Low expectations set the stage for Apple as the tech company reports after the bell on Tuesday. Analysts will be watching as Apple discloses service margins for the time as well as looking for signs of life in iPhone sales.
On January 2nd in a rare move, the company issued a downtrodden pre-announcement with a revenue warning mostly blaming China. At the time, Jefferies said it was the "biggest miss in years." Apple is down nearly 2 percent for the year, missing out a market comeback that's boosted most technology stocks.
Following the last earnings report, several firms like Bank of America downgraded the stock. Other analysts like Morgan Stanley's Katy Huberty still have an overweight rating noting that, "Following Apple's Dec Q pre-announcement, the most common question we have fielded from investors is what caused reclassified Services revenue growth to decelerate to 18% Y/Y, from an estimated 25% Y/Y in the September quarter...Apple gave little detail in the pre-announcement, and therefore we'd expect the company to address the drivers of Services revenue during the earnings call."
In his earnings preview note to clients J.P. Morgan's Samik Chatterjee said, "We rate Apple shares overweight given our favorable outlook on iPhone and Services revenues relative to investor expectations, catalysts to accelerate revenue growth, and upside risk to our base forecast for +15% earnings CAGR."
However, Bernstein's Toni Sacconaghi, who has a market perform rating and was the number one ranked Apple analyst according to Institutional Investor last year said that, "Beyond guidance, we encourage investors to listen for the following on the earnings call: (1) Commentary on iPhone replacement cycles; (2) China, and whether recent weakness appears due to cyclical, structural, or nationalist factors; (3) iPhone softness in other markets, given our contention that China only appears to account for half of the iPhone's shortfall in Q1; and (4) Services gross margins, which will be disclosed for the first time (we forecast mid-60s %). We don't see the latter as a catalyst for the stock."
Here's what some of the other analysts are watching for:
"Apple negatively pre-announced December quarter results on January 2nd, lowering revenue guidance by $7B or 8%, blaming iPhone weakness in China as the primary driver of the miss... As such, street (and buyside) expectations are largely aligned for December, and we forecast total revenue of $84B, iPhone revenue of $52.2B (units of 62.3M, ASP of $842), Services revenue of $10.8B, a gross margin of 38.0% and EPS of $4.17 (Exhibit 1)... While clarity on the Services growth deceleration in December will also be a key focus for investors (see next paragraph), March quarter guidancewill provide a base for forecasts during the remainder of the year, and with the stock close to where it was ahead of the pre-announcement, Apple likely needs to deliver a "better than feared" revenue outlook for shares to recover further in the very near-term... We model March quarter total revenue of $62.0B, iPhone revenue of $34.9B (units of 43M, down 18% Y/Y), Services revenue of $11.7B (+19% Y/Y), gross margin of 38.4% and EPS of $2.84 vs. consensus of $59.3B in total revenue, $33.9B in iPhone revenue (on 45.0M units), Services revenue of $11.3B, a gross margin of 38.4% and EPS of $2.65... Based on investor conversations, we believe the stock could trade up on revenue and gross margin guidance range of $58B and 38% at the mid-point, respectively, while guidance meaningfully below these levels would fuel the bear case..."
"Apple's January 2 pre-announcement has removed much of the uncertainty surrounding its fiscal Q1 earnings call, and confirmed that the current iPhone cycle is very weak, with Q1 revenues down ~15%. We have updated our models to fully reflect Apple's new accounting standard, and have lowered our FY 19 EPS by -4% to $11.64 (vs. consensus of $11.99)...Investor focus now, of course, is on fiscal Q2 (March quarter) revenue guidance... We note that consensus Q2 revenues of $59B appear appropriately conservative vs. history, but the big question is how much iPhone channel inventory Apple built in Q1, and how much it might draw down in Q2... While the company will likely not disclose it, our analysis suggests that a significant inventory build (4 – 5M+ units) and a material drawdown in Q2 (2M+) – i.e., a scenario worse than last year – could still result in downward revisions...Beyond guidance, we encourage investors to listen for the following on the earnings call: (1) Commentary on iPhone replacement cycles; (2) China, and whether recent weakness appears due to cyclical, structural, or nationalist factors; (3) iPhone softness in other markets, given our contention that China only appears to account for half of the iPhone's shortfall in Q1; and (4) Services gross margins, which will be disclosed for the first time (we forecast mid-60s %)...We don't see the latter as a catalyst for the stock..."
"We rate AAPL shares Overweight given our favorable outlook on iPhone and Services revenues relative to investor expectations, catalysts to accelerate revenue growth, and upside risk to our base forecast for +15% earnings CAGR... We see upside on several aspects of the business as well as financials that remain underappreciated by investors, namely the transformation of the company to services, growth in the installed base, technology leadership, and optionality around capital deployment ― all of which together leads us to expect double digit earnings growth and a modest re-rating for the shares..."
"We expect rev/EPS $83.8B/$4.14 in line with revised guide... We assume iPhone rev/unit of $52bn/64MM vs Street at $52.9bn/68MM... CIRP survey implies a fairly healthy new iPhone mix and, equally importantly, a definite move to higher memory densities... Services rev reclassification and disclosure cadence was confusing, but the $10.8B for Dec. was above Street (now 18% Y/Y pro-forma)... Most importantly, Apple will disclose Services margin for the first time; our analysis based on top-down product segments using iPhone teardowns combined with bottom-up services segment suggests GM could be in low-60s..."
"Apple pre-announced FQ1 negatively on January 2 due to weaker than expected demand in China and other EMs... We believe China remains weak though deterioration in demand seems to have slowed... We also believe that Apple is losing share in Europe in the midst of a more tepid demand environment there... Consistent with these trends we see Apple promotional activity higher than normal though it is tough to quantify this or to know how Apple will ultimately account for costs... However, as we have indicated in prior research we now believe most of the earnings risk in Apple relates to ASP trajectory in 2019 as opposed to units... Our FQ2 revenue estimate of $58.3bn is ~2% still below consensus (we reduced our estimates on January 3)... Our FQ2 iPhone units estimate of 42.3m is ~6% below FactSet sell-side consensus, but we believe buy-side estimates are likely a touch below our estimates... More positively, we believe Apple's latest plan to slow hiring could help the company control its opex intensity levels..."
"Given Apple's pre-announcement earlier this month, investors will be focused on 1) March quarter guidance (our iPhone estimates for Dec/Mar of 65mn/41mn remain below Street at 68mn/45mn and we model lower overall rev at $57bn vs consensus of $59bn), 2) commentary on product vs. services margins (Apple to disclose Services margins for the first time, where too high a services margin number could be perceived negatively around implied hardware margins) and any color on services margin trajectory, 3) Updated commentary around demand from China and other Emerging markets and 4) any commentary on Services revenue growth... (We estimate App Store rev, approx. 37% of total services revenue, grew 18% y/y globally in F1Q19 in-line with preannounced total Services rev of $10.8bn, and grew 5% y/y in China. See figure 8)... Although we see valuation as relatively attractive, we reiterate Neutral on lack of near-term catalysts, expected continued weak iPhone sales, balanced by large net cash/optionality..."
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