Apple (AAPL) Q4 2013 Earnings Preview: Will Strong iPhone Sales Override Wall Street Estimates?

 @redletterdave
on October 26 2013 8:45 AM
Apple store 2012
An Apple store in New York. Reuters

Apple Inc. (NASDAQ: AAPL) on Monday will announce earnings for its fourth fiscal quarter (third calendar quarter) of 2013. Apple and its executive board will release earnings shortly after the market closes around 4:30 p.m. EST. The company’s conference call with investors is scheduled to follow shortly thereafter, at 5 p.m. EST.

Apple CFO Peter Oppenheimer provided guidance for Q4 2013 in the company’s third quarter earnings report, expecting Q4 2013 revenue to range between $34 and 37 billion, but the company updated its outlook in late September after the release of two new iPhone models and iOS 7, saying it now expects revenue and gross margin to be at the high end of its guidance range. Analysts’ consensus figures similarly predict $36.1 billion in revenue with earnings per share of $7.66, while Thomson Reuters predicts 36.8 billion in revenue on earnings of $11.40 per diluted share. That’s only slightly better than the company’s Q4 2012 earnings, in which Apple reported $36 billion in sales and $8.67 earnings per share, which is actually a higher EPS than what’s predicted for Q4 2013. In the same quarter a year ago, Apple posted quarterly revenue of $36 billion on $8.67 a share, which was up from $6.62 billion ($7.05 a share) in Q4 2011.

Though Q4 2013 is not expected to be a tremendous quarter for Apple, the company will likely post better-than-expected results. By releasing the two new iPhones so late in the quarter, Apple will bolster its revenue for that particular product line, as well as its overall business in Q4. Strong iPhone sales, especially from Apple’s record-breaking launch weekend, will also likely help the dwindling unit sales of the iPad, which were down double digits percentage-wise in Q3 2013. Analysts still expect rising iPhone sales to account for roughly half of the company’s total revenue for the quarter, while the iPad and Mac are expected to experience small drop-offs in unit sales, which should be supplemented from the growing iTunes Store.

“We think a faster gross-margin recovery aided by better than expected iPhone unit growth and mix shift could represent upside to our thesis,” Steve Milunovich, managing director at Swiss bank UBS, wrote in an Oct. 18 note. “A distribution agreement with China Mobile and strong developed country interest the iPhone 5s/5c and iOS 7 may help to improve the company’s leverage with current form factors.”

Apple Q4 2013 Earnings Preview: Looking Ahead To Q1 2014

With the new iPhone 5c and scarce iPhone 5s leading the way for quarterly revenue, Apple should rake in monster profits when it announces its December quarter in mid-January; Apple continues to roll out those new iPhones out to new countries each week. The iPhone line does face a cannibalization issue for the first time, but since sales of the more expensive iPhone 5s are outweighing the cheaper iPhone 5c by a significant margin, Apple should enjoy fine profits from its iPhone line in Q1 2014.

As for the iPad, Apple on Tuesday recently introduced its new iPad lineup, which includes the new iPad Air ($499), the iPad mini with Retina display ($399), the iPad 2 ($399), and the first-generation iPad mini ($299). Like the iPhone 5c and iPhone 5s, the cheaper iPad models will likely be less popular than the newer, more expensive models, which should again result in huge profits – that is, unless the cheaper tablets from Amazon or Google have anything to say about that.

“It seems as though Apple is trying to push average selling prices for iPads back up again after they've dropped steadily over the past year,” Jan Dawson, chief analyst at London-based market research firm Ovumtold IBTimes. “Both (the iPad Air and Retina iPad mini) should sell very well, especially over the holiday period, but Apple held off being as disruptive as they might have been by pricing them relatively high.”

Apple will also have a handful of new Macs powered by its new OS X Mavericks platform in Q1 2014, including an updated Retina MacBook Pro line and the redesigned Mac Pro, which hasn’t seen a meaningful update since 2010. The impact of these new computers may slightly improve sales for the following quarter, especially since it falls within the holiday season. 

But if Apple needs help improving its share price, maybe it should follow the advice of activist investor Carl Icahn, who has been pushing for Apple to announce a $150 billion stock buyback program, which would allow Apple to take on billions of dollars in debt via bond sales and thus be able to purchase its own outstanding shares. It could then report higher earnings per share with fewer outstanding shares. Apple announced a $60 billion buyback program in April, and currently has $44 billion left in its buyback budget after splurging on 36 million shares in the June quarter worth $444 a piece on average.

On Friday, Apple shares dropped 1.12 percent, starting the day valued around $532, then dipping below $526 shortly before the market closed.

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