Apple Q4 Earnings Preview: New iPhones, China, Services And More

Apple Inc. AAPL, which hit the $1-trillion market-cap milestone in the September quarter, is gearing up to release fiscal fourth-quarter results after the close Thursday, Nov. 1 amid the launch of three iterations of the iPhone X: the iPhone XS, iPhone XS Max and a cheaper iPhone XR.

Expectations

The Street consensus is modeling 34-percent EPS growth to $2.78 and 17-percent revenue growth to $61.59 for the quarter, which is Apple's second-busiest, as it encompasses back-to-school sales.

For the full year, analysts, on average, estimate EPS of $11.79 on revenue of $264.05 billion. This compares to the EPS of $9.21 and sales of $229.23 billion the company reported for fiscal 2017.

Higher ASP To Prop Up iPhone Revenues In Q4

The average selling prices of the iPhone could boost the September quarter results, Wedbush analyst Daniel Ives said in a note. The analyst forecast Q4 iPhone unit sales of 48 million, which is roughly in-line with consensus, and ASPs trending toward $800, which is likely to catalyze an earnings beat.

Apple earns roughly three-fifths of its revenue from the iPhone. 

Ives has an Outperform rating on Apple with a $310 price target.

Citing supply chain and store checks, Ives said he is positive on XR demand.

Loup Ventures' Gene Munster estimates iPhone sales of 48.1 million units, underlining its evolution as a stable business.

China A Drag On Services Revenue?

Even as Wedbush is calling for healthy Services sector performance in the September quarter, Morgan Stanley's Katy Huberty said she expects the segment's revenue to trail expectations.

The analyst expects softness in App Store revenues due to a slowdown in gaming-related App Store revenue in China. China, where regulators have paused gaming license approvals. 

Huberty projects September-quarter Services revenue of $9.8 billion, below the $10.1-billion consensus estimate.

Bank of America Merrill Lynch analyst Wamsi Mohan projects Services revenues of $10.711 billion, representing 26-percent year-over-year growth.

Loup Ventures' Munster predicts the Services segment will post 20-percent growth, in-line with the Street. This represents a slowdown from the 28-percent growth in the June quarter, with tougher comps to blame. 

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Outlook Remains Mixed

Apple's outlook for the December quarter, encompassing the key holiday season, is the key Thursday, rather than Q4 results said Wedbush's Ives.

The guidance will serve as a key barometer of health for the XS/XR iPhone demand cycle, he said. 

The XR could help Apple further penetrate the Chinese consumer market in fiscal 2019, with Ives estimating roughly 60-70 million iPhone unit shipments in the region, which is on the cusp of an upgrade.

Ives dismissed worries that the XR, which has a base price of $749, will negatively impact ASPs. The analyst expects roughly two-third of the total sales of XR iPhones to come from the $899 price point. This, along with the $1,000-plus XS/XS Max, will drive ASPs toward $800-plus as opposed the consensus ASP estimate of $700, Ives said. 

BofA's Mohan isn't equally enthusiastic. Although Mohan expects an above-consensus September quarter, he lowered his December quarter as well as 2019 iPhone unit shipment estimates, citing a slowdown in China and forex headwinds.

The analyst forecast a double-digit unit decline, but said he expects ASP to drive revenue. 

Mohan now estimates iPhone shipments of 73 million for the December quarter and 214 million for fiscal 2019. This a pullback from his earlier estimates, which called for 77 million and 222 million, respectively. 

BofA raised its 2019 Apple Watch estimate from 39.3 million units to 42.3 million units.

Mohan said he expects Apple to guide to a December quarter revenue range of $90 billion to $93 billion and a gross margin of 38-38.5 percent.

Notwithstanding the end-market weakness in iPhones, Mohan reiterated a Buy rating on Apple on the basis of strong Services growth, strong capital return and cash balance. The analyst lowered the price target from $256 to $235. 

Munster said the focus on the earnings call is likely to be the management view on iPhone ASPs in 2019. He expects ASPs to land at $791, outperforming the $756 consensus, as Apple finds ways to counter weakness in volume in the long-term.

Loup Ventures forecast the midpoint of the December quarter revenue guidance to be 3 percent ahead of the Street estimate, which would translate to revenue of $99 billion.

The Price Action

Apple shares have been rangebound since late August, trading between the $214 and $232 levels amid the broader market weakness. On Oct. 3, the stock hit an all-time closing high of $232.07 before pulling back.

The stock is trading below its 50-day moving average, currently at $219.38, which should serve as a key resistance level. The 14-day RSI at 47 is suggesting the stock is at a neutral zone.

" ... We believe Apple's earnings and more importantly guidance around initial iPhone demand heading into year-end and its trajectory for 2019 will be a positive catalyst for Cupertino (and its investors) as well as the overall tech sector," Wedbush's Ives said.

Apple shares have gained about 29 percent year-to-date.

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Photo courtesy of Apple.