Merrill Lynch’s downgrade late last year was predicated on a weaker China but demand seems to have deteriorated materially over the past two months.
This analyst report was written by Wamsi Mohan
Apple Inc.
Rare miss but weakness likely to extend beyond Dec qtr
Apple stock is down approx. 7% after market following the negative preannouncement. Although the trade tensions with China could ease in 1H19, the broader demand weakness and slower upgrade cycles are likely to push units much lower in F19 (we now model 181mn units down from 210mn previously). Our downgrade late last year was predicated on a weaker China but demand seems to have deteriorated materially over the past two months. We remain Neutral as we expect further consensus negative revisions to continue to pressure the stock in the near term, although our scenario analysis suggests the stock is discounting structural declines in hardware and strong services deceleration.
Cutting Q1 rev guid. by $7bn, mostly due to China, iPhone
Apple updated revenue guidance of $84bn is $7bn (7.7%) lower than the $91bn +/-$2bn midpoint provided in the F4Q18 earnings announcement. Apple noted that over 100% of the y/y rev decline (above $4.3bn / above 60% of $7bn cut) is due to slower sales of the iPhone, Mac, and iPad in China. The company attributed the cut to slow GDP growth in China and China-U.S. trade tensions lowering retail store traffic as well as channel sales, with the impact especially high for the iPhone and the general smartphone market. In a further negative, Apple noted that developed markets were impacted by a worse than expected iPhone upgrade cycle, driven by weaker macro environment, fewer carrier subsidies, stronger dollar impacting ASPs, and prolonged use of older models given reduced pricing for iPhone battery replacements. All-in-all, Apple noted that lower iPhone sales accounted for all of the revenue guidance shortfall ($7bn) in the quarter.
Revenue ex iPhone grew 19% y/y, in-line with our estimate, with services coming in at
$10.8bn (higher than our $10.1bn estimate) and on track to double by 2020, wearables growing almost 50% y/y, and iPad up double-digits.
Lowering ests and PO to reflect China, iPhone weakness
We lower our estimates for iPhone units/revenues materially. Our FY19/20/21 EPS estimates move to $12.20/$14.07/$16.44 from $13.86/$15.26/$16.98 and our new PO of $195 is based on approximately (unchanged) 15x our C2019 EPS estimate of $12.6, given the slowdown in China/iPhones.
Other drivers to rev decline “playing out as predicted”
Apple reiterated that other factors highlighted in its F4Q18 earnings call are playing out as predicted, notably 1) later iPhone Xs/Xs Max launch timing creating tough y/y comp, 2) Stronger dollar to lead to 200bps revenue growth headwind in the quarter, 3) supply constraints limited sales of recently announced new products, with Apple highlighting the Apple Watch Series 4 and the iPad Pro supplies constrained for most to the entire quarter, while AirPods and the MacBook Air also constrained.
Price objective basis & risk
Our PO of $195 is based on approximately 15x our C2019 EPS estimate of $12.61. Our target multiple compares to the long-term historical range of 9-15x (median 12x). We believe the high end of the historical multiple range is justified given the smoother iPhone cycles, largely consistent growth in iPhone units and revs (with lower than historical cyclicality). We also think a 15x multiple is justified given a large cash balance and opportunity to diversify into new end markets, and increasing mix and diversity of services.
Upside risks are: gross margin upside from better mix of higher end iPhones, and tailwind from lower memory costs and lower warranty accruals, a faster than expected recovery in emerging markets, and faster than expected recovery in China App Store sales.
Downside risks are: potential trade conflicts, tariffs, and a stronger USD. Other risks are Apple’s continued significant exposure to the iPhone, commoditization in the smartphone market, intensifying competition in the tablet market, managing beat and raise expectations for EPS estimates, and requirement to maintain pace of product innovation.
