Loup Ventures

About the Author Loup Ventures

At Loup Ventures, research is in our blood. The spirit of our team has always lived on the curiosity to discover new insights that yield investment opportunities. For years we did this on Wall Street, focused on public tech companies. Now we invest in private frontier tech companies, but public companies like Tesla, Nvidia, and others are also meaningful innovators in frontier tech. These public companies are shaping the emergence of AI, robotics, autonomous vehicles, and AR/VR just as much as early stage startups. As a result, we’ve always kept a watchful eye on public market participants to inform our private investment strategy. Gene Munster is a managing partner and co-founder at Loup Ventures. Prior to Loup Ventures, Gene was a managing director and senior research analyst at Piper Jaffray where he covered technology companies including Apple, Amazon, Google and Facebook. During his 21-year tenure, Gene received many acknowledgements including: Top Stock Picker from Forbes, Best on the Street from The Wall Street Journal, and was widely recognized for his work on Apple. Gene holds a bachelor’s degree in finance and entrepreneurship from University of St. Thomas.

Apple (AAPL) Earnings Preview: Calibrating Ahead of New Reporting Methodology


By Gene Munster

The Dec-18 quarter is significant for two reasons: First, this call is the initial forum for Apple (AAPL) to address the revenue miss that they pre-announced on January 2nd. Second, the quarter will be Apple’s first under its new reporting methodology, which excludes unit sales for individual products and includes revenue and margin breakout for Services and Products separately. Here are a few things to think about before the call:

Changes to Model

We think the Street has not fully factored in the repercussions of the miss into FY19 estimates. We are expecting FY19 total revenue to be down about 5% y/y. Consensus currently calls for a 2% y/y decline. We now anticipate iPhone units to be down 17% in FY19 compared to flat in FY18. Link to updated model here.

Takeaways from December

  • China hit a wall – we estimate greater China (accounts for 20% of revenue) was down 36% y/y compared to up 16% y/y in Sep-18.
  • Upgrades were delayed due to the 23% weighted average iPhone price increase in the fall along with a more generous battery replacement program.
  • Despite these headwinds, Apple will report a record quarter for EPS. This gets lost in negative headlines, but the company will report revenue down 5% y/y and earnings down only 1% (EPS up 7% due to decreased share count). This is unprecedented and representative of a resilient business.
  • Non-iPhone business grew at 19% y/y. This implies iPhone was down 17%, which is effectively equal to the worst iPhone unit performance on a y/y basis (Mar-16 down 16.3%).

Calibration for New Reporting Methodology

  • When it comes to reporting, disclosing less information is a negative. That said, we support Apple’s move to align their reporting and, therefore, investor thinking with a strategic shift in their business to a more service-based model. Keep in mind, Apple’s updated disclosures are debatably more helpful than other large-cap tech.
  • We’re expecting Services to have a 65% gross margin and account for 13% of revenue and Products to have a 27% gross margin and account for 87% of revenue. Given this is the first reported quarter with segment margins, consensus estimates will have a wide, less helpful range.
  • We’re hopeful that Apple provides a year of historicals that follow the new reporting methodology for modeling purposes. We believe those historicals will show slightly increasing hardware margin in FY18 based on increasing iPhone ASPs, but we expect the hardware margin will decline in FY19 and Services margins will rise. The net effect is flat margins.
  • Going forward, if hardware margin steps down measurably, it’s likely a sign the company is losing pricing leverage (e.g. Blackberry in 2008). The rare case in which a step-down in Apple’s hardware margin would be acceptable is an offensive initiative to gain market share (and Services revenue) with lower-priced devices.

Other Key Topics for the Call

  • Updated thinking on the use of cash for buybacks vs M&A and R&D.
  • Timing, scope, and go-to-market of original video content offering.
  • Direction related to Tim Cook’s January 8th comment that, “if you zoom out into the future, and you look back, and you ask the question, ‘What was Apple’s greatest contribution to mankind,’ it will be about health.”
  • Has China stabilized in the first month of the March quarter?
  • Expectations related to changes in China trade and their impact in FY19.
  • Would Apple consider making the more generous iPhone trade-in terms permanent?
  • Outlining the business model benefits of Apple’s privacy-first approach.
  • Apple’s perspective on subscription offerings that include hardware, services, and support.

Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio. 

 

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