Apple reports its June quarter results after the market closes on Tuesday. While the guidance it provides for the September quarter is critical the past quarter’s numbers are also important. These are four key metrics to watch for.
iPhone unit sales expectations are muted
How many iPhones Apple sold is important since they will give a clue if or how much all the rumors regarding the upcoming iPhone 8 is impacting sales. Over the past three years iPhone unit sales have fallen by 19%, 22% and 21%, respectively, from the March to June quarter. Keep in mind that the past three years unit sales, when they are adjusted for channel inventory changes, have decreased by 19%, 20% and 14%, respectively.
At 40.5 million, which is what I am forecasting, iPhone sales would be down just over 20% quarter to quarter and up slightly year over year. I have reviewed 16 sell-side analyst models and their average iPhone unit sales are 40.8 million, down just under 20% quarter to quarter.
If iPhone unit sales fall much more than 20% then there will be concerns about how much the iPhone 8 rumors could impact current model sales. Even though Apple should provide guidance for the September quarter, if the iPhone 8 has major supply constraints it could impact expectations for the December quarter.
Gross margins may be the most important metric
Gross margins may be more important than how many iPhones were sold. Apple’s guidance is for them to be between 37.5% and 38.5% and the company has been within 0.1% of the high-end of its guidance the past six quarters. And compared to a year ago the 38.0% mid-point matches last year’s 38.0% result. If gross margins come in below 38.0% while still within guidance (and especially if they are below 37.5%) investors could have a major concern added to their plate.
A wild card on gross margins is what warranty expenses were in the quarter. This isn’t disclosed until the 10-Q is filed (typically the day after earnings are announced) and since they have ranged from 0.9% to 3.0% of revenue the past eight quarters they can have a material impact on gross margin results.
Can services revenue grow fast enough
Tim Cook has talked about doubling Apple’s Services revenue over the next four years. This means that the company’s services revenue would grow from $24.3 billion in fiscal 2016 to almost $50 billion in fiscal 2020 or 19% per year. After growing 18.4% and 17.5% in the first two quarters this fiscal year if the services growth rate continues to slow it will put a bit more pressure on Apple acquiring services companies. While I don’t expect Apple to buy Netflix or a large company adding incremental services revenue streams makes sense.
Operating expenses are often overlooked
For the past 19 quarter’s Apple’s operating expenses have been below the high-end of its guidance. While I don’t expect this trend to change it does mean that operating expenses are still increasing as a percent of revenue.
For almost five years operating expenses as a percent of revenue has gone from 9.0% in fiscal 2013 to 9.6% in fiscal 2015 to 11.2% in fiscal 2016. When you combine the first two quarters for this year and June quarter’s guidance this would mean operating expenses increased by 20 basis points or 0.2% of revenue to 11.4%. The increase in the operating expense ratio has been driven by research and development spending as sales, marketing and administrative expenses have stayed relative flat as a percent of revenue.
