Apple (AAPL) Jittery Ahead of Earnings As Analyst Discusses Slowing iPhone Sales, Subsidy Cuts

April 23, 2012 10:53 AM EDT
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Apple (NASDAQ: AAPL) shares continue to be a little jittery ahead of Tuesday's earnings report after BMO Capital analyst Keith Bachman, while reiterating his Outperform rating, discussed slowing iPhone sales over the summer quarters and the impact of subsidy levels.

Bachman said Apple is at risk of having two quarters of sequentially flat to declining iPhone sales (June and Sept).

For the March quarter he raised iPhone unit estimate from 30 million to 31.5 million units. However, he projects 27 million iPhone units in the June quarter and 30 million units for the September quarter. The numbers, however, depends on the timing of the iPhone 5 launch. "We submit that depending on the timing of the iPhone launch this year, September Q units could decline compared with the June Q – particularly if the iPhone is launched in October 2012. In this case, we believe that our September Q forecast would be too high, although our December Q forecast could be too low."

On subsidy levels, Bachman notes that Apple's subsidy level is about $100 higher than that of comparable smartphones at present. If subsidy levels were to change by approximately $100/phone, he believes FY2013 EPS estimate would decline by approximately $7.50, all else equal.

On what would cause subsidies to change, he said, "we think that carriers would only push back on Apple if they collectively felt that competing phones would drive the same economics (high ARPU, low churn) as iPhones. With that said, we don’t think this is a simple decision as carriers would fear much higher churn if they could no longer sell iPhone." Telefonica and Vodafone in Spain have made comments about lowering subsidy levels in Spain, which is a cause for concern, he notes.

While he doesn't see near-term change to subsidy levels, he said it is the number one risk to the Apple story and it will change at some point in the future.

Bachman lifted his FY2012 EPS estimate from $43.50 to $43.80, but is maintaining FY2013 EPS estimate of $50.35.

He expects a very strong March quarter but thinks Apple stock will consolidate in the June quarter given declines in iPhone sales and some risks to iPhone sales in the September quarter.

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.

Shares of Apple are down over $11 to $562 early Monday.

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