel inventory anywhere close to Apple's touted 5 to 7-week range. However, I'd guess Apple was able to begin building in a channel inventory buffer for the benefit of all of the carriers and other points of sale eager to stock iPhone X in shelves. That benefits the GAAP number.

Next, the counterbalance. While reportedly "below industry expectations", Canalys reported that Apple shipped (essentially, sold) 29M iPhone X units during CQ4 2017, which is more or less FQ1 2018. Now, if one-third of iPhones sold were of the $999 and up variety...and particularly if I'm a few million or more units too high on iPhone units...wouldn't that have a massive impact on iPhone ASP, which was about $695 in FQ1 2017?

Let's run the numbers real quick. Assume a fairly conservative iPhone X blended ASP of $1050, since the arithmetic average price is $1074. Reduce "not an iPhone X" ASP from the year-ago $695 to say...$620, by assuming...somewhat boldly, in my humble opinion...that the $699 - $949 iPhone 8 and 8 Plus collapsed unit sales-wise mere weeks after the end of FQ4 2017, leaving the $349 iPhone SE through $769 top-end iPhone 7 Plus to absorb a large amount of consumer demand.

The resulting blended iPhone ASP at 86M units is $765, a solid 6% higher than my ASP wild guess. At 80M units (assuming 29M iPhone X units), the blended ASP jumps to $775.

So while my iPhone units are probably quite high relative to other estimates, my ASP projection has a significant moderating effect on line revenue. In fact, assuming 80M units sold on a GAAP basis (2% YOY growth, around 10% on a normalized 13-week FQ1 2017 basis) with an ASP of $775 actually nets the same line revenue result of around $62B (I didn't know the number would be the same beforehand, for the record).

Uncertainty abounds heading into Thursday, but that makes the earnings prognostication game "more fun", wouldn't you agree?

Next up, iPad.

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iPad

Last 16 fiscal quarters of year-over-year unit growth/decline: +14%, -16%, -8%, -13%, -18%, -23%, -18%, -20%, -25%, -19%, -9%, -6%, -22%, -13%, +15%, +11%

Not much to say here. Units and ASP have recovered nicely over the past two quarters, and iPad faces a much more favorable YOY compare, since units had actually dropped 22% YOY in FQ1 2017.

With a much fresher lineup of iPad Pros (and the $329 iPad A9 not being that old, at an approx. average product age of 7.5 months through the December quarter), I'm taking a guess that the typical iPad seasonality provides a unit sales boost that just wasn't there last holiday season, particularly with iPad Pros significantly newer (mid-June 2017 launch, the 10.5" model being a new form factor) than their Pro predecessors the year prior (mid-November 2015 launch for the iPad Pro 12.9, late March launch for the iPad Pro 9.7). Then there's the iOS 11 factor, bringing more robust, traditional-PC-like functionality to the platform.

Not so robust - iPad mini 4, which is looking more and more like it'll never be replaced. iPad mini, we hardly knew ye! On that dour note which also rhymed, let’s move on to Mac.

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Mac

Last 16 fiscal quarters of year-over-year unit growth/decline: 19%, 5%, 13%, 21%, 14%, 10%, 9%, 3%, -4%, -12%, -11%, -14%, +7%, +4%, +1%, +10%

I know, I know, MacBook Pros have been quite the disappointment among the commentary class.

Try telling Apple's customers, though - thanks to them, Mac significantly outperformed Gartner's (-5.6% growth) and IDC's (-0.5% growth) unit estimates in CQ3 / FQ4 2017. To say nothing of line revenue, which had a staggering 25% YOY increase to $7.17B - the WWDC-refreshed iMacs probably helped a bit in that department too.

The FQ1 2017 "normalization factor" may well mean that my Mac unit growth estimate is too high, but with a bit of help from iMac Pro, my revenue growth estimate may not be, at around "only" 4% YOY growth unadjusted, and around 12% YOY growth "normalized". Whatever the case, a number over $7B for the quarter seems very likely - that would prove there's still a lot of life in Apple's "Mac truck" product line. Which, if I remember right, is making new all-time revenue highs.

We now move on to Apple Watch and Other Products.

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Watch and Other Products

Last 10 fiscal quarters of year-over-year unit growth/decline IN REVENUE (FQ3 2015 — FQ4 2017): 49%, 61%, 62%, 30%, -16%, -22%, -8%, +31%, +23%, +36%

Apple Watch doing well? Sure seems like it.

