Key Trends To Watch As Apple Reports Q4 Earnings

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Apple (NASDAQ:AAPL) is scheduled to publish its Q4 FY 2016 earnings on October 25th, reporting on an eventful quarter that saw the firm refresh its flagship iPhone and introduce a new version of the Apple Watch. Below, we outline some of the key factors to watch when the firm publishes its results.

We have a $120 price estimate for Apple, which is roughly in line with the current market price.

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iPhone 7 Unlikely To Have A Meaningful Impact Q4 Shipments

Apple launched the iPhone 7 in mid-September and demand appears to have been very strong, driven in part by Samsung’s Galaxy Note 7 recall and attractive U.S. carrier promotions, which essentially offered the iPhone 7 for free with trade-ins. However, the device is unlikely to significantly impact Apple’s Q4 earnings, as it was available for just about two weeks during the quarter and also because Apple likely underestimated initial demand. Q4 iPhone figures will still largely be driven by the 6S, which should have seen some discounting in order to drive volumes and reduce inventory prior to the launch of the new flagships. The lower-spec iPhone SE ($400 at launch) could also be a big driver of sales for the quarter. Overall, we expect iPhone shipments and ASPs to decline on a year-over-year basis, putting pressure on Apple’s gross margins (guided at 37.5% to 38% for the quarter).

Chinese Headwinds Will Continue On FX, Competitive Headwinds

Apple’s performance in Greater China (China, Hong Kong and Taiwan), its second largest geographic market, will also be a key factor to watch. During Q3 FY’16, revenues from the region declined by about 33% year over year to roughly $8.8 billion, accounting for about 60% of Apple’s overall revenue decline for the quarter. Key factors weighing down Apple’s performance in the region include significantly stronger competition from Chinese smartphone rivals, FX headwinds (RMB down by about 5% versus USD over the last year) as well as some regulatory setbacks. We expect things to improve slightly, on account of the launch of the Apple Watch Series 2 and the iPhone 7, which saw strong promotional activity from Chinese carriers.  That said, revenues could still see a double digit decline compared to last year.

iPad Could Look Up As Mac Struggles

Apple’s Mac product line has been performing poorly in recent quarters,  amid a shrinking global PC market and Apple’s ageing product line-up (mainstream Macs haven’t seen a refresh in close to 18 months). Based on Gartner’s preliminary Q3 2016 figures, Mac shipments declined 13.4% year over year to just about 4.9 million units, while the overall PC market shrank by 5.7%. That said, the iPad business, which has seen its importance diminish amid cannibalization from large-screen smartphones, could look up on a year-over-year basis, both on account of the iPad Pro devices, which sport premium price tags, and also due to a favorable comparison with last year’s weak numbers.

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