Tuesday, December 13, 2011, 03:47 pm
Why Apple's guidance is still conservative
Another piece of significant evidence which suggests that Apple hasn't changed anything with respect to its guidance, and that the fiscal Q4 anomaly was merely the result of analyst error, is demonstrated in variations in the consensus.
Before Apple's recently reported fiscal Q4, the Wall Street consensus estimate for Apple's revenue over the past two years has tended to range between 5 percent and 7 percent in the typical quarter. This gave Apple plenty of room to beat on the upside given that Apple tends to beat its own revenue guidance by between 12-18 percent.
Yet, because things got so out of hand in fiscal Q4 as a result of the huge beat in fiscal Q3, the Wall Street consensus on revenue was 20 percent above Apple's guidance by the time the company reported earnings. That consensus estimate was so high that it would have amounted to an earnings miss by Apple in a whopping 7 out the last 8 quarters. This suggests that Apple was basically set-up to miss Wall Street expectations in fiscal Q4, and couldn't have done anything about it. Apple's fiscal Q3 blowout, basically sealed Apple's fate for fiscal Q4. This chart below clearly demonstrates that to be the case.
And to be honest, it was just an unfortunate series of events that lead Wall Street analysts to hold such high expectations. If Apple hadn't absolutely decimating expectations in fiscal Q3, Wall Street wouldn't have ignored Apple's warnings with its fiscal Q4 guidance and we wouldn't have had this miss. The fact that everyone accepted the belief that Apple is always conservative with its guidance also played a massive role in the fiscal Q4 earnings miss. Hopefully this article will help correct that viewpoint with respect to Apple's guidance.
But what this should demonstrate is that Apple doesn't try to play games. They guide where they believe they can reasonable beat expectations. If that means guiding $2.7 billion below the Street, then by golly they will guide $2.7 billion below the Street. If it means guiding $1.6 billion above the Street, then so be it. Apple has no problem guiding $1.4 billion above the Street and in fact when it did so in fiscal Q2, it was offering a more aggressive guidance than it is this quarter. Yet, as aggressive as that guidance was in fiscal Q2, Apple still beat its revenue guidance by the same old 12-18 percent range notwithstanding.
That tells you that what Apple is doing with its revenue guidance is it's trying to set the right type of expectations. Here that means telling the Street that the company internally believes that Apple will report anywhere from $41.6 billion to $43.7 billion in fiscal Q1 2012. That $2 billion range is how the company has done it in the past. Pretty much every quarter since Q1 2010 has fallen within that $2 billion range. The determination of where Apple's earnings will ultimately fall within that $2 billion range will largely depend on the analysis of research data.
Remember that $2 billion is merely the difference between 3.3 million iOS Devices i.e. iPhones + iPads. So for example, if Apple reports sales of 32 million iPhones and 13.5 million iPads, that would amount to $42 billion in revenue all else being equal. But suppose Apple were to sell 35 million iPhones and 13.8 million iPads. That would result in Apple reporting a revenue number in the upper end of its range. Doesn't this sound kind of ridiculous?
Who is going to really know for sure whether Apple sells an extra 3.3 million iOS devices? No one. That's the best anyone can hope to do without insider information. Apple has told us that it will report between 32 million and 35 million iPhones or 13.5 to 14.5 million iPads. How much more specificity do we really need in our forecasting? Bullish Cross holds an expectation that Apple will report $42 billion in revenue on 32 million iPhones and 13.5 million iPads. The reason? We don't really care to risk missing. We're fine with our forecast. If Apple beats us and reports a few more million iPhones, then so be it. But we take comfort in knowing that our forecast will be within a 5 percent margin of error.
Andy M. Zaky is a fund manager at Bullish Cross Capital and the editor of the Bullish Cross Financial Newsletter. Bullish Cross Capital owns a significant long position in Apple, Inc.
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