Apple Fiscal Q4 Earnings Preview

by riskreversal October 25, 2016 11:45 am • Trade Ideas

Event: Apple (AAPL) reports their fiscal Q4 results tonight after the close. The options market is implying about a 4% move in either direction, which is shy to the average of 5.85% over the last 4 quarters, and shy to the 10 year average of about 4.84%.

Price Action / Technicals: AAPL is up 20% since reporting their fiscal Q3 results on July 26th, now up 31% from its 52 week lows made in May, and up 12% on the year.

Taking a quick gander at the chart since the start of 2015, the 52 week high of $124 made last November should serve as reasonable near term technical resistance, while the prior all time high from April 2015 is likely insurmountable anytime soon (in this trader’s opinion). The last two earnings gaps took place between $100 and $110, which appears to be a fairly massive technical support range:

AAPL since Jan 2015 from Bloomberg
AAPL since Jan 2015 from Bloomberg

Taking a longer term view, $100 is the convergence of the downtrend from the 2015 highs and the breakout level to new highs in 2014. The stock is at the mid point between the 2015 all time highs, and what could serve as a magnet on the downside (not in one fell swoop) at $100:

AAPL since 2009 from Bloomberg
AAPL since 2009 from Bloomberg

Fundamentals / Expectations: iPhone 7 units and average selling prices (ASPs) will be the focus, with consensus looking for 45 million units (down from 48 million Q4 2015). In the June quarter iPhone ASPs were $595, the lowest level since 2014 just prior to the release of the iPhone 6.  On their July call, the company guided fQ4 sales to a range of $45.5 billion to $47.5 billion and gross margins between 37.5% to 38%, which would be the lowest quarterly gross margin since fQ1 2014.

Philip Elmer-DeWitt who writes the Apple 3.0 blog put together this handy rundown of analyst and investor estimates into the print:


Sales in China will also be a focus as growth rates have dropped from triple digits to negative over the last year. This has probably been the single most controversial issue relating to the stock (aside from iPhone shipments, but they are kind of attached at the hip) since the highs in 2015. Sales in the country in 2015 had been 3x/4x that of the company’s revenue growth rate:

In fiscal Q3’16 (Jun qtr) sales in China were 21% of the total, down 29% sequentially, and down 33% year over year, vs down 15% for the whole.

In fiscal Q2’16 (Apr qtr) sales in China were 25% of the total, down 32% sequentially, down 26% year/year, vs down 13% year/year for the whole company.

In fiscal Q1’16 (Jan qtr) sales in China were 24% of the total, up 47% sequentially, up only 14% year/year, vs 2% for the whole.

In fiscal Q4’15 (Sept qtr) sales in China were 24% of the total, down 5% sequentially, up 99% year/year, vs 22% for the whole.

UBS’s Steve Milunovich, was quoted in Barron’s online with some cautious commentary from his team on iPhone sales in China:

Milunovich who rates the shares a Buy, with a $127 price target, yesterday wrote up remarks by his colleague Jinjin Wang, who follows China’s telecom market. “Her views on Apple were cautious,” writes Milunovich, “indicating that domestic handsets are likely to continue to gain share and that iPhone 7 demand is below 6s according to distributors.”

We followed up with her to clarify. She said that (1) there have been supply constraints for the iPhone 7 in China, (2) her sense still is that demand will be softer because consumers don’t perceive as much value to Apple with domestic brands catching up, and (3) total Apple sales (6s and 7) could be relatively stable. Our estimate of 8% iPhone unit growth in F17 assumes China is slightly down. Jinjin sees two reasons for Apple slowing in China: (1) high-end smartphone penetration is 80-90%, and (2) domestic brands are catching up as Apple’s innovation has lagged—consumers are now not embarrassed to own Oppo, Vivo, or Huawei handsets. Apple this year is number five or six among the top 20 sellers. The iPhone SE and used phones don’t sell well because if a consumer pays up for Apple, she wants the latest and greatest. Domestic players have become good at selling offline, which facilitates penetration of Tier 4, 5, and 6 cities. The government may favor domestic brands over time, and the App Store can be difficult to access and run slow. She thinks Apple Pay is unlikely to beat our AliPay and WeChat.

And then there is Services which bulls point to, but as I have pointed out recently, they are not really moving the needle yet:

For those who are pinning AAPL’s return to double digit sales growth on the back of Services, I would not hold your breath in fiscal 2017. Lets run through the last 4 quarters for Services (which includes Music & Pay) yoy sales growth and percentage of the whole:

-Fiscal Q3’16 services grew 19% yoy, equaling 14% of their $42.35 billion in sales,

-Fiscal Q2’16 Services grew 20% yoy, equaling 12% of their $50.5 billion in sales,

-Fiscal Q1’16 Services grew 26% yoy, equaling 8% of their $76.8 billion in sales.

-Fiscal Q4’15 Services grew 10% yoy, equaling 10% of their $51.5 billion in sales.

Not exactly gangbusters.

While Services have not exactly been in Apple’s DNA (see iCloud, Maps, Siri, Music & inability to bundle video content), I could see how investors could get behind a plan put forward by Goldman Sachs research to bundle Services into a sort of Apple Prime product, via Bloomberg:


This is obviously pie in the sky sort of stuff, which I have written about in the past (On Mobile Social Apps & Services), but I suspect as we hit the post iPhone 7 launch lull after the holidays, investors will turn their sites briefly away from hardware.

My View Into the Print:

AAPL’s rally since mid September discounts a lot of good news for the quarter just ended in my opinion. FQ4 might not show the upside the stock reflects given the short quarter (Sept 24th fiscal year end) and the fact the company already stated they would be supply constrained. So FQ1 guidance will be the main event, and consensus is now calling for a massive uptick in iPhone units to nearly 80 million, which would be a new record of last fQ1’15’s 74.5 million.

Beat and inline Q1, with rising ASPs and margins due to new phone launch, stock could be testing the 52 week highs at $124.

A massive beat and raise and the stock is through $124 on its way to the prior all time highs ($134.50) by year end, but I’d be shocked to see that.

-An inline quarter and a material guide down for current quarter and AAPL is $110 quickly.  One last point, since the company launched the iPhone 7 in mid Sept, the U.S. dollar is up nearly 3.5%. Much of the early release was likely here in the U.S. as the geographic roll out kicked in late Sept / early Oct. Dollar strength could weigh on current quarter guidance as more than 55% of their sales come from outside the U.S.