Apple Inc. Earnings Preview: Who's the Real Smartphone King Now, Buddy?

By Michael Comeau  OCT 28, 2013 11:13 AM

Apple's earnings report could see it reclaim its champion status, if such a distinction even exists any more.

 


The breakfast of champions isn't cereal, it's the competition!
-- David Lee Roth

Apple (NASDAQ:AAPL) is on deck to deliver its fiscal fourth-quarter earnings report tonight, giving the Cupertino-based giant a chance to recapture its crown as king of the high-end smartphone market.

We've already seen Google (NASDAQ:GOOG)-owned Motorola and HTC (OTCMKTS:HTCXF) stumble in rather dramatic proportions, while last week, Korean superpower Samsung (OTCMKTS:SSNLF) reported what can be characterized as mixed results in smartphones.

Samsung hit record earnings in its third quarter on the back of its booming memory business. However, within its enormous smartphone business, it saw growth led by mass-market models rather than high-end ones. Meanwhile, in the prior two quarters, Samsung's smartphone growth was led by the big-time flagship models like the Galaxy SIII and S4.

To be fair, there's a chance that this is a near-term hiccup.

However, the global Google Android smartphone market is astoundingly competitive, which can't possibly be helping the situation.

At my carrier Verizon Wireless (NYSE:VZ), I have 24 Android models to choose from. AT&T (NYSE:T) carries 21, while Sprint has 27.

With all the competition, is it any wonder the industry finds profits so hard to come by, even with 46.5% unit growth in the second quarter, per Gartner's research?

And if it's clobbering Motorola and HTC, Samsung should feel at least a little bit of pain.

Meanwhile, Apple has been hanging tough with its latest lineup, which consists of the high-end 5S and lower-priced 5C. Apple had a spectacular opening weekend, selling 9 million units, an 80% improvement over the 5 million iPhone 5 units sold during that model's 2012 debut.

But what's interesting is that all signs point to the 5S dramatically outselling the 5C, which reinforces the idea that Apple has a unique brand power in that customers actually want to pay up in the name of buying the best.

And with that, let's circle back to earnings tonight.

In conjunction with the iPhone launch sales numbers, Apple indicated that its fiscal Q4 revenues would come in near the high end of guidance of $34-37 billion, which would put it at or slightly above the then-consensus of $36.15 billion. Gross margins would also be near the top of its guidance of 34-37%.

Editor's Note: Minyanville will be hosting a FREE live conference call with Sean Udall, author of Minyanville's TechStrat Report, today at 2:00 p.m. ET. Sean will preview Apple's earnings, comment on the competitive landscape, and give his outlook on the world's most important technology company. Click here to register. So essentially, Apple preannounced a slightly better than expected quarter, though I imagine it may have left itself some wiggle room on the upside for revenues and gross margins above the guidance range. As it stands now, analysts expect Apple to report a profit of $7.92 per share on revenue of $36.8 billion, according to Bloomberg.

In terms of product mix, it's likely that Apple's expected revenues embed a weak iPad unit number due to last quarter's weakness and a slowdown ahead of the October refresh.

However, that would imply very strong iPhone numbers, which would be mathematically necessary to ensure meeting or beating guidance. There's a good chance Apple will comment on the sales mix of 5S to 5C. If, as expected, the 5S has dramatically outsold the 5C, then Apple more or less is the undisputed king of the high-end smartphone market -- for now.

As noted above, Samsung may have hit a wall. Remember, however, that although Apple is currently riding high, it hit its own wall last year, and in any case, the mobile device market has been remarkably volatile through the years, so don't count out Samsung just yet.

That brings us to December quarter guidance, which is key. According to Bloomberg, analysts are currently forecasting earnings of $13.84 per share on revenues of $55.45 billion.

And if Apple can satisfy the Street by coming in at the very least slightly below that guidance (in the name of under-promising), it can set the stage for a continuation of its big rally off the $385 April low. In that event, get ready to hear even more calls of a Nasdaq (INDEXNASDAQ:.IXIC) bubble. Apple is not only the biggest name in the index, but its results can impact some other big names like Qualcomm (NASDAQ:QCOM) and Sandisk (NASDAQ:SNDK), in addition to its influence as a driver of psychology toward tech stocks.

But as an Apple shareholder, I'm not ready to be buying just yet.

Why?

I'm concerned about iPad sales. The iPad mini line could struggle because of pricing that looks a bit too high, and that may impact iPad unit sales numbers. Sticking to premium pricing is the right thing to do for the brand, but there's a chance it causes some near-term pain.

Note that Apple's stock price has been rising in concert with financial expectations. Our mighty Bloomberg machine indicates that sales and earnings estimates for next quarter have indeed been ticking higher:


Click to enlarge

Sales estimate is in red, stock price is in white.



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So I'll be just waiting eagerly, eating my popcorn.

Twitter: @Minyanville

Position in AAPL

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