Apple is expected to report a drop in profit and flat sales when it releases third-quarter earnings today, although the results could get a lift on better-than-expected iPhone demand.
Analysts on average expect Apple to report sales of about $35.01 billion, little changed from $35 billion a year ago. Profit is expected to be $7.31 a share, down from $9.32. For gross margin, a key measure of profitability, analysts are counting on CEO Tim Cook to deliver 36.7 percent, which is at the high-end of Apple’s forecast of 36 to 37 percent for the quarter ended in June -- but way down from the 42.8 percent it delivered in the third quarter of 2012.
But today’s Apple story won’t be just about the third-quarter numbers, which Piper Jaffray analyst Gene Munster says will likely be “uninspiring.” Instead, analysts and investors are hoping that Cook, who celebrates his second anniversary as CEO next month, will provide a strong hint about when new products – including the update to the iPhone – will be released. And that hint may come in the form of the sales forecast that Apple gives for its fiscal fourth quarter ending in September.
“If guidance is weak, it suggests new products will likely be announced in September or October, contributing to a lull in fourth quarter sales and EPS,” says Toni Sacconaghi, an analyst with Sanford C. Bernstein & Co. “Conversely, strong guidance likely presages new products beginning to ship in September, which could trigger positive revisions and investor enthusiasm.”
Investors need a reason to be enthusiastic. After Apple’s shares reached a record $702.10 in September, they’ve plummeted 39 percent on concerns that Apple has lost its innovation edge, that rivals including Google and Samsung are winning ground, and that the increased competition in the market for smartphones and tablets, which together account for more than 70 percent of Apple’s revenue, could push Apple to offer lower-priced and less profitable products, further eating into its gross margin.
For the fourth quarter, analysts, on average, are looking for gross margin of 37 percent and sales of $37.6 billion – though Sacconaghi says Apple's sales forecast could be as low as $30 billion if no new products ship in September or $40 billion or more if some are available then. “It is possible that Apple might get a ‘free pass’ on weak Q4 guidance, particularly if it alludes to significant new offerings in October,” says Sacconaghi. “But it will depend on how solid Q3 results ultimately are and where Q4 guidance ultimately lands.”
The third-quarter may offer a surprise in that iPhone shipments may be better than expected after Verizon yesterday reported iPhone activations that topped analysts' projections. Analysts on average are looking for 3Q iPhone shipments of 26 to 27 million units.
New Products
Steve Milunovich of UBS expects “mediocre” guidance for the fourth quarter, with the new iPhone 5S to be announced in late September or October.
Piper’s Munster expects Apple to introduce the iPhone 5S, a less-expensive version of the iPhone for cost-conscious buyers, a smart TV, a smartwatch, and the iPhone 6 with a larger screen over the next six quarters. He believes the new iPhone will be released in the last few weeks of September, but that won't be enough to overcome a dip in iPad sales as users hold off buying until new models of the tablet are released.
Amit Daryanani of RBC Capital Markets is looking for the iPhone 5S and a low-end iPhone, updates to the iPad and iPad mini, a deal to distribute the iPhone through China Mobile, and announcements around a smartTV and smartwatch in coming months. But all those potential new products won’t translate into an uptick in the stock “until investors obtain better visibility and understand new product launches,” Daryanani said, noting that creates an opportunity for investors. “The recent pullback on Apple’s stock creates an attractive entry point for investors to benefit from Apple’s ability to sustain material revenue and EPS growth over the next several years.”
Apple’s shares rose $1.36, or less than 1 percent, in Nasdaq trading yesterday to close at $426.31. The shares are down 20 percent so far this year.
The company will host a conference call to discuss earnings results at 2 p.m. California time. You can listen to it over the Web (assuming you have Apple’s Quicktime player installed) here. I’ll also be live-blogging the results and call, so check back here.
