[Article Date: Oct. 29, 2018]

Introduction

The rumors were true where it mattered, making Apple's September 2018 Special Event particularly suitable for people who...don't like surprises.

iPhone X had its "S cycle" in Year Two of the New iPhone Paradigm; iPhone 8 Plus yielded the phablet stage to iPhone Xs Max; and the Mystery Midsize Phablet, the most puzzling of the new iPhone devices (as of its announcement-leak by Ming-Chi Kuo back in November 2017, anyway), turned out to be the iPhone XR, the mainstram flagship Apple NotchPhone which could easily have been called "iPhone 9" in a world without...er...tens. 😅

Meanwhile, developer and HTML-super-sleuth Guilherme Rambo caught Apple in a comfortable loop of naming marketing photos a little too similarly to last year, and uploading said photos a little too far in advance of the special event - revealing the massive and dense new (Infographic) watch face of Series 4 nearly two weeks before the actual announcement.

The only relative surprises?

• XR launched near the end of October, leaving the iPhone Xs-series and/or the new Watch lineup to drive hardware revenue and/or unit growth for FQ4 2018,

• while new-form-factor iPads (FINALLY!), some Mac refreshes, and possibly other devices did not launch at all from July-September, to be revealed instead during Apple's Oct. 30, 2018 Special Event in Brooklyn (so I hear).

Given all this, is it any real surprise that FQ4 isn't much more than a momentum-checkpoint quarter, while market participants the world over await management guidance for The Possibly Great Big FQ1 2019 Holiday Quarter?

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) take a entertainment-purposes-only look at FQ4 2018 with some quick, humble home game commentary on major revenue categories; and

(3) wrap up this 5+ year continuing series with a quick note on the quarter of most interest — the in-progress FQ1 2019, which for the time being remains the Greatest (Consumer Tech Earnings) Show on Earth.

(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 bunch of paragraphs from a hobbyist blogger in my cozy corner of the Web trying to understand Apple/financials/tech a little 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 FQ4 2018 Guidance, Plus Wall Street’s Consensus [as of late October]

>>> Apple’s Guidance

Here’s the FQ4 guidance from Apple:

• revenue between $60 billion and $62 billion

• gross margin between 38 percent and 38.5 percent

• operating expenses between $7.95 billion and $8.05 billion

• other income/(expense) of $300 million

• tax rate of approximately 15 percent before discrete items

Top-line-wise, Apple's calling for its second fiscal quarter ever in the $60B range (the first being FQ2 2018's $61.14B result), and there's a chance FQ4 2018 will ring in the highest $60B-class revenue number to date.

YOY revenue growth has been guided to between 14.1% and 17.9% versus the year-ago $52.6B number - a range very similar to management guides for FQ2 and FQ3 in the just-ended FY18, coincidentally. Considering Apple Scale™ and FQ3 being the nadir quarter lately, it's not terribly surprising Wall Street was generally cheered by Apple's strong fundamentals until the recent volatility seesaw (though at around $216/share as of Oct. 26, 2018, that's still over 10% stock appreciation post-July-earnings). [Oct. 29, 2018 MARKET UPDATE: Bounced at the last market minutes to close at $212, still over 10% post-July-earnings]

Net income guided range is between $12.8B - $13.8B versus $11.5B in FQ4 2017, representing GAAP growth of around 19.4 to 28.7%.

Just for apples-to-apples completeness' sake (thankfully, this is the last quarter I'd need to do this 😒), let's go non-GAAP for net income. Thus, we'll pretend Apple still labored under the US corporate tax system in place as of most of calendar 2017. At a projected tax provisioning rate of around 25.5%, Apple would have implied net income YOY change of between +4.6% and +12.8%...the midpoint being (what little ol' me thinks is) a solid 8.7% profit growth under this scenario.

Why isn't net income growth more in line with revenue growth percentage-wise under the "old rules"? Blame it on Apple's "stair-stepping" OpEx, up a generally consistent $1B and change per quarter vs. FY17, which, of course, means disproportionate impacts during lower-revenue fiscal quarters.

Gross margin remains "stubbornly static" at between 38-38.5% if management is to be believed, but it's a whole new product ballgame starting FY19. It'll be very interesting to see if and how that metric moves, given the all-but-incontrovertible-proof that iPhone X wasn't a profit driver at all from a gross margin standpoint. Component prices and iPhone cost structures (and bulls) and bears, oh my!

Next up, the Wall Street consensus for FQ4, and a quick bonus retrospective.

