AAPL: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Apple's earnings for fiscal 2021's first quarter, which ended on December 26, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available on January 28, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about Apple.

Apple became one of the world's most valuable companies by designing and selling stylish, easy-to-use computers, tablets, smartphones, music players, and watches, as well as software and media.  Services for these devices are also a lucrative and growing business for Apple, but selling iPhones is, by far, the company's largest single revenue source. The transition to 5G mobile technology may serve to boost iPhone sales even higher.  Apple is now selling laptops with fast, power-efficient processors it designed, replacing chips made by Intel, and they expectation is that other Apple-designed chips will be included in future products.  Apple's shares split 4-for-1 on 28 August 2020; they had split 7-for-1 just six years earlier.

Shares of Apple now trade for about $130 each.  These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

Apple recorded profits of $57 billion on revenue of $275 billion during the last year.  In the quarter that ended on September 26, 2020, Apple earned $0.73 per share, which beat the $0.71 Wall Street consensus forecast. See https://tinyurl.com/yx9xv84k for Apple's most recent quarterly report.

Revenue in the September 2020 quarter totaled $64.7 billion, 1% more than last year's $64.0 billion. The iPhone business was responsible for 41% of overall revenue, and this unit's revenue fell by 20.7% compared to the year-earlier result. The Services business contributed 22% of revenue, and this unit's revenue grew by 16.3%. The Mac unit supplied 14% of revenue, and the amount grew by 29.2%.  

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Apple communicated its expectations for the December 2020 quarter last October during the conference call it held for financial analysts after it released the results for the September quarter. (It would have been nice if they had included the guidance in their earnings press release or the associated 8-K SEC filing.) Apple declined to provide specific revenue guidance because of the uncertainties associated with COVID-19, but they did provide some information about the company's outlook.

Given the continued uncertainty around the world in the near term, we will not be issuing revenue guidance for the coming quarter. However, we are providing some insights on our expectations for the December quarter for our product categories. These directional comments, assume that COVID related impacts to our business in November and December are similar to what we’re seeing in October.

We just started shipping iPhone 12 and 12 Pro, and we’re off to a great start. We are also excited to start preorders on iPhone 12 Mini and 12 Pro Max next Friday. Given the tremendously positive response, we expect iPhone revenue to grow during the December quarter, despite shipping iPhone 12 and 12 Pro four weeks into the quarter, and iPhone 12 Mini and 12 Pro Max seven weeks into the quarter. We expect all other products in aggregate to grow double digits, and we also expect services to continue to grow double digits.

For gross margin, we expect it to be similar to our most recent quarters, despite the costs associated with the launch of several new products. For OpEx, we expect to be between $10.7 billion and $10.8 billion. We expect OI&E to be around $50 million, and the tax rate to be around 16%.

In the quarter that ended in December 2019, Apple's sales totaled $91.8 billion (see below), with the iPhone responsible for $56 billion or almost 61 percent.  Lacking more specific guidance, I've assumed iPhone sales in the December 2020 quarter will increase 3 percent, and sales of all other products and services will rise 10 percent.  These assumptions yield a revenue estimate of $97.1 billion

1) Net sales by category:
iPhone	$	55,957			$	51,982
Mac	7,160				7,416
iPad	5,977				6,729
Wearables, Home and Accessories	10,010				7,308
Services	12,715				10,875
Total net sales	$	91,819

I'm also assuming the Gross Margin will be 38.2 percent, which is about what it has been recently.  The other lines of the Income Statement get determined fairly easily from Apple's guidance and/or historical results.

This process yields an earnings estimate of $22.2 billion ($1.30 per share).

The following Income Statement summarizes the figures discussed above. 

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

 #apple  #aapl  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis