Why Apple guided for a steep sequential revenue decline
Apple beats all estimates to produce stellar fiscal 1Q15 results (Part 5 of 10)
Apple’s revenues expected to decline sequentially
As discussed in Part 1 of the series, Apple’s (AAPL) fiscal 1Q15 results beat all expectations. However, Apple guided for sequential revenue declines of 26% to 30% in fiscal 2Q15. As the chart below shows, at the midpoint of guidance, Apple’s overall revenues could sequentially decline by around 28% in fiscal 2Q15. Comparatively, this sequential decline has ranged between 8% to 21% in the past four fiscal years.
Why Apple guided for fast revenue decline
In Part 3 of the series, we explored Apple’s bullish prospects for the iPhone in fiscal 2Q15. Then, why did Apple guide for such a steep revenue decline? The major reason is the currency headwinds that Apple continues to face, which we discussed earlier in this series. Apple expects a 5% hit to its revenue growth in this quarter, and it didn’t face these currency issues in prior years.
During Apple’s earnings call, its management mentioned several other reasons for this decline. Firstly, Apple ramped up the manufacturing of the iPhone 6 and the iPhone Plus in expectation of huge demand for its smartphones in the last quarter. This was the fastest manufacturing ramp up in the history of the company.
This means that Apple was able to meet most of the initial demand for its new iPhones. The demand for the new iPhones in the second quarter would be far less. This is evident from the rapid market share gain that Apple made during the last quarter. As discussed in Part 1 of this series, Apple’s iOS market share narrowly edged Google’s (GOOG)(GOOGL) Android market share in the US in December 2014.
China Mobile partnership
Secondly, in January 2014, Apple partnered with China Mobile (CHL). This partnership gave Apple access to about 800 million China Mobile subscribers to sell its products, an action that will not be repeated this year. Thirdly, Japan’s value added tax (or VAT) increased from 5% to 8% starting April 1, 2014. This increase led Japanese consumers to buy iPhones in advance, which benefited Apple in the fiscal 2Q14 quarter. Again, this kind of pull forward of sales won’t be repeated.
Although the sequential revenue growth for Apple is expected to decline at a steep rate in this quarter, it should still represent a healthy 20% revenue growth on a year-over-year basis. To gain exposure to Apple, you could invest in the Technology Select Sector SPDR ETF (XLK), which has 16% weightage in Apple.
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