>>> The Wall Street Consensus for FQ4 2018 (approx. Oct. 25, 2018)

The Thomson Reuters consensus (33 analysts) as tabulated by Yahoo! Finance predicts FQ4 revenues of $61.59B, which beats the (only other) FQ2 2018 $60B-class result by $450M.

Maybe analysts are suddenly feeling a bit bullish (vs. the prior quarter consensus) on the anticipated strength of Series 4 and a dash of iPhone Xs Max initial demand? Whatever the case, the consensus is closer to the high end of guidance than it is the midpoint of $61B.

>>> Wall Street's Shifting Goalposts for FY18: An Amusing Retrospective

Since we're very close to a fully-reported FY18, let's see what analysts thought FY18 would look like around a year ago. Referring back to my FQ4 2017 earnings preview, estimates were all over the place - from $239.3B to a sky-high, bet-someone-wishes-they-hadn't-predicted-it-right-now $306.95B. The consensus as of October 2017 was for a $265.6B revenue quarter...

...which spiked nearly $9B to over $274B within barely a couple of weeks...

...before analysts started getting "spooked" about the perceived low supply (or was it perceived low demand, I can never remember exactly) of iPhone X, leading the FY18 consensus to fall thirteen billion dollars to $261.2B as of late April 2018...

...and it took until after Apple's "reassuring" FQ3 results at the end of July 2018 for analysts to feel better about...

OK. Let's stop here. Because at THIS point, the consensus had effectively no choice but to move up their numbers...because a "lousy" $60B quarter out of Apple to end the fiscal year meant a $262.7B grand total. And a "great" quarter of $62B is less than a billion from the consensus from a year ago, around three dozen basis points off the higher total. Real estimation courage there, people.

Until I see differently, my base assumption is not to put much of any proverbial stock in Wall Street's full-year revenue consensus. Sure, maybe they got a little too excited about iPhone X and "supercycle" nonsense, but the swings in collective groupthink were just a bit excessive at the end of the day.

Soon, we move on, like always, to my “entertainment purposes only” estimates for FQ4 2018. But first, a quick additional bonus section on Apple's revenue growth drivers year-to-date.

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(Double) Bonus Mini-Feature: YTD Revenue MVPs

Courtesy of Page 24 of the Apple FQ3 2018 SEC 10-Q filing:

Because iPhone comprises the lion's share of Apple revenue - of course - its 15.2% YTD (FQ1 thru FQ3 2018) year-on-year growth in revenue drove Apple's overall 14.7% revenue gain in that same period (note that all FY18-related numbers are slightly disadvantaged by the extra week in FQ1 2017, i.e., tougher compare).

Numerically speaking? YTD, Apple revenue grew about $26B (not bad for a $250B-Class Company, eh? 😜), and iPhone contributed around $17B, or 65% of that total. That, despite having flat GAAP unit growth from iPhone for the comparable periods.

iPad and Mac didn't do much of anything. iPad was a faint positive (+$325M), Mac a faint negative (-$607M)...which tomorrow's October event will partly address, one would think). Collectively, Apple's Big-Screened product portfolio was a ~15basis point retrograde revenue headwind YTD.

That left Services and Other Products to pick up the slack - and both performed superbly. Services, the Perennial Achiever of the Apple revenue family lately, had 26.7% YTD growth, contributing $5.7B of the remaining $9B in YTD revenue growth.

But Other Products outperformed the outperformer! Granted, it's "easier to do" given Other Products' smaller scale. But the category given new life by mostly Apple Watch and AirPods roared to 36.9% YTD category growth, and chipped in an impressive $3.5B of Apple's total YTD revenue growth despite not yet being a consistent $15B+/yr run-rate business segment.

The revenue categories are all related of course, but it's nice that Apple has two very robust growth engines to supplement its main business, isn't it?

Now, a somewhat-quicker-than-usual look at Apple's to-be-reported FQ4 2018.

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The AAPL Tree “I Got Nothing, but I Have to Come up with Something” Horseshoe Toss for Apple’s Reported FQ4 2018 Numbers

Here's my humble home gamer take on Apple's just-ended September quarter:

It's practically the consensus, at a "mere" $100M and change over their $61.59B number. Call it mildly bullish, I suppose, compared to that benchmark.

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

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iPhone

Last 19 fiscal quarters of year-over-year unit growth/decline, GAAP sell-in reporting basis (FQ1 2014 — FQ3 2018): 7%, 17%, 13%, 16%, 46%, 40%, 35%, 22%, 0.42%, -16%, -15%, -5%, +5%, -1%, +2%, +3%, -1%* (around +6% normalized), +3%, +1%

What else is there to say, really? iPhone X was an expensive phone. That impacts demand, because, well, price. Anyone could have told you that...or so I thought.

