Takeaways from Apple CY2Q results ::Macquarie Research

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Takeaways from Apple CY2Q results
Event
 Apple (AAPL US, NR) posted strong CY2Q11 results ahead of expectations,
driven by robust shipment in iPhone (+142% YoY despite no new model) and
iPads (+183% YoY as supply chain production has improved) and stock is
+5% in after-market. Mgmt guided conservatively (per tradition) for CY3Q
given “future product transitions”. With our view of upcoming launch of new
iPhone 4S in Sept and strong momentum in tablets, we continue to
overweight on Apple plays over Android into CY2H11. In the APPL supply
chain we favour Catcher (casing), TPK (touch panel), Hon Hai/Pegatron
(EMS), Largan (lens), Toshiba/Samsung (NAND flash, TXC (crystal),
Radiant/TSMT (backlight) and Samsung SDI (battery).
Impact
 CY2Q results far above consensus. CY2Q sales +16% QoQ and EPS of
US$7.8 (+122% YoY) was far above street estimates. Despite lack of a new
model launch in 2Q, iPhone units of 20.3m, up +142% YoY (+21% ahead of
consensus), with growth particularly strong in Asia-Pac (sales quadrupled,
likely iPhone 4 and 3GS) and beating expectations. iPad units (+183% YoY)
also grew to 9.3m units (4.7m in 1Q) as supply chain production improved and
mgmt noted they "sold everything they could make.” Mac (desktops + NBs)
units of 3.95m rose +14% YoY, above the +3% PC industry YoY growth, with
strong demand again from AsiaPac. iPod units was only weaker area, -20%
YoY. Inventory levels across all product segments are "extremely healthy".
 Expect product transition in 3Q. Apple gave usual conservative guidance
for 3Q sales of US$25bn and EPS of US$5.5, citing ”future product transition”
and new iOS 5 launch as major reasons, consistent with our view of new
iPhone 4S launch and potentially upgraded iPad2 version in Sept. Apple sees
more favourable components in areas such as NAND, DRAM, battery, optical
drive, panel in 3Q, and expects pricing to fall at or above the historical range.
The only exception is HDD, where it sees supply as being more constrained.
 Apple will aggressively enter mainstream smartphone in 2H. In the highend
market, we expect to see robust shipments for Apple's iPhone 4S when it
is launched globally in Sept. In the mid to lower end markets, we believe the
market is unaware that, in addition to iPhone 3GS, (likely to reach 12m in
2011), Apple may de-spec iPhone 4 with a slashed price to further gain share
in 4Q in mainstream segment. We believe Apple's total iPhone sales (iPhone
4S, 3GS, and de-spec iPhone 4) in 4Q11 could see significant growth.
 Increasing patent cost for Android players. MSFT and Apple have recently
been chasing Android players for licensing deals on patent infringement
claims. MSFT reportedly has asked Samsung to pay a royalty on Android
smartphone; other Android makers are likely to face rising patent costs.
Apple, on the other hand, has recently filed a patent lawsuit against major
Android smartphone players like HTC and Motorola on touch-related patent.
On the earnings call, Apple stated it will “vigorously defend its IP patent
portfolio.” We believe Android's low cost advantage will be eroded due to
mounting patent fees, and thus prefer to be overweight Apple supply chain
plays as highlighted above over Android camp going into 2H11.