UPDATED: Apple expected to confirm tough Q3 in fiscal call

Expectations low as earnings announcement looms

Apple, iOS, iPhone, Mac, Apple Watch, financial news, AAPL
Credit: Apple

All eyes on Apple today, with analyst’s expecting it to announce its worst quarter for iPhone growth since 2007, along with weakness across its business.

**UPDATE: Apple exceeded estimates. It reported revenue of $42.4 billion and earnings of $1.42 per share. Analysts predicted $1.38 per share on revenue of $42.09 billion. More follows.

Tough markets

In the context of global economic weakness and political instability, it’s no surprise consumers are buying less, but analysts expect Apple to reveal a 20 percent decline in iPhone sales.

There are certainly signs the company has always been prepared for this tough year. Apple used WWDC 2016 to focus attention on its fall software release schedule, which takes place at the start of its new fiscal quarter. I think Apple sees this as a transition year, and remain optimistic at its 64-bit, hyper-connected future.

For this quarter, consensus sits around 40 million unit sales, but some expect the company to announce as few as 38 million sales. Revenue should be broadly in range of the company’s expectation, $42.1 billion, claims Wall Street Journal.

UPDATE: Apple instead revealed revenue of $49.6 billion and net income of $10.7 billion, or $1.85 per diluted share, in the year-ago quarter. Gross margin was 38 percent compared to 39.7 percent in the year-ago quarter. International sales accounted for 63 percent of the quarter’s revenue.

A wave of rumors claim Apple will move to a three-year cycle of major iPhone model upgrades. If true these claims also say the company will launch an iPhone 6SE device this fall, rather than introducing iPhone 7. That will prompt a wave of reevaluations and analysts will be hoping for a little more insight from tonight’s financial call.

Investors will also be interested to see if iPhone SE sales have impacted those of the rest of the iPhone range.

Rumor and speculation currently favors a September 16 launch of new models, just within the critical time frame.

Beyond iPhone

Apple Watch sales don’t appear to be setting Wall Street hearts ablaze, but it’s arguable they priced it wrong in the first place. Piper Jaffray said, “It’s difficult not to view the Watch as an early flop.”

That’s an unusual way to describe a product that leaves 94 percent of customers satisfied and a little unfair, given Apple Watch needs an iPhone in order to function, limiting the addressable market. This should change with Apple Watch 2, but reading between the lines WWDC suggests this year’s focus may be on watchOS 3, rather than new hardware.

Analysts will also want to know what Apple’s anticipated revenue for the next quarter is, as this will likely include the first (critical) week of new iPhone sales. They will seek insight into Mac and iPad sales.

Apple’s services jewel

Apple’s growing services income may well be utterly eclipsed by its hardware sales, but it is growing. Apple is expected to announce sale of its billionth iOS device this week, and this means it has a huge market for service-related products.

“Although the product cycle is soft, the ecosystem is strong,” the analysts at UBS wrote in a note reported by the FT. “Most of the debate is about when, not if, iPhone customers will upgrade.”

Apple revealed that services revenue (from the App Store, iTunes, Apple Music and Apple Pay) increased 20% to $6 billion in its March quarter.

Piper Jaffray analyst, Gene Munster, estimates the company will see an 18 percent increase in services revenue, reaching $5.9 billion.

UPDATE: Apple exceeded this. “Our Services business grew 19 percent year-over-year and App Store revenue was the highest ever, as our installed base continued to grow and transacting customers hit an all-time record,” said Luca Maestri, Apple’s CFO.

Buy, sell, rumor

There is speculation Apple may announce some key acquisitions tonight, but with the company recently missing the chance to purchase ARM and Yahoo!, its focus seems likely to lay around technology advancement and building up its music services business.

Investors will want a few hints at Apple’s progress on Apple Car, given the recent return of Bob Mansfield to (allegedly) head up product development.

Apple’s moves in China and its attempts to engage in India and other developing economies are important.

China generates about a quarter of Apple’s revenue but the company faces big competitors, not least Huawei, whose founder recently called Apple “cowardly and conservative”.

Despite the intensification of competition in the country, Apple’s App Store income is growing steadily in China. However with local competitors Huawei and Oppo launching flagship smartphones this year, Apple’s speculated move to delay release of new iPhone 7 units until 2017 may reap dividends in terms of attracting China customers back.

As we head into Apple’s conference call, it’s clear the company is having a tough year and while (I see) multiple signs that this is a lull, rather than a new normal, expectation appears low.

  • UPDATE: Looking ahead, Apple Apple offered the following guidance for its Q4 2016:
    Revenue between $45.5 billion and $47.5 billion
    Gross margin between 37.5 percent and 38 percent
    Operating expenses between $6.05 billion and $6.15 billion
    Other income/(expense) of $350 million
    Tax rate of 25.5 percent

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