What to expect from Apple’s first-quarter earnings

Published January 31, 2017 by lagmen
They were probably not looking at Apple's earnings on that iPhone.

Last quarter, Apple announced an annual decline in revenue and profit, its first in 15 years. Over that period, the company revolutionized personal computing, and launched the iPod, iPhone, and iPad. But the sheen started to wear thin in 2016, as Apple’s newer models of old product lines, as well as entirely new products like the Apple Watch, failed to excite consumers.

On Jan. 31, Apple will report its first-quarter earnings (its fiscal year ends in September). The quarter is generally the company’s busiest, given that it falls over the holiday season, when many people tend to give Apple products as presents. Over this particular quarter, Apple released a slew of new devices, including a new line of MacBook Pro laptops—met with mixed reviews—and its AirPods wireless headphones. The iPhone 7 and 7 Plus also went on sale just a few days before Apple’s last earnings announcement, so this will be the first quarter that gives a true indication of how they were received.

Even if Apple’s new products lead to a strong quarter, it’s unlikely that the company will be able to break its streak of consecutive quarterly declines in revenue and profit. The first fiscal quarter of 2016 was record-breaking for Apple: It sold the most iPhones it ever has in a single quarter, and generated its largest-ever quarterly profit.

Still, Wall Street is bullish on Apple. Analysts are expecting the company to post $77.38 billion in revenue for the quarter, which would be a roughly 2% increase over the $75.9 billion the company posted in the same quarter last year.

Here are a few things to keep an eye on when Apple reports:

How the iPhone 7 was received

The iPhone routinely generates around two-thirds of Apple’s quarterly revenue, so any dip in smartphone sales tends to have a dramatic impact on the company’s earnings, as was the case with most quarters last year. Apple has been criticized of late for releasing iPhones that essentially look and feel just like previous generations—the iPhone 7 is not noticeably different from the iPhone 6S or iPhone 6—and sales in 2016 seem to have dropped over that monotony. If Apple is to return to growth in 2017, the iPhone is going to have to lead the charge.

Having said that…

If services are still on a tear

The downturn in iPhone sales have been buffeted slightly by growth in Apple’s services business. This includes sales of music, games, movies, and apps, as well as AppleCare insurance and cloud-services offerings. This slice of Apple’s business has been on an upward trajectory for the past few years, and is now Apple’s second-largest business.

Apple is also getting into original TV programming, and has been heavily marketing music exclusives in its Apple Music subscription service. As the company looks for ways to keep consumers locked into its ecosystem, and ways to generate revenue from people beyond just selling them new devices, it’s figuring out what sort of content might keep customers coming back to Apple devices. Whether expensive movie and album releases are the way to do that remains unclear, given the high cost of investing in original programming.

What’s beyond the iPhone

Although Apple’s services business is growing, nothing comes close to generating the sort of cash that the iPhone does.

The iPad celebrated its seventh anniversary last week, but Apple’s tablet never really achieved success like the iPod and iPhone. Although Steve Jobs said after its launch that the iPad marked the beginning of the “post-PC era,” Mac sales have remained stubbornly resilient—even though overall global computer sales are down—and Macs now generate more revenue for Apple than iPads.

Apple has recently revitalized its laptop line—reports suggest it’s about to do the same for desktops—and has started pushing the iPad as a complete computing device. It seems possible that there will eventually be a convergence in Apple’s two computing lines, as tablets get more powerful and laptops get more tactile—just as the iPhone ultimately cannibalized iPod sales. Look for signs tomorrow as to whether the powerful new iPad Pro models have boosted Apple’s tablet sales, and whether the new MacBooks have done anything for Mac sales.

The Apple Watch also remains a concern. Apple’s first new product line in five years, the watch has failed to reach sales levels of even the iPad. The watch is still bundled into Apple’s catchall bucket, called “Other Products” on its earnings reports—a miscellany of smaller businesses, including the iPod, accessory sales, Beats headphones, AirPods, and the watch. Look for any mention on whether the September launch of the second-generation version of the Watch was a success.

Whether Apple is growing overseas

China and India remain massive markets that Apple is trying to figure how to crack. In China, Apple has had moderate success, despite regulations against foreign companies affecting parts of its business, but has seen its revenue in the region fall in recent quarters. Apple is also trying to expand rapidly in India, which CEO Tim Cook views as the next China, but as The Wall Street Journal (paywall) pointed out last year, the average per-capita output in India is a third less than what China’s was a decade ago. That means the average Indian consumer has far less disposable income to spend on things like pricey smartphones.

Apple hopes to get around this is by, in part, selling more affordable, refurbished, phones. But as of right now, India’s impact on Apple’s revenue is so slight that it’s still rolled up into an earnings bucket labeled “Rest of Asia,” which is Apple’s smallest geographic region. Look for whether that bucket has made any noticeable headway over the quarter.

What’s in the future

Although Wall Street tends to be concerned only with what’s happening at a company right now, it’s worth considering that Apple has a massive amount of cash (and its equivalents) stocked up, and the company is also spending considerably more on research and development than it did when working on the iPod, iPhone, or iPad.

There have long been rumors (and hires) that suggest Apple is either working on a self-driving car, or just an electric car. There have also been indications that the company is working on a pair of augmented-reality glasses, sort of like an Apple Watch for your face. Look to see whether Apple’s research spending continues to rise, as it may give an indication as to whether the company is still searching for what comes next.

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