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Earnings Preview: Apple Inc.

Zacks Equity Research

Apple Inc. (AAPL) is scheduled to release its second quarter 2012 results after the market closes on Tuesday, April 24, 2012. In the run up to the earnings results, we notice an upward revision in the analysts’ estimates over the past few days, and considering the past trends we continue to believe that another earnings beat is on the cards.

Prior Quarter Recap

Apple reported a stellar first quarter of 2012. Apple earned $13.87 per share in the reported quarter, handily beating the Zacks Consensus Estimate of $10.07. Earnings per share (EPS) soared 115.7% from the year-ago level of $6.43 and were also ahead of Apple’s conservative guidance of $9.30.

Apple’s first quarter beat was primarily driven by strong holiday season sales based on the ramp in demand for the new iPhone 4S, which was released in October 2011. Total revenue in the quarter surged 73.3% year over year to $46.33 billion and beat both the company’s forecast of $37.00 billion and the Zacks Consensus Estimate of $38.86 billion. The year-over-year upside was driven by strong growth in iPhone (up 133.0% year over year), iPad (up 99.0% year over year), and Macintosh (up 22.0% year over year) sales.

For further details please read: Stellar 1Q for Apple

Current Quarter Expectations

For the current quarter, the Zacks Consensus Estimate is pegged at $9.99 per share, way ahead of Apple’s own conservative guidance of $8.50 per share. Apple expects to earn revenues of $32.5 billion. The Zacks Consensus Estimate expects Apple’s revenues to be around $36.56 billion.

Apple expects gross margin to be 42.0%, reflecting stock-based compensation expense of approximately $60.0 million. Operating expenses are estimated to be $3.05 billion, including about $350.0 million in stock-based compensation, while other income and expenses are anticipated to be around $125.0 million. The tax rate is estimated to be about 25.25%.

Estimate Revision Trend

For the current quarter, out of the 33 analysts covering the stock, 14 analysts raised their estimates and there was just one negative revision in the last 30 days. As the estimates revision was positively biased, the Zacks Consensus Estimate increased from $9.74 to $9.99 over the same period.

We note that Apple has consistently exceeded estimates in the previous four quarters. The average surprise in the preceding four quarters is positive 21.97% and we expect another positive earnings surprise from the company.

The analysts believe that strong sales of iPad 3 (released in March 2012) would drive results in the quarter. Moreover, they believe that the tech-giant is expanding its iPhone addressable market (released in China during the quarter) through additional wireless carriers in new regions and multiple carriers per country, which should sustain solid unit growth.

However, the recent sell-off (down approximately 10% in the last 10 days) reflects a growing concern over iPhone’s growth trajectory going forward. Recently, Verizon (VZ) reported a significant drop in iPhone sales to 3.2 million in the first quarter from 4.3 million in the sequentially preceding quarter. As iPhone contributes more than 50% of Apple’s sales, a decline in unit sales will hurt revenue going forward.

Further, some analysts believe that continuing supply chain constraints, which may result in the shortfall of certain important component such as LTE chips (used in 4G enabled devices) may hurt Apple’s capability to meet the increasing demand for its iPhone and iPad, thereby hurting top-line growth going forward.

Conclusion

We believe that Apple will report a strong second quarter based on higher iPad and iPhone sales. However, we expect some seasonality in sales, as the first quarter benefited significantly from strong holiday season sales.

Nonetheless, we believe that Apple remains the biggest growth story in the technology sector, primarily on account of its superior product pipeline, Apps, strong iCloud revenues, loyal customer base and international expansion going forward. Despite the legal complexities and increasing competition in iPad and iPhone segments, we are optimistic about the company’s growth prospects in the long term.

We maintain an Outperform rating over the long term (6-12 months). Currently, Apple has a Zacks #1 Rank which translates into a Strong Buy rating over the short term.

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