Apple faces questions on trade war as results issued

By Mark Gurman

When Apple reports results later this evening, investors will seek insight into upcoming iPhones and how the flagship iPhone X is performing. 

They also want executives’ latest thoughts on the growing trade dispute between the US and China.

The technology company is expected to announce fiscal third-quarter revenue of $52.3bn (€44.85bn) according to analyst estimates. 

That’s in line with the company’s recent forecast and translates to yearly revenue growth of about 15%, the strongest for Apple’s June quarter since 2015.

Higher iPhone average selling prices, increased services revenue, and unit sales growth for the Apple Watch should drive the expansion, analysts say.

iPhone Apple sold about 41.8 million iPhones in the third quarter, up almost 2% from a year earlier, according to Toni Sacconaghi, an analyst at Sanford C. Bernstein.

Because of the $1,000 iPhone X starting price, analysts on average are expecting iPhone revenue to increase about 17% year-over-year, Sacconaghi said in a recent note. 

He’s looking for an average iPhone price of $690, up from $606 in the year-ago quarter.

Steady sales growth like this suggests consumers are still buying iPhones despite expectations that Apple, for the sixth year in a row, will revamp its smartphone lineup in or around September.

Investors and analysts will also be closely watching Apple’s fiscal fourth-quarter outlook. This is the period when new iPhones are often unveiled.

Analysts see the September quarter revenue of about $59.5bn, which would represent 15% year-over-year growth.

Apple’s fourth-quarter forecast will give clues to when the new iPhones will debut, according to Shannon Cross of Cross Research. Last year, the iPhone X was unveiled in November, later than usual.

Queues for the iPhone X

“We’re looking for 3% growth this quarter, 1% growth next quarter, and flat growth next year, leading analysts to model for the iPhone growth story coming to a close,” said Gene Munster, a veteran Apple analyst and co-founder of Loup Ventures. 

He sees annual iPhone unit growth of zero to 5% for the next several years.

Apple’s Services division is expected to pick up the growth baton from iPhones. 

The company wants Services to be a $50bn business in coming years, and analysts are expecting revenue from this business to top $9bn in the fiscal third quarter, according to Bernstein research.

Apple Music streaming subscriptions and App Store sales should power services growth in 2019.

Beyond that, the company’s impending online video offering may bolster the division’s expansion, Munster said. 

While Apple is expected to report solid revenue growth, the Trump administration’s simmering trade war with China looms over the company.

While products like the iPhone and iPad are designed in the US, they are assembled in China-based factories run by the likes of Hon Hai Precision Industry and Pegatron.

So far, Apple has not publicly been affected by tariffs, and chief executive Tim Cook has expressed optimism about Apple’s fortunes.

Still, the executive told Trump earlier this year that tariffs “were not the right approach”. And analysts will likely ask the CEO about this.

“Apple is going to have to address trade during the earnings call, especially given their extensive involvement in the Chinese supply chain,” Cross said.

My guess is that they will emphasize the investments they’re making in the US as that could be their best angle here.

Analysts differ on iPad performance in the fiscal third quarter. Cross Research is predicting iPad unit sales of 12.1 million, while Bernstein sees 10 million.

Apple rebooted its iPad strategy recently to focus on expensive Pro models and cheaper versions geared toward the education market.

Apple plans new iPad Pros with iPhone X features this year. 

That could boost iPad sales in the fiscal fourth quarter and the upcoming US holiday quarter, depending on when in 2018 the devices are upgraded.

Bernstein is predicting an iPad average selling price of $440 in the fiscal fourth quarter, suggesting the cheaper models will be more popular. 

IPad Pro prices range from $649 to $1,279, while the low-cost model ranges from $329 to $559.

Apple’s Other Products segment, one of its fastest growing, includes the Apple Watch, AirPods, HomePod, Apple TV, and accessories like the iPad’s detachable keyboard.

Bernstein expects revenue from the category to jump 40% year-over-year to $3.8bn in the fiscal third quarter. 

The company is planning its first full Apple Watch redesign and new AirPods later this year, Bloomberg News has reported.

Bloomberg


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