Apple is expected to report the worst quarter for iPhone growth since the device was first launched nine years ago, with analysts forecasting a drop in unit sales of as much as 20 per cent.
Shares in Apple have fallen by more than a fifth over the past year but now that investors are getting used to the idea that the company will post little to no growth over the next year, analysts at Morgan Stanley are betting that the June quarter “marks the trough”.
Here is what to expect when Apple reports third-quarter earnings after the closing bell on Tuesday:
iPhone
Apple's flagship product accounts for about two-thirds of its sales and an even greater portion of its profits. As such, it will be the focus for Tuesday's commentary, as investors weigh the impact of a broad slowdown in the smartphone market, a lengthening replacement cycle and stronger competition from low-cost rivals in China.
Wall Street will be looking for at least 40 million iPhone sales in the quarter, a drop of 16 per cent year on year, although some analysts predict the closely watched figure could go as low as 38 million, down 20 per cent.
With expectations muted for the next iPhone, due to arrive in September, many analysts are looking towards a new "super cycle" of customer upgrades beginning in September 2017. On the earnings call, analysts will prod chief executive Tim Cook about what happens to iPhone sales over the next 14 months, especially with the lower-priced iPhone SE putting pressure on margins.
Other products
It is not just the iPhone that is in decline. Sales of the iPad, Mac and even – if market researchers at IDC are to be believed – the year-old Apple Watch are also falling.
Earlier this year, Apple tried to focus Wall Street’s attention on its services business, as digital products such as the App Store, Apple Music and Apple Pay are growing faster and fluctuate less than the rest of its line-up. Morgan Stanley expects 18 per cent growth in the quarter.
Apple's services are also crucial to customer loyalty. "Although the product cycle is soft, the ecosystem is strong," wrote UBS in a recent note to clients. "Most of the debate is about when, not if, iPhone customers will upgrade."
M&A
On recent earnings calls, Mr Cook has hinted that Apple was on the lookout for more and larger acquisitions, perhaps taking advantage of lower valuations in Silicon Valley to strike a good deal. Apple is said to have considered buying Time Warner and music service Tidal in recent months.
Some on Wall Street are impatient for a transformational deal. Colin Gillis, analyst at BGC, downgraded Apple on Monday in part because he believes Mr Cook should have bought Arm Holdings before Japan's SoftBankswooped on the UK chip designer last week, rather than spending $117 billion on share buybacks.
“Apple acquiring Arm could make so much sense,” he wrote. “So disappointing!” He added that Apple had “peaked” under Mr Cook’s leadership.
Guidance
With so much uncertainty surrounding the iPhone pending the rollout of its next generation, much of the focus will be on Apple's outlook for the September quarter, which usually includes its first weekend of new iPhone sales. Analysts at Piper Jaffray expect 44 million iPhone sales in Apple's fiscal fourth quarter, with total revenue guidance of $43 billion-$45 billion and gross margins of 37-38 per cent.
Although the Apple Watch is also likely to get an update in September, Piper Jaffray said investors were not expecting much: “It’s difficult not to view the Watch as an early flop, although we had expected the product to ramp [UP]slowly in the beginning.” – (Copyright The Financial Times Limited 2016)
