Apple delivered upbeat FY2Q (CY1Q20) results with EPS of US$2.55 (+3% YoY) and revenue of US$58.3bn (+1% YoY), which are 11% and 8% ahead of consensus. However, Apple decided not to issue FY3Q guidance due to lack of visibility amid COVID-19 impact. Looking ahead, mgmt. expected downward pressure on iPhone/wearables but improving demand for iPad/Mac in FY3Q. While we believe iPhone weakness and potential 5G iPhone launch delay are largely reflected in share price, we expect potential order cuts and demand uncertainty will continue to put the sector under pressure. We maintain Sell on AAC given margin pressure and lack of growth drivers, and reiterate Buy on Luxshare for AirPods momentum and strong visibility of its 5G product pipeline.
- iPhone better-than-feared and stronger service; Guidance pulled as expected. Key highlights from earnings call include 1) iPhone revenue down 7% YoY (vs +8% in FY1Q) due to both demand and supply impacted by COVID-19, 2) slower China/Japan sales (-7%/-6% YoY), 3) continued wearables/home/accessories momentum (+23% YoY) with strong double-digit growth across all regions, 4) service well on track to double 2016 revenue by 2020, 5) no FY3Q guidance issued due to lack of visibility in the near term, and 6) FY3Q outlook: iPhone/wearables to worsen YoY and iPad/Mac to improve YoY.
- New 5G iPhone cycle to be postponed from 4Q19E to 1H21E. Our check suggested that two or more 5G iPhone model launch will be delayed to Nov-Dec timeframe given supply chain disruption and 1.5-month delay of EVT/PVT for new production lines in China. Given recent COVID-19 impact in US/Europe (40%/21% of iPhone sales), we estimate iPhone shipment will decline 25%/8%/1% YoY to 26mn/43mn/73mn in 2Q/3Q/4Q20E. We forecast iPhone volume to drop 10% YoY to 175mn in FY20E.
- Too early to become constructive; Wearables is the only bright spot. Overall, we remain cautious on tech names with high consumer electronics exposure in 2Q20E given lockdown of global major cities and ongoing economic slowdown. Although we believe iPhone weakness and 5G model launch delays are largely priced in, we expect order cuts and demand uncertainty will continue to weigh on iPhone supply chain in the near term. We maintain Sell rating on AAC due to share loss and margin pressure, and reiterate Buy on Luxshare given its AirPods leadership and strong 5G product pipeline.
