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Apple Announces Earnings Today Amid Plenty Of Anxiety Over iPhone X Sales

Apple stock has lost 8% of its value in the last two weeks leading up to the company’s Q2 earnings reveal. Here’s why.

Apple Announces Earnings Today Amid Plenty Of Anxiety Over iPhone X Sales

[Photo: courtesy of Apple]

BY Mark Sullivan4 minute read

One of the most interesting challenges faced by Apple this year is the question of whether consumers are willing to pay more than $1,000 for a smartphone. We’re likely to get an answer later today when Apple reports its second quarter earnings.

“Wall Street has major jitters when it comes to Apple’s upcoming earnings release,” wrote Above Avalon analyst Neil Cybart in a Monday research note. Indeed Apple’s stock price has fallen 8% over the past couple of weeks, driven down by Wall Street’s anxiety over demand for Apple’s most expensive phone to date, the iPhone X.

Lots of people paid up to $1,000 and more for the iPhone X during the device’s first quarter of availability–the 2017 holiday quarter. Apple sold 77.3 million iPhones during those three months, including an estimated 27 million iPhone Xs. But signs are emerging that the first wave of buyers may not have been representative of the whole smartphone market, and that the big holiday sales bump was followed by a bigger than usual decline in the new year.

Several of the companies that supply parts for the iPhone X recently reported weak earnings. A source told Fast Company last week that Apple plans to produce only 8 million iPhone X’s in the second quarter.

Many analysts’ eyes will be on the iPhone ASP (average selling price) number that Apple reports, which could suggest how sales of the X have sustained past the holiday quarter. The ASP in the December-ending quarter rose to $796. A significantly lower ASP this quarter would suggest iPhone X sales had fallen off.

A couple of important, and negative, macros will be at play in the background. The March-ending quarter is a seasonably slow quarter for Apple. Sales typically fall way off after the holidays. To make matters worse, the global smartphone market is contracting as people are holding on to their own phones longer.

Apple already ratcheted down its revenue expectations to between $60 billion and $62 billion for the third quarter, below the $65.73 billion expected by Thomson Reuters analysts. More recent consensus estimates show analysts expecting revenues of around $61.5 billion, and iPhone unit sales of 53 million.

Two Stories

Apple’s Q2 results will contain two main storylines–one about the company’s actual earnings, the other about how many iPhones it expects to sell through June. The first story is likely to be a (relatively) happy one, while the second may be a little darker.

It’s likely that Apple narrowly beats analyst revenue expectations for Q2, and at least comes close to that 53 million number for iPhone sales. One analyst roundup, by Bloomberg, says Apple will report iPhone sales growth of 2% over the same quarter last year.

If the troubling signs we’re seeing about iPhone X demand today are legit, the real effects of that will show up next quarter–in the third quarter results. It could be ugly. But some analysts polled by Bloomberg expect iPhone sales in that quarter to be 5% less than the year before, and Goldman Sachs adjusted its model to show sales of around 41 million iPhones.

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On The Plus Side

There will be things to feel good about, too. The two major knocks on the iPhone X have been that it’s too expensive and its display too small. But Apple’s next group of new phones seem to address those two complaints nicely. That is, they’re bigger and at least one is less expensive.

“Apple will have to smartly manage its iPhone product portfolio and pricing, especially in Asia, where some countries still witness smartphone growth,” writes Forrester analyst Julie Ask in an email to Fast Company. “Apple has proven over the past few years that it masters the art and science of managing its product portfolio.”

The company will reportedly announce a new 5.8-inch OLED display iPhone, which may be called the iPhone X Plus or something like that. It’ll also reportedly announce a 6.5-inch OLED display iPhone, which would be the largest iPhone ever made. Both these phones would likely have aluminum bodies like the X, as well as facial recognition.

While the OLED phones will likely be in the iPhone X’s general price range (nobody knows yet), Apple will release another iPhone with a 6.1-inch LCD display. LCDs displays are about half the cost of OLED displays. The LCD iPhone could be priced as low as $550, says KGI Securities analyst Ming-Chi Kuo, but I’m betting it’ll be priced at between $600 and $700. Still, the phone delivers the big display people want, and the lower price tag. Apple, a source tells me, believes the LCD phone will contribute half of the unit sales of the 2018 lineup during the year after its launch.

Apple is also likely to announce the continued steady growth of its content and services business, analysts believe. “Having said that, 2018 is a tipping point for Apple: it has no choice but to demonstrate it can reduce its dependency on iPhone sales and enter new adjacent markets and territories,” writes Forrester’s Julie Ask in an email to Fast Company. “I’d expect again a very strong growth of its content and service revenues . . .”

“Despite the dramatic downturn in (iPhone sales) expectations, Apple’s stock price has held up remarkably well,” Above Avalon’s Cybart wrote in the research note. “While many eyes will be on iPhone . . . my suspicion is that the data point won’t have as much influence as consensus assumes. Instead, Apple’s capital return update has the potential to be the major takeaway from 2Q18 earnings.”

Apple has been ramping up its programs for investing in itself and returning dividends to shareholders. The company will use most of the profits it is bringing back from overseas (under the lower tax rate provided in the GOP tax law) for both stockholder dividends and to buy back shares. Both of those things could add buoyancy to the stock price, regardless of the iPhone numbers.

I will be posting the results, with commentary, after the earnings announcement and Apple executives’ call with analysts.

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ABOUT THE AUTHOR

Mark Sullivan is a senior writer at Fast Company, covering emerging tech, AI, and tech policy. Before coming to Fast Company in January 2016, Sullivan wrote for VentureBeat, Light Reading, CNET, Wired, and PCWorld More


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