Despite iPhone X being an expensive phone, however, it still sold quite well. Thus, despite Apple's suddenly anachronistic-looking lineup of Notch-Free rectangular-screened smartphones (including the last-hurrah iPhone 8-series, iPhone held the line on unit growth (really, managed to grow units slightly YOY-YTD, when normalizing for FQ1 2018).

ASP is where iPhone hit a home run, and yes, it's very appropriate to wonder where ASP trends go from here.

Thanks to the "timely" (traditional) launch of new iPhones juuuust before the end of the quarter, Apple will, in my opinion, most likely crest $700 in GAAP-reported ASP

• for the 4th time in a row,

• which was also the 4th time ever.

Impressive. I "figured" (translation: made a WAG) that demand for brand new Plus (er, Max) variant of the iPhone X(s) would help lift ASP sequentially, in keeping with the trend from the last four fiscal years.

As for unit growth? Who knows, maybe around 2% YOY growth is too bullish. There was no new iPhone for consumers to buy starting at around $650-750(US), not until just a few days ago, weeks into FQ1 2019. We'll just have to see.

Will iPhone ASP remain in the $700 range throughout (most or all of) FY19? My WAG is yes.

Will the considerably more affordable XR combined with the Xs-series unlock the unit growth that was quite muted in FY18? For that one, I'll wait until the management guide on Thursday for more clues. At this point, looks like Wall Street would be just fine with mid-single-digit percentage growth - and honestly, I would be too. You just don't get supercycles at this scale. And that's perfectly fine and...well...perfectly rational.

Next up - iPad.

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iPad

Last 19 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%, +1%* (around +7% normalized), +2%, +1%

iPads look to be thoroughly redesigned in their newest iteration - and the timing couldn't be better, since the essential form factor of every iPad being sold today can trace its design lineage to iPad mini in 2012. I'm not saying there's anything bad about the design at all - but like many things, change is good, and like anything in fast-paced consumer tech, change after around a half-dozen years is especially welcome.

All the same, iPad units, as with iPhone, held the line with 3 or so percent unit growth YTD (normalized basis). ASP is "lousy", most recently $410, but that as much to do with waning demand aging iPad Pro product (getting close to 18 months since last refresh) as it does Apple's A10 iPad, which offers full Apple Pencil support and plentiful tablet computing power for a very affordable ("for Apple", heh) $329 starting price at retail.

For FQ4, I'm being a bit "pessimistic" on iPad unit growth (down around 10% YOY), given the assumption that (1) a fully redesigned slate of iPad Pros plus (2) the presumptive end of iPad mini 4 (the reigning Zombie iPad) results in GAAP-impacting channel inventory drawdowns in anticipation of new product.

With rumored USB-C supplanting the good "old" Lightning cable - an iOS first if true - iPad could be "going (even more) Pro" in a fairly dramatic new way. Exciting times for Apple tablets.

Next, a quick look at Mac.

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Mac

Last 19 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%, -5%* (around +1% normalized), -3%, -13%

So tomorrow's October event is rumored to bring news of Mac refreshes, too!

Now, Mac has the core prosumer-to-pro market (and particularly the iOS/MacOS developer market) covered with the refreshed MacBook Pro line as of mid-July. I'm guessing it will slow, but not stop, the retrograde growth in Mac units that's been going on for two consecutive quarters now on a normalized basis (WAG for FQ4: -8% unit growth YOY).

And again, much like iPad, if one or more Mac models are up for major/full redesign (MacBook 12"? Mac mini? Dare we dream MacBook Air?!), that could mean channel inventory drawdowns in the September quarter.

Just as a semi-nerdy Mac sidenote, aside from Mac Pro Gen 3 (maybe next year!), the iMac line, which apparently has been doing just fine, is getting "due" for a new design of some sort. Yes, the current form factor has certainly aged well, and the 4K/5K displays are plenty good enough, but it's about as old a design as the iPad line at around 6 years. The "curveball" so to speak is iMac Pro, which is still a "first-gen" product. Does that impact the design lifecycle of all iMacs? We'll get some hints (or an actual answer) in a matter of hours!

And with that, we move on to no-asterisks-required growth businesses! First up, Apple Watch and Other Products.

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Apple Watch and Other Products

Last 14 fiscal quarters of year-over-year unit growth/decline IN REVENUE (FQ3 2015 — FQ3 2018): 49%, 61%, 62%, 30%, -16%, -22%, -8%, +31%, +23%, +36%, +36%* (+42% or so normalized), +38%, +37%

Apple Watch and Friends (perhaps still mostly AirPods) have now driven four consecutive quarters of GAAP YOY revenue growth in excess of 35%. Wow.

