Return of the Mac ($AAPL Earnings Preview)

July 26, 2016 Wolf

AAPL is expected to report third quarter earnings tonight after the close. There is a conference call scheduled for 5pm (the company typically guides in the press release).

Q3 Capital IQ consensus calls for EPS of $1.39 (versus $1.85 last year) on revenue of $42.126 bln (-27% YoY). The current consensus is $41-43 bln.

Guidance: Fourth quarter Capital IQ consensus calls for EPS of $1.62 & $45.91 bln.

Based on AAPL options, implied volatility stands at ~ 24%, which is 40% higher than historical volatility (over the past 30 days) but cheaper than its historical average.

Based on the AAPL Weekly Jul29 $97.5 straddle, the options market is currently pricing in a move of ~4% in either direction by weekly expiration (Friday) I'd say expect higher than that.

TECHS:

AAPL shares have underperformed the Nasdaq so far this year with AAPL falling by 7% vs a 2% gain in the index. AAPL tends to have 4-6% reactions to earnings. On a positive report, look for resistance near the $99.50-100.00 area.

RESULTS

Apple beats by $0.04, reports revs in-line; guides Q4 rev mostly above estimates, gross margin a little light

Apple reports Q3 gross margins of 38.0% vs 37.9% ests vs 39.7% last year; sees Q4 gross margins of 37.5-38.0% versus 38.3% ests versus 39.9% last year

Reports Q3 (Jun) earnings of $1.42 per share, $0.04 better than the Capital IQ Consensus of $1.38; revenues fell 14.6% year/year to $42.36 bln vs the $42.1 bln Capital IQ Consensus; gross margins of 38.0% vs 37.9% ests vs 39.7% last year.
iPhones 40.4 mln vs 40.2 mln ests vs 47.5 mln last year.
- iPads 9.95 mln vs 8.7 mln ests vs 10.9 mln last year.
- Macs 4.2 mln vs 4.6 mln ests vs 4.4 mln last year.
Americas rev -11%; Europe -7%; China -33%; Asia/Pac -20%.
Co issues upside guidance for Q4, sees Q4 revs of $45.5-47.5 bln vs. $45.8 bln Capital IQ Consensus Estimate; gross margin 37.5-38% vs. 38.3% ests.

Apple reports Q3 unit metrics:

Q3 iPhones 40.4 mln vs 40.2 mln ests vs 47.5 mln last year.
Q3 iPads 9.95 mln vs 8.7 mln ests vs 10.9 mln last year.
Q3 Macs 4.2 mln vs 4.6 mln ests vs 4.4 mln last year.

Conference Call -- Prepared Remarks:

The company expects September quarter iPhone sell through to improve (June Quarter was -8%)
Expects service revs to be size of a Fortune 100 company next year.
Encouraged by growth prospects in China & India; co will continue making investments in China
Co indicated that 9 month iPhone sales in India were up 51% YoY.
Co plans additional store openings in India.
3 million locations are now accepting Apple Pay; service is now live in 9 markets.
Half of Apple Pay transaction volume are from international transactions.
Company had growth in Russia, Turkey, and Canada.
Co reduced iPhone channel inventory by 4 mln units; co exited quarter near the low end of 5-7 week range for target inventory.
Co expects iPhone ASP's to improve in Q4.
Co had double digit iPhone growth in Brazil and India.
Mac install base reached all time high in the June quarter
iPad Pro helped ASP's; reduced channel inventory by 500K units.

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Sees growth in Russia, Turkey, and Canada.
Reduced iPhone channel inventory by 4 mln units; co exited quarter near the low end of 5-7 week range for target inventory.
Expects iPhone ASP's to improve in Q4.
Had double digit iPhone growth in Brazil and India.
Mac install base reached all time high in the June quarter
iPad Pro helped ASP's; reduced channel inventory by 500K units.
The company expects September quarter iPhone sell through to improve (June Quarter was -8%)
Expects service revs to be size of a Fortune 100 company next year.
Encouraged by growth prospects in China & India; co will continue making investments in China
Co indicated that 9 month iPhone sales in India were up 51% YoY.
Co plans additional store openings in India.
3 million locations are now accepting Apple Pay; service is now live in 9 markets.
Half of Apple Pay transaction volume are from international transactions.

Q&A Session:

Asked about investments: Co said its investing in research and development; looking on the outside for talent and intellectual property. Co will continue to look for acquisitions.
Co sees DRAM in an oversupply situation; co expects decline in commodity prices. Related Stocks: MU

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