Apple Delivers Mixed Quarter Amid Seasonal Lull; All Eyes Beyond June

Apple Inc.'s AAPL March quarter results were mixed amid the seasonal lull. The spotlight, according to Oppenheimer, is now beyond the June quarter.

Analysts Andrew Uerkwitz, Martin Yang and Paul Dean broached the question of further margin pressure. The analysts noted that the company expects near-term pressure due to lack of scale in June, forex headwinds, and elevated memory prices, although expecting improving efficiency and higher mix of services revenues to be offsets.

The analysts are skeptical whether service revenue growth can materially alleviate the structural pressure on gross margin.

Tight-lipped on Competitive Pressure in China

Oppenheimer noted that CEO Tim Cook didn't comment on local competition when probed over the weakness in Greater China. Cook suggested forex, declining Hong Kong sales and older iPhone sales were sources of weakness, while he touted record sales of iPhone 7 Plus and growth in Mac, service and retail and online store revenues.

Bubbling Service Momentum

Oppenheimer pointed to App store revenue growth of 40 percent year-over-year. The firm sees the 165 million paying service subscribers and the growth in the average revenue per paying users during users' stay in Apple's ecosystem as signs of strength. That said, the firm isn't confident the magnitude is enough to offset iPhone's projected decline following the fiscal year 2018.

Apple's Goal of Doubling Services Revenues By 2020

Oppenheimer wishes to learn more about the company's rationale for a doubling of projected service revenues by 2020.

"While App Store still shows impressive growth today, we expect dwindling benefits from new additions to the iOS ecosystem. We wonder whether Apple has factored in any new device or services in that projection," the firm added.

Adjusting Estimates

The firm is raising its fiscal year 2018 earnings per share estimate on higher iPhone ASP assumptions. However, the firm lowered its fiscal year 2019 and 2020 earnings per share estimates due to higher share count assumptions.

Concluding, Oppenheimer said, "we believe most investors will look beyond March and June and focus on the positive impact of iPhone 8 cycle. Scrutiny on emerging negative signals on continuously declining China sales and margin headwinds is likely brushed aside post iPhone 8 release."

Oppenheimer reiterated its Perform rating on shares of Apple.

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