I'm "predicting" this is the quarter that Other Products out-revenues the iPad product line - and not by a little. Is 57% YOY revenue growth too aggressive, especially given the relative age of AirPods? As a clear-eyed home gamer, I readily acknowledge the possibility. However, a rather important new product launched on September 21, giving it about nine days' worth of sales before the end of FQ4. That, of course, was the Apple Watch Series 4.

Maybe I'm overbullish, but there's just an air of excitement and dramatic improvement about the device (not to mention a fair amount of redesign, especially noticeable via the larger, iPhone X-style rounded-corner OLED display). It feels a bit like the iPhone 4 did - a significant step forward and inflection point, drawing in existing Watch owners as well as those consumers deciding to wear a watch again for the first time in years (me!)

Other Products is the Apple revenue category to watch during FY19 on the promise of Series 4 alone, if you ask me.

While we continue to wait on the mythical AirPower wireless charging mat (and a related wireless-charge-capable AirPods case), let's do the quickest of quick checks on Apple's continued growth star, Services.

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Services

Last 19 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), 18%* (around 24% or so normalized), 31%, 31% (a second time)

Services is a proven, amazing, consistent and highly-profitable growth business poised to mint a $10B+ revenue quarter for the first time ever (and possibly, more than FQ4 iPad and Mac revenue combined).

Ten billion dollars. Whoa. Quite the milestone.

We'll talk Services again in around three months! 😂

Finally, we conclude with a sneak peek at FQ1 2019. An FQ1 that needs no introduction, as some might say.

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FQ1 2019 Quick Look - Hello, $90 Billion and Up (Probably)

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

Another holiday quarter, another...broad range of opinions. It's not the over-$20B range of last year's FQ1 (2018) professional estimates, but it's still "uncertain", spanning over $16B. And, just like last year, there's at least one analyst out there that "dares" to believe $100B (an utterly ridiculous quarterly revenue number for almost any company, never mind a consumer tech-centric company) is in the cards.

Average all the noise out, and the consensus ends up at $93B - a number that's been creeping up over the past several weeks, as I recall.

Since we're at the last section of this TL;DR earnings preview, let's run some numbers just for fun to see how Apple might get to $93B, now that 13-week-to-13-week holiday quarters have returned for the next several years. Here's Apple's FQ1 2018 financial summary data:

First, as a baseline, we'll pretend that Apple's iPhone, Mac and iPad businesses will not budge from a revenue growth standpoint (in FQ1 2019). Won't get better YOY, won't get worse. Under that scenario (which I don't think particularly likely - just as one example, the iPhone 8-replacing iPhone XR's midrange price is $799), Apple line revenue ex-Services and Other Products is $74.33B.

That leaves us with Services and Other Products to figure out. For fun, let's assume both continue to do well enough in the current quarter: Services grows 20% YOY (the Apple global installed base continues to grow, after all), and Other Products grows a "mere" 40% YOY thanks in large part to Watch Series 4. The two line revenues combined would grow from FY18's $13.96B to $17.84B, thus improving Apple's FQ1 2019 by around $3.9B.

As it so happens? That's, um, 4.4% revenue growth right there, less than 100 basis points away from the Wall Street consensus.

So here's the big question on everyone's minds[FN1]:

Will iPhone, iPad and Mac's combined "forces" muster up around $800M worth of revenue growth vs. the year-ago FQ1?

Where you stand on this relatively simple question goes a surprisingly long way towards (in)forming your opinion on Apple's relative trajectory headed into the new fiscal (and calendar) year.

But there's one little surprise left in store. Just like last year, analysts seem to believe Apple's best growth quarters (on a percentage basis) arrive after its biggest one - projecting not ~5%,but instead ~7%YOY revenue growth for all of FY19, to nearly $282B. Which is, by the way, an increase in the full-year consensus of close to $10B in the space of three months. 😁

Is Apple capable of delivering on these higher expectations, given a light background buzz of global economic worry and trade tensions, now that it's (presumably) armed with the freshest and best product portfolio yet (especially after tomorrow)? I have an informal working theory of sorts, but as always, I prefer to let management guidance light the way.

This concludes my 22nd (yes, really!) consecutive Apple Inc. quarterly 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 Nov. 1 earnings event!

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FOOTNOTE:

[FN1] (No "will Apple last the winter?" snarks, I've already used up the Internet's entire quota of 'em.)