Home Technology Apple Inc. (AAPL) Q3 Earnings Preview: Bernstein

Apple Inc. (AAPL) Q3 Earnings Preview: Bernstein

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Apple Inc. (NASDAQ:AAPL) releases its next quarterly earnings exactly one week from today, and analysts at more than one firm are expecting the company’s results come in at the low end of guidance. The biggest wildcard right now according to analysts at Bernstein is changes in the company’s channel inventory, especially for the iPhone.

Apple Inc. (AAPL) Q3 Earnings Preview: Bernstein

Apple’s iPhone sales are anyone’s guess

Cannacord Genuity analysts lowered their estimates for iPhone sales last week, citing weaker growth in the high end smartphone segment. Bernstein Research analyst A.M. (Toni) Sacconaghi, Jr. also teaked his estimates modestly, although he actually increased his iPhone estimate. He’s expecting Apple Inc. (NASDAQ:AAPL) to come in slightly below consensus with revenue of $34.3 billion and earnings per share of $7.21.

Sacconaghi is looking for sales of 25.5 million iPhones during the quarter, a slight increase from his previous 25 million estimate. He’s expecting to see 17 million iPads sold (a slight decrease from his previous 18 million estimate), 4.2 million Macs (an increase from 4.1 million previously) and 4.8 million iPods (a decrease from his previous 5.1 million estimate).

The analyst has an Outperform rating and a $600 per share price target on Apple Inc. (NASDAQ:AAPL)

Analyzing Apple clues from Verizon’s results

Bernstein analysts note that the earliest indication we will have on how Apple Inc. (NASDAQ:AAPL)’s iPhones were selling during the second quarter will be Wednesday before the markets open. That’s when Verizon Communications Inc (NYSE:VZ) will release its second quarter report. They said the carrier has averaged 11.6 percent of global sell-out over the nine quarters it has sold the iPhone and 12.1 percent over the last three quarters.

Therefore they note that if Verizon Communications Inc (NYSE:VZ) reports 3 million iPhones activated during the second quarter, that might imply sell-out of between 25.9 million and 24.8 million iPhones during the quarter. They said if the carrier activates as many as 3.5 million iPhones during the quarter, it would imply 26.1 million iPhones sold in all, which they view as “a solid result” for Apple Inc. (NASDAQ:AAPL)

How channel inventory shapes Apple’s results

Sacconaghi said the biggest question mark in Apple Inc. (NASDAQ:AAPL)’s earnings right now is channel inventory for the iPhone. He said in the past, the inventory has never fallen by more than 300,000 units, although if it doesn’t drop by at least 2 million units, then it will be “unprecedentedly high vs. historical levels.”  estimate assumes a 1 million unit decline in the iPhone channel inventory, which suggests a sell-through of about 26.5 million.

He also said that not knowing exactly what kind of changes in channel inventory we will see during the quarter will greatly affect the company’s results. He said every 1 million iPhones on a sell-in basis changes his revenue estimate by about $600 million and earnings per share by 17 cents.

Sentiment shaped by Apple’s gross margins

Sacconaghi believes that like last quarter, Apple Inc. (NASDAQ:AAPL)’s gross margins will be one of the main areas of this quarter’s report that will shape investor sentiment. Last quarter, margins disappointed investors. He believes gross margins of at least 36.5 percent will be seen as neutral or favorable, while margins lower than that will be seen as negative.

He noted “several puts and takes” on gross margins this quarter, but he believes the company will come in on the high end of its guidance and report margins of 37 percent for the second quarter.

What will Apple’s guidance look like?

Another potential driver of investor sentiment in next week’s report will be guidance for the next quarter. He says the potential fiscal fourth quarter guidance range “is huge” and could range from $6 to $10 per share. A large part of guidance will be whether Apple Inc. (NASDAQ:AAPL) is shipping any new products during the quarter.

He said if guidance is week, then it might mean that new products like the iPhone 5S will be announced in September or October. That would mean the company is expecting “a lull” in fourth-quarter sales and earnings per share. On the other hand, stronger guidance probably means that the new products will actually ship in September rather than just being announced.

If Apple Inc. (NASDAQ:AAPL)’s guidance is strong, then he thinks analysts could start reporting positive revisions to their estimates and trigger enthusiasm on the part of investors. He also believes that if guidance is weak, the company could get a “free pass,” especially “if it alludes to significant new offerings in October.”

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