The earnings report of Apple after the Wall Street closing bell on Tuesday has taken on a significance beyond the usual quarterly update. It may prove to be a referendum on what kind of company shareholders want Apple to be – or, at least, what kind of investors hold Apple stock these days. Will investors focus, as they have historically done, on iPhone sales? Or will they look past potential disappointment there to a massive return of capital?
Here are the numbers that investors of all stripes will be watching for:
iPhone sales
Smartphone suppliers have sent a strong signal that growth in the number of units being sold is slowing around the world, even in supposed growth markets such as China and India. This threw Apple investors into what an analyst, Daniel Ives at GBH Insights, called “full panic mode”.
But remember that when it comes to Apple there is an important distinction between unit volumes and revenues.
Depending on how you look at it, the decision to launch the most expensive iPhone ever at just the moment demand was petering out was a terrible misreading of the market or a genius move to buoy up revenues, even if it came at the expense of volumes.
Most analysts are expecting Apple to say it sold about 52 million to 53 million iPhones in the quarter ended March 30th, up 2 to 4 per cent year on year, bringing total revenues to roughly $61 billion.
Many on Wall Street have been trimming their estimates in recent weeks, however. Barclays, for instance, now expects Apple to sell only 48 million iPhones in the quarter.
The iPhone’s average selling price (ASP) should give some clues as to which model is selling better. Morgan Stanley pegs the analyst consensus at an ASP of $741 (€615)but believes that “could be aggressive” if iPhone X sales have indeed waned.
Capital returns
Three months ago, Luca Maestri, Apple’s finance chief, said the company planned to run down its entire net cash balance of $163 billion to zero, over time.
That has many analysts expecting as much as $100 billion will be returned to shareholders in the form of dividends and share repurchases – though a one-off special dividend is unlikely after Tim Cook, chief executive, said he was "not a fan" of them at Apple's annual shareholder meeting.
Analysts at Barclays say this has insulated Apple’s share price from a sharper drop, as iPhone fears gather. “We think the market has shrugged off weaker demand in expecting a big payday from Apple,” they wrote in a note on Monday.
Does that mean Apple’s share price is vulnerable if the company is less generous than they hope, or decides to use its repatriated profits for something else, such as an acquisition?
“Our concern is that a weaker iPhone franchise could require the company to allocate more cash to M&A,” Barclays said.
Services and other products
Apple optimists have tried to point out lately that there is life beyond the iPhone. Although the smartphone typically makes up more than half of Apple’s revenues, the company’s services business is growing steadily, thanks to software sales from the App Store and subscriptions such as Apple Music. Morgan Stanley predicts services revenues grew 28 per cent year on year to $9bn in the quarter.
Apple also launched its $350 smart speaker, HomePod, in the quarter. The signs are that the device has fallen some way short of blockbuster success, as it struggles to compete with the likes of Sonos speakers or Amazon’s Echo. Nonetheless, it could add to the “Other products” line of Apple’s results, which also includes the fast-growing Apple Watch.
Neil Cybart, analyst at Above Avalon, predicts $4.1 billion in sales of "Other products", up 43 per cent year on year.
Outlook
The true test of the iPhone’s enduring appeal will be how well sales are sustained until the next new model arrives in September. Wall Street expects revenues of about $52 billion for the current quarter that runs to June 30th, based on roughly 42 million iPhones sold. However, a growing number of analysts predict Apple could see a year-on-year drop from the same quarter last year, when it reported iPhone sales of 41 million.
"We suspect negative news flow should peak with this reset, with supply chain build rates improving soon," said HSBC.
– Copyright The Financial Times Limited 2018
