New iPhone Boosts Apple Results

Apple's solid December-quarter outlook points to healthy demand for the company’s new iPhones and iPads, as September's revenue exceeds forecasts

Brian Colello, CPA 29 October, 2013 | 4:14PM

Apple's (AAPL) strong, fiscal fourth-quarter results came in ahead of both the Street's, and our own, expectations. More importantly,  Apple's solid December-quarter outlook points to healthy demand for the company’s new iPhones and iPads. We're maintaining our $600-per-share fair value estimate, and our narrow economic moat rating.

For the September quarter, revenue of $37.5 billion and earnings per share (EPS) of $8.26 also exceeded the company’s prior forecast. We suspect that the strong results were driven by a tremendous iPhone launch during the quarter's closing days. Apple’s iPhone unit sales held up well, at 33.8 million units, while a 1% sequential decline in the average selling price, or ASP, appears reasonable in light of Apple selling older iPhones during most of the reporting period. Apple's iPad unit sales and revenue declined modestly, but again pertains to the sale of older models, as customers likely pushed out new iPad purchases until the new lineup of tablets rolls out in November.

Apple’s strong outlook for the December quarter still points to robust ongoing iOS adoption, and we continue to view Apple's shares as modestly undervalued. We calculate that revenue in the range of $55 billion to $58 billion likely implies iPhone unit sales in the low-to-mid 50 million-unit range, ahead of unit sales of 47 million during last year's iPhone 5 launch. We attribute most of the projected unit growth to new carrier deals with NTT DoCoMO (NDCM) and  T-Mobile (TMUS), as well as launching iPhones in China a quarter earlier than usual. The guidance also hints at strong, but not exponential, iPad growth from new product launches, although even the company is unsure whether it can fulfill all iPad Mini demand this holiday season. Gross margin of 37% is a nice forecast, in our view, once adjusted upward by about 150 basis points for deferred revenue associated with free software giveaways.

We're encouraged by Apple’s December-quarter revenue forecast, as well as management's comments that it remains confident that iPhone 5s production can continue to ramp up in order to satisfy tremendous demand. We recognize concerns that Apple misjudged its iPhone 5s versus 5c product split by building far too many devices of the latter, while possibly being unable to fulfill all demand for the former. Production may shift heavily toward the 5s in the near-term, but based on the company’s healthy revenue guidance, we don’t believe that the firm will be missing out on many iPhone sales to potential customers this holiday season. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Apple Inc441.96 USD-3.00
T-Mobile US Inc114.53 USD5.95

About Author

Brian Colello, CPA  is a senior stock analyst with Morningstar.

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