Equities: Apple Q1 18 Earnings Preview

Apple earnings preview: Could iPhone X sales guidance disappoint?

Apple said iPhone X pre-orders were ‘off the charts’ ahead of its fourth quarter earnings – but as we approach the first quarter 2018 earnings, it seems like the $1,000 device may not be all it’s cracked up to be.

Apple (AAPL) is due to report earnings for the quarter ending December 2017 on Thursday, February 1st, after the market closes.

Apple earnings what to watch:

iPhone sales

The iPhone still accounts for the largest share of Apple earnings, with around 50-60% coming from the device. Supply problems relating to the X were overcome and this may boost sales. However by bringing forward sales earlier, it could have the effect of denting sales guidance for the current quarter.

Record sales are expected - consensus estimates point to 79 million units sold during the quarter, which could deliver more than $59bn in revenue.

Total revenues are forecast at in excess of $86bn, up 11% from a year before in the peak trading quarter. In the most recent call management guided earnings in the range of $84bn-$87bn. Net income is being called at $19.6 billion, equating to a consensus EPS of $3.84.

Don’t forget Apple is coming off a strong quarter: revenues rose 12.2% to $52.6bn with EPS at $2.07 in Q4 to comfortably exceed expectations.


Guidance will be crucial – anything short of the $66bn-$69bn being forecast for the March quarter will rattle investors.

Shares were down on Monday after a report in the Nikkei said that Apple planned to cut its production target for the device in the quarter ending March from 40 million units to 20 million. There are clearly concerns that the phone is at the top-end of budgets but nevertheless with the iPhone 8 and 8 Plus in the mix there are expectations that average selling prices will climb towards $800. With the iPhone X coming in at $1,000, the price elasticity of consumers is being tested severely.


Investors will also be looking at gross profit margins as sign of what impact the high-end X has on profitability. Q1 of fiscal 2017 was 38.5%. The high price for the X should support further margin accretion and allows Apple to offset slower volume growth. As stated above, the higher selling price is a key part of Apple’s strategy.


Services revenues have exploded and continue to offer investors an attractive revenue stream that is more sustainable and durable than hardware sales. Services revenues jumped 34% in the last quarter to $8.5bn from $6.3bn in the year ago period – smashing expectations for 20% growth. Growing Services revenues are crucial to AAPL enjoying higher multiples – another leap would be as important for the stock as strong iPhone sales. Estimates again suggest growth of around 20-25%.

Other products

We’ve seen iPad sales bounce back with a 14% rise in Q4 and the holiday trading season will likely see this trend continue. Mac sales are also performing well – rising 25% in the last quarter. The Other Products segment produced earnings growth of 36% in the last quarter and the run rate is expected to remain at or close to this level.


Apple has suffered falling sales in Greater China but the X could be the answer. The high spec, high price iPhone 8 should offer Apple a stronger, more differentiated position in this particular market. The market accounts for about one fifth of Apple revenues but revenues fell 17% in 2016. A return to growth here is important and the new cycle offers a compelling argument for this to happen in FY2018.


The earnings update may also provide further information on plans to repatriate cash, although we may have to wait a further three months for an update on buybacks and dividends. Apple has already said it will take a one-off $38 billion charge in respect of the new tax regime.


AAPL stock has disappointed in 2018, with a slight decline registered against firm gains for the broader tech sector. In trading on Monday the stock was seen around $167, or about 6% off its record high hit earlier in the month.

We have to look at doubts around the iPhone X as the chief cause of this, but this could create the circumstances for a bounce back to record highs a $179 if earnings beat and, crucially, guidance remains at the top end of estimates. Trading at 18 times earnings, AAPL is still well below its tech peers in valuation terms; something that bulls consistently point to in relation to soaring Services revenues as a reason to be optimistic. But with earnings still so heavily dependent on the iPhone, sales of the device remain the key metric in the short term.

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