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Finance

What to Expect From Apple’s Earnings Report Tuesday

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Bloomberg
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May 1, 2018, 8:06 AM ET
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Apple (AAPL) will get a chance to give wary investors some much needed inspiration with earnings on Tuesday.

Apple shares have fallen 7% in the past nine trading days as ominous signals from iPhone suppliers cast a shadow over the world’s most-valuable publicly traded company. Wall Street analysts responded by further reducing estimates for iPhone sales.

When the company reports after the market closes on Tuesday, iPhone numbers and a revenue forecast will be closely watched. Apple will also likely reveal plans to return more money to shareholders, along with details on sales in China and growth in services. Here’s a breakdown:

IPhone Performance

The iPhone is Apple’s most-important product, contributing about two-thirds of revenue. So the performance of this gadget will be scrutinized first. The company is expected to report sales of 51.9 million iPhone units from the fiscal second quarter, along with an average selling price of $740, according to average analyst forecasts compiled by Bloomberg.

For the fiscal third quarter, analysts are looking for unit sales of 39 million and an average selling price of $691.

Following Apple’s previous earnings report in February, Chief Financial Officer Luca Maestri gave rare additional guidance, telling analysts on a conference call that iPhone revenue would grow by at least 10% year-over-year in the current quarter.

Capital Return Plans

With sales of the iPhone X underwhelming, many investors have shifted focus to Apple’s swelling cash hoard and the potential for bigger capital returns. Lower corporate taxes and Apple comments about holding an equal amount of cash and debt over time have elevated expectations.

“The iPhone mega cycle didn’t happen, but many investors stuck around for the next big capital returns update,” Barclays analyst Mark Moskowitz wrote in a note on Monday.

Apple has given back more than $200 billion to shareholders since it started a cash-return program in 2012, mostly in the form of share repurchases. For the past two years, the company has announced an extra $50 billion for buybacks and dividends in conjunction with fiscal second-quarter earnings.

Apple may boost total capital returns by $150 billion this year, including a dividend hike of as much as 50%, according to Morgan Stanley’s Katy Huberty.

Still, analysts caution that an increase in capital returns is widely anticipated and its effect on the stock could be limited.

China

China has been a key focus for Tim Cook since he took over as chief executive officer in 2011. Apple now has more stores in China than any other region outside of the U.S. Despite that, China revenue fell to $45 billion in the latest fiscal year, down from a record $59 billion in 2015 amid greater competition from local phone makers like Huawei Technologies and Xiaomi.

With an estimated 100 million iPhone users, China represents a “major swing factor” for Apple, Daniel Ives, head of technology research at GBH Insights, said. About 60 million to 70 million Chinese consumers are due for an upgrade in the next 12 to 18 months, he estimated.

Any indication that performance in China is improving will have big implications for sales of future iPhones.

Services

Services revenue, which includes sales of apps and music, has become increasingly important for Apple as iPhone growth slows. Services are now the second-biggest source of revenue for the company.

On the last quarter’s earnings call, CFO Maestri forecast strong performance from services and wearables in the fiscal second quarter.

“Services should still be a bright spot in March,” Loup Ventures co-founder Gene Munster, a long-time Apple analyst, said in an interview. He’s expecting year-over-year growth of 18% to 20%.

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