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Apple Earnings: Why I'll Be Watching Steerage – jj

Apple Earnings: Why I'll Be Watching Steerage


There’s plenty to watch when Apple (NASDAQ:AAPL) reports its fiscal third-quarter results later this month. Investors will be looking to see if there’s improvement in iPhone sales trends; whether strong growth persists in the company’s services and wearables, home, and accessories segments; and more.

But one of the most interesting items to watch will be management’s revenue guidance for its fourth quarter of fiscal 2019. Here’s why investors should pay attention to this metric.

Apple CEO Tim Cook during the company's 2019 WWDC keynote presentation.

Apple CEO Tim Cook. Image source: Apple.

Will Apple return to growth?

Due to declining iPhone sales, Apple’s total revenue has been falling recently. Fortunately, the tech giant’s guidance for its fiscal third-quarter revenue suggests that a return to year-over-year growth is likely during the period. Management guided for fiscal third-quarter revenue between $52.5 billion and $54.5 billion. The midpoint of this guidance range represents a slight increase over $53.3 billion in the year-ago quarter.

But Apple will need to prove a return to growth is sustainable for investors to really start buying into the company’s revenue growth story. Guidance for growth in fiscal Q4 could help this narrative. If management believes Apple can grow its top line during the period, it would have to guide for fiscal fourth-quarter revenue above the $62.9 billion it reported in the fourth quarter of fiscal 2018.

Unfortunately, analysts don’t believe Apple can grow revenue during the period. On average, analysts currently expect fiscal fourth-quarter revenue of $61.2 billion, down 2.7% from the same quarter in fiscal 2018.

Such a pessimistic outlook for fiscal Q4 isn’t surprising. Apple hasn’t launched any new iPhones since the end of the fourth quarter of fiscal 2018. This means the same iPhone cycle that has led to year-over-year declines in the tech giant’s smartphone revenue will still likely be weighing on Apple’s fiscal fourth-quarter results. It’s not usually until the final few weeks of fiscal Q4 that Apple refreshes its iPhone lineup with new versions — so the impact of new iPhone sales on the period is minimal.

Two catalysts could help

While investors shouldn’t get their hopes up, there’s a small chance that Apple’s fastest-growing segments could be offsetting iPhone sales enough for management to guide for fiscal fourth-quarter revenue growth.

Apple’s services segment, which accounts for about 16% of total revenue, saw revenue increase 18% year over year during the trailing-six-month period ending March 30, 2019. And the company’s wearables, home, and accessories segment, which represents about 9% of revenue, saw its revenue rise more than 30% over the same time frame. While these segments pale in comparison to iPhone (accounting for about 58% of revenue), stronger-than-expected growth in services and wearables, home, and accessories could help Apple return to growth for the remainder of the fiscal year.

Despite this potential for upside, Apple investors should still expect management to guide for a slight year-over-year decline in fiscal fourth-quarter revenue. iPhone revenue has been falling sharply; the segment’s revenue was down 17% year over year in fiscal Q2. Until Apple proves the iPhone’s declining sales can start moderating, sustainable growth in the company’s consolidated top line is going to be difficult to achieve.

Apple reports its fiscal second-quarter results after market close on Tuesday, July 30.

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