Apple’s Q3 Earnings Will Trend Lower On Sluggish iPhone And Mac Sales

Apple (NASDAQ:AAPL) is scheduled to publish its fiscal Q3 results on Tuesday, July 26, reporting on another challenging quarter that is likely to see revenues and margins contract on a year-over-year basis amid sluggish iPhone and Mac sales. Apple has guided for revenues of between $41 billion and $43 billion for the quarter, with gross margins in the range of 37.5% to 38%. Below we provide some of the key trends to watch when Apple publishes earnings.

We have a $123 price estimate for Apple, which is close to 30% ahead of the current market price.

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• iPhone shipments saw their first ever quarterly decline during fiscal Q2 (-16% year-over-year), and the number likely fell further during Q3 amid weak uptake for the iPhone 6S, competition from Samsung’s well received Galaxy S7 and a tough comparison with the prior year quarter, when the company benefited from soaring demand for its just-launched large-screen iPhone. That said, Apple may benefit from the recently launched iPhone SE and a slight reduction in channel inventory (-450k units) during the quarter.

• iPhone ASPs could also trend sequentially lower, as the $399 iPhone SE contributes to the revenue mix, while the iPhone 6S potentially sees discounts as it moves toward the end of its flagship life-cycle. Currency headwinds in Europe and emerging markets could also hamper ASPs in dollar terms. For perspective, the Trade Weighted U.S. Dollar Index – a measure of the value of the U.S. dollar relative to other world currencies – was up by roughly 4% compared to the same quarter last year. ^[1]

• The Mac is likely to have had another tough quarter, driven by headwinds in the global PC market and also due to Apple’s aging mainstream notebook lineup. For instance, Apple’s flagship MacBook Pro saw its last major design refresh in 2012. Research firm IDC estimates that Mac shipments for the quarter dropped by about 8.3% year-over-year to 4.42 million units, underperforming the global PC market, which saw shipments decline by about 4.5% year-over-year. ^[2]

• iPad sales have been declining over the last two years, driven by longer upgrade cycles for tablets and increasing cannibalization from smartphones with bigger screens. However, this quarter could see Apple post its best levels of iPad revenue growth in recent years, driven by the new iPad Pro devices which sport premium price tags ($600+) and also due to a favorable comparison with last year’s weak numbers.

• Services now constitute Apple’s second largest business segment after the iPhone. During the previous quarter, Service revenues grew 20% y-o-y, driven by higher App Store sales and a reasonably strong uptake for the Apple Music service. The trend should continue, as the streaming music service has seen its subscriber base grow to 15 million paying subscribers as of mid-June, from 11 million subscribers in February. Apple’s mobile payment service Apple Pay has also been recording strong user growth (adding 1 million new users per week as of April), and retailer support (10 million+ contactless payment locations worldwide) and it could slowly begin to contribute more meaningfully to Apple’s financials.

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1. Trade Weighted U.S. Dollar Index: Broad, FRED [↩]
2. IDC Press Release [↩]