Next … J.P. Morgan …
North America Equity Research
This analyst report was written by Samik Chatterjee, Gokul Hariharan and Narci Chang
Apple
Monthly Slice: Supplier Tracker Deceleration; Momentum on Video; Look for Inorganic Services Acceleration
We are launching our inaugural monthly wrap-up to keep investors briefed on the latest revenue trends from a sampling of iPhone suppliers, latest feedback received from Apple supply chain companies by our Asian technology team, as well as our latest thoughts on the most relevant news stories over the last month.
Next … UBS …
This analyst report was written by analysts Timothy Arcuri and Munjal Shah
Apple Inc.
Services Good, But China Headwinds Intensifying; Cutting Target On Negative Pre
CQ4 neg-pre on weak China demand; services an important silver lining
AAPL announced preliminary FQ1:19 (Mar) results w/revenue ~$84B versus prior $89- 93B guidance due almost wholly to weaker than expected emerging market demand, particularly in China. Despite the ~8% revenue miss, GM of 38% was still at low-end of guide; other line item results imply EPS of ~$4.20 vs Street ~$4.70. The release implies China revenue declined ~25-30% Y/Y, declines last seen during the iPhone 6S cycle due at that time to very tough iPhone 6 comps. Services notably strong w/revenue $10.8B, or ~$500MM ABOVE our model. While we are cutting AAPL estimates and price target, to us this speaks more about why it is too early to get more +ve on semis.
Results imply ~64MM iPhone units, or ~9-10MM shortfall
AAPL will no longer discuss iPhone units, but given our view that shortfall was primarily iPhone XR-related (see here and here), results imply ~64MM units (vs ~73.5MM guide) and iPhone revenue down ~15% Y/Y – the worst CQ4 for iPhone by far. To that end, using historical Gartner data, we calculate iPhone units in China were flat to down Q/Q for the first time in a Dec Q, speaking both to the XR demand challenges as well as macroeconomic/trade headwinds. Given the XR-focused weakness, QRVO seems the most direct supply chain read and ~10MM is consistent w/its negative pre, though our procurement estimates still suggested that AAPL’s guide had factored much of this in.
PIVOTAL QUESTIONS
Q: How would iPhones perform in F19?
We forecast iPhone revenue to decline 12% in F19 driven by roughly 15% decline in units partially offset by 5% growth in ASPs. Macro uncertainties are impacting demand in emerging markets and developed markets are seeing elongating replacement cycle due to lower carrier subsidies and battery replacements. High retention rates would ultimately lead to upgrades.
Q: Could services drive 3-5% growth for Apple?
Services continue to see strong growth and drive overall revenue for Apple. We continue to expect solid 20% growth for the services business. However, our expectation for it to drive overall revenue growth is dependent upon stable hardware sales. Apple’s ability to increase services penetration, shift to favorable mix, and potentially new service offerings including bundles could drive further growth.
Q: Could Apple continue to innovate and what is its incremental TAM opportunity?
Apple has ample opportunities to innovate and increase its TAM by at least an incremental $1tn. Some markets Apple is targeting include AR/VR, video streaming, healthcare, autonomous vehicle ecosystem, among others. Some could be introduced in the medium term while others may take time.
UBS VIEW
iPhone demand is weak due to several factors –iPhone XR, China macro/trade issues, FX, emerging markets and longer replacement cycle. However, we continue to view the ecosystem being sticky. Services growth of 20%+ could continue with a huge untapped install base of 600mn+ active iPhone users. Apple could garner a higher multiple once investors start looking beyond the iPhone weakness and services margin disclosure shed light on recurring profits.
EVIDENCE
Apple lowered its fiscal 1Q guidance due to softness in iPhones, particularly in Greater China and emerging markets. Other products segments in aggregate saw revenue growth of 19% YoY. UBS Evidence Lab Survey in November suggested decline in buying intent with the UK and China intent below that seen during the iPhone 6s cycle. Replacement cycles are still elongating.
WHAT’S PRICED IN?
