Apple's 4Q16 earnings release is set within a dynamic environment. Expectations are on the rise. Wall Street is now calling for the iPhone to return to sales growth in 2017. In addition, there are very early signs of light at the end of the iPad sales tunnel. However, given severe iPhone and Apple Watch supply shortages following last month's product launches, 4Q16 numbers won't provide the clearest answers for judging Apple's performance improvement. Instead, a greater than usual amount of attention will be focused on management's earnings conference call and 1Q17 revenue guidance.

4Q16 Estimates

The following exhibit contains my full 4Q16 estimates as well as expectations for 1Q17 guidance.

Exhibit 1: Apple 4Q16 Estimates

My methodology behind these estimates are available for Above Avalon members here and here. (To become a member, click here.)

iPhone

Management's revenue guidance provided this past July implied approximately 43 million iPhone unit sales in 4Q16. This number would reflect weaker iPhone 6s and 6s Plus sales in July and August, continued robust iPhone SE sales, and the initial round of iPhone 7 shipments in September. While a sales number closer to 40 million units would raise questions, Wall Street will be much more interested in management's commentary regarding 1Q17 iPhone sales.

Exhibit 2: iPhone Expectation Meter (4Q16)

Mac and iPad

Given an outdated product line, 4Q16 Mac sales will likely be extremely weak. However, with management announcing new Macs later this week, Apple will not get penalized for weak Mac sales in 4Q16. Attention will quickly move to the future and the prospects of an updated Mac line ushering in a return to unit sales growth.

As for the iPad, 4Q16 results will be much more useful for analysis. The 9.7-inch and 12.9-inch iPad Pro represent the future of the iPad. The two devices have increased the probability of the iPad business returning to year-over-year unit sales growth in the coming year. While I continue to include year-over-year declines in unit sales in my earnings model, there is a good chance of Apple reporting the second consecutive quarter of year-over-year revenue increase for iPad.

Exhibit 3: iPad Expectation Meter (4Q16)

Apple Watch

Similar to iPhone results, 4Q16 Apple Watch results won't tell us the complete sales picture. Very tight Apple Watch Series 2 supply will make it difficult to judge Apple Watch demand. As detailed in my recent article, "Apple Is Going After Fitbit," there is much change occurring in the Apple Watch business as management repositions the Watch given current market dynamics.

Exhibit 4: Apple Watch Expectation Meters (4Q16)

Guidance

The line in the sand for management's 1Q17 revenue guidance is found at $75 billion. A guidance range that includes $75 billion will give Wall Street much confidence that Apple will return to growth in 2017. Meanwhile, a revenue guidance range closer to $71B to $73B may disappoint those expecting a significant turnaround in iPhone growth.

Exhibit 5: 1Q17 Guidance Expectation Meters (Revenue and Gross Margin)

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Members will also receive my exclusive earnings reaction notes containing all of my thoughts and observations on Apple's earnings. To receive these earnings reaction notes, become a member here.