Thursday, April 24, 2014

Apple Earnings: Four Key Themes

A long-running streak is in jeopardy when Apple(AAPL) reports fiscal second-quarter financial results Wednesday: It's been 11 years since the company reported a year-over-year decline in quarterly revenue.

It's possible this time. Analysts surveyed by Thomson Reuters project revenue of $43.54 billion for the quarter ended in March, slightly below $43.6 billion in the same period a year earlier. Apple forecast revenue for the period of $42 billion to $44 billion.

The last time Apple's revenue declined on a year-over-year basis was in March 2003. Its revenue then: $1.48 billion.

The streak, and its possible end, reflect both Apple's incredible success over the last decade and its current challenges. Since 2003, Apple's revenue has increased 30-fold. But now Apple's growth engine is slowing and the company is fighting the perception that its best days are behind it. Those concerns gained momentum after the company reported results for the first fiscal-quarter, ended in December.

Apple reported that it sold 51 million iPhones in that quarter, short of analysts' expectations of 55 million. The disappointing iPhone sales came despite the introduction of two new iPhone models — the 5S and 5C — before the holiday shopping season for the first time. Chief Executive Tim Cook noted that iPhone sales in North America were especially soft.

Wall Street will be watching to see if Apple bounced back in the March quarter. The average estimate from analysts is for net income of $9.07 billion, about 5% lower than a year ago. But per-share earnings are projected to rise 1% to $10.18, because Apple has repurchased so many shares.

Apple will report earnings after market close Wednesday and hold a conference call at 5 p.m. ET. The Journal is live blogging the call in Digits. Here are some key themes to watch:


Cash Rules: Apple is expected to update its plans to return cash to shareholders. Sitting on $159 billion, Apple has said it will consider expanding a plan to purchase up to $60 billion of its shares by 2015.

In an interview with The Wall Street Journal in February, Cook said Apple had bought more than $40 billion worth of its shares in the previous 12 months. At its annual shareholder meeting Feb. 28, Cook promised to announce an update to the plan within 60 days.

Sanford Bernstein analyst Toni Sacconaghi said some value investors hope the company will commit to return a certain percentage of free cash flow to shareholders. But Sacconaghi thinks Apple will announce a more modest increase to its existing share buyback program – an additional $30 billion by the end of 2015.

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Dialing Up the iPhone: The iPhone accounts for the biggest chunk of Apple's revenue and it is the company's most profitable hardware product. So any sign of an iPhone slowdown sets off alarm bells — as the company learned in January.

Analysts forecast sales of 38.2 million iPhone units in the January to March period, a 2% increase from a year earlier. Beyond the headline figures, investors will listen for details on whether demand for the less-expensive iPhone 5C remains soft and how the iPhone is faring with China Mobile.

China Mobile Impact: Apple started supplying iPhones to China Mobile, the world's largest wireless carrier with more than 770 million subscribers, in January. Cook called it a watershed moment for Apple in China, where it has struggled to gain a foothold.

Last month, China Mobile's CEO said three-fourths of the 1.34 million subscribers who signed up for its high-speed 4G network in February purchased an iPhone. On Tuesday, China Mobile said it added another 1.45 million users for its 4G network in March, but didn't break out the ratio of iPhone customers. There was a lot of excitement about China Mobile as a potential catalyst for iPhone demand in the world's largest smartphone market — and the March quarter provides the first peek at the impact.

Any Word on New Products?: This is starting to sound like a broken record. Apple has said that the company will break into new product categories in 2014. It has been four years since Apple introduced a major new product, the iPad. Investors and enthusiasts alike are waiting for the company to do something new like a smartwatch or a breakthrough set-top box and prove that it hasn't lost its innovative touch.

Will Cook spill the beans on Wednesday? Don't bet on it.

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