AirPods in stock in time for the holiday season? Check.

Apple TV 4K in stock? Except for the 64GB model for mysterious reasons, check. Reviews have been...generally positive, I'd say.

Beats? Sure, why not. Apple will never get specific with Beats-brand sales, but they've clearly allowed the brand to continue releasing new hardware, including W1 AirPods tech.

HomePod? Well...no, but as an originally-slated December launch, it was never going to factor significantly into FQ1 2018's results. And it clearly would've been very late for the holiday shopping season even if it had started shipping that month, versus early February 2018.

Some other miscellany, including iPhone X cases, wireless charging peripherals, and so on? Probably good for a few tens to hundreds of millions, right?

Given all that, I figured my 19% YOY revenue growth guess (around 27% normalized) wasn't too out of line.

Next, Services.

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Services

Last 15 fiscal quarters of year-over-year line revenue growth: 19%, 11%, 12%, 8%, 9%, 9%, 12%, 10%, 26%, 20%, 19%, 24%, 18%, 18%, 23%, 34%* (more like 26% for FQ4 2017 after one-time adjustment)

Hi, Services! Still doing well I see, and you'll also be positively impacted by installed base adds in Apple's biggest fiscal quarter of the year, right? Take care, see you next quarter!

Finally, we conclude with the "suddenly a bit scary to Wall Street" FQ2 2018.

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FQ2 2018, and What It Might "Portend"

Reposting that Thomson Reuters/Yahoo! Finance analyst consensus screenshot for convenience:

So, why the acceleration from around 19% normalized FQ1 2018 revenue growth to 27% revenue growth in FQ2 2018? I'd have to guess iPhone X and analyst assumptions that China's holiday event of the year, Chinese New Year (landing on Feb. 16, 2018) would boost Apple's results via the region's own revenue seasonality.

Even without that "it must be a typo, yet no one owns up to it or corrects it after all this time" $83.2B high estimate (seriously?!), the consensus growth rate would still be around 26% or so by my quick math. Well into mid-$60B revenue territory. Which would be quite the feat for a company of Apple's scale (reminder: there has never been a company even close to Apple's scale in consumer-centric tech, and Apple has never had a $60B-level fiscal quarter).

Additionally, when you look at the consensus full-year FY 2018 estimate - with the caveat that there's eight more analysts in that sample - you can see that the second-half revenue growth consensus projection for FY 2018 is not expected to be all that close to the 25%-or-so level (it's more like a blended 20% for 2H FY18).

Meaning: FQ2, in a percentage growth sense anyway, is expected to help "carry" Apple's fiscal 2018. Any dropoff in FQ2 momentum, as I'm guessing the prevailing analyst theory goes, would have an additional (negative) impact on the second half of fiscal 2018.

Which might explain why Apple shares dipped from around $179 to $167 over the past couple of weeks...due to "fear" that iPhone X demand in particular is fading "more quickly than anticipated".

Who knows. Apple entered uncharted iPhone territory with two flagship models at two starting price tiers, one a solid update to the traditional paradigm, one an expensive-but-appealing look into the future of iPhone.

Here's something I do know. Asking a company to beat its prior $229B annual revenue record by over $40B in the course of a single year (almost "pretending" as if $250B isn't even there)? That's asking quite a lot.

Related: Asking a $999-$1149 iPhone to sell 40M units in its first full calendar quarter of availability? When by simple virtue of its (relative) price tag, it was obviously never intended to be anything close to a volume leader at this point in time? That may also have been asking way too much.

Personally, I've thought revenue growth in the low-10% range would have made for a perfectly respectable FY 2018, especially since iPhone X-class technology will be available at a more accessible price point starting this year (as it's the obvious bridge away from the iPhone 6/Plus paradigm). Rational or not, Wall Street clearly thought Apple was capable of better.

And with anxiety having an effect on the share price, it'll be interesting to see how Apple stock and full-year estimates both adjust (if at all) following Apple's FQ1 results and highly-anticipated FQ2 guidance. [FN-1]

This concludes my 19th consecutive Apple Inc. earnings preview. Hope you didn’t mind reading, and it sure would be great if you felt it worthy of a weekend/evenings-eve share, like or retweet! See you all online for the Feb. 2 earnings day!

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Footnote:

[1] As far as the upcoming shareholders' meeting, I'd say Tim Cook's board seat is more than safe, short of, say, absolutely horrific FQ2 guidance.