At 11.6x P/E, the stock is trading below the five-year average multiple and at a discount to S&P. In 2016, during the iPhone 6s cycle, the stock traded as low as 9.9x, but services was a much smaller business. Investor expectations for this iPhone cycle are muted. We now forecast iPhone units to decline 15% in F19 and revenue to decline 12%.
Next … more from UBS …
This analyst report was written by analysts Timothy Arcuri and Munjal Shah
Apple Inc.
Apple iPhones weakness; Market or Share Loss?
Nearly all of our investor discussions post the AAPL miss centered on the question of whether China weakness is AAPL-specific, or general market weakness. We analyzed data from multiple sources – Apple’s China revenue implied in the release, Gartner, and data from China government (MIIT). Historical data from these sources suggests a fairly close correlation, adding some confidence in our China iPhone unit estimate. Based on monthly China MIIT data, the market has contracted mid to high teens Y/Y for much of 2018. While it could have been much worse in December month, we assume ~20% YoY decline assumption for the December month. Against this backdrop, we estimate that AAPL lost ~5-7 points of market share in CQ4:18 versus a year ago – a number about 2x what Gartner had been estimating prior to the preannouncement. While the China market is clearly soft, it is hard not to conclude that AAPL has lost China share.
iPhone demand appears to have fallen off precipitously in the month of Dec.
Based on AAPL’s comments in the release, we est. AAPL’s CQ4 Greater China rev was no more than ~$13.5B. Assuming 70% iPhone mix (a little heavier than corporate avg) and assuming ASP roughly in-line, we est CQ4 China iPhone shipments of ~11MM. According to China MIIT data, we calculate Apple shipments in China were ~9-10MM through the first 2mos of the Q, thus implying that shipments in Dec month may have only been a couple of MM units. iPhone XR was weak since launch, but this much of decline could imply some potential backlash to the Huawei event and trade issues.
This sets a very low base for China iPhone shipments exiting C2018, a factor we have tried to consider in our CQ1/CQ2 iPhone unit forecasts of 43 and 35Mm. It is possible, however, there could be intensifying backlash against AAPL products in China including Chinese corporations incentivizing consumers to purchase Huawei phones. A trade deal between US and China may ease some pressure, but this is difficult to predict.
Our $180 PT is based on 24x to recurring revenue and ~10x to non-recurring (hardware + AppleCare). Slower iPhone growth is a headwind to services, but AAPL still has huge untapped base (600mn+ active iPhones pay zero) and new bundle appears very likely.
Share loss in China
We further analyzed iPhone shipments in China based on data available from different sources – 1) Apple’s reported Greater China revenue, 2) Gartner, and 3) China MIIT data. We conclude Apple lost share on a year-over-year basis in the December quarter with the month of December likely being particularly bad.
Gartner and MIIT data shows similar market share trend for iPhones versus the overall smartphone shipments in China.
In terms of the premium segment of the China market, Apple is losing share there too with roughly 32% share in September quarter down from 34% a year ago and a steady decline since December 2017 quarter.
We correlated our iPhone unit shipments in China from three sources – Apple’s reported revenue, Gartner and China MIIT. The shipments are fairly close, within 1-2 million on a quarterly basis, which gives us confidence in our iPhone unit shipments into China.
Based on the available data, we predict December quarter China iPhone units in the range of 10-11 million.
Apple noted most of the revenue shortfall in the December quarter versus their guidance was coming from Greater China. Based on that we believe Greater China revenue would be roughly $13.5 billion in the December quarter. Assuming 70% iPhone mix, we estimate iPhone unit shipments of roughly 11 million.
We also looked at the monthly data from China Ministry of Industry and Information Technology. Based on the reported numbers for the months of October and November and the total December quarter estimate of 11 million derived above, we calculate iPhone shipments in China in the month of December were roughly 1-2 million, a sharp sequential and year-over-year decline.