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Apple earnings: iPhone X supply is the question, but the answer may not matter

Apple Chief Executive Tim Cook could give some interesting insight into iPhone X supply Thursday. Or not.

Apple Inc. investors and analysts are convinced that the $1,000 iPhone X will lead to a return to revenue growth for the world’s most valuable company, and questions about when it will actually make it into willing buyers’ hands don’t appear to have an effect.

When Apple announces fiscal fourth-quarter earnings after the bell on Thursday, it will be just hours before the iPhone X goes on sale at Apple stores in the U.S. and more than 50 other countries the next morning. While the annual sights of fans lining up outside Apple Stores for the newest iPhone were few and far between when the iPhone 8 and iPhone 8 Plus were released last month, Apple seems to expect more for the iPhone X, announcing in a news release last week that fans “are encouraged to arrive early.”

Apple’s earnings report will include the initial sales of iPhone 8 and iPhone 8 Plus, but the company is not expected to get the same boost it usually does from an iPhone launch at the end of its fiscal year. Many iPhone buyers are reportedly waiting to buy the iPhone X instead, though persistent rumors of production issues have raised concerns about whether Apple is going to be able to build enough phones to satisfy demand of early adopters.

Don’t miss: The iPhone X and other new gadgets that will matter this earnings season

That will make the forecast Apple provides Thursday more important than the actual fourth-quarter financial results, and expectations are currently huge. Analysts on average predict record quarterly revenue for Apple of $85.56 billion, according to FactSet; Apple has never before hit $80 billion in quarterly sales.

Preorders of the iPhone X began Friday, and consumers quickly began receiving delayed delivery times of more than a month. However, just as analysts were unconcerned about a later launch date for the iPhone X getting in the way of their constant predictions of an iPhone “supercycle,” they are convinced that initial shortages of the iPhone X will just mean the billions of dollars headed Apple’s way will take a little longer.

RBC Capital Markets analyst Amit Daryanani said in a note last week that the long-hypothesized “supercycle” is in fact going to be a “superlong cycle,” which will lead to prolonged growth in Apple’s iPhone sales, revenue and profit though the 2019 fiscal year. Daryanani, who rates Apple stock as outperform with a $180 price target, contends that a “superlong cycle” is actually preferable for Apple and its investors.

“We think the ‘superlong’ cycle scenario is more attractive as it enables a longer, extended cycle that dampens the general seasonality seen with iPhones as iPhone X drives sales into March and June quarter,” the analyst wrote.

In case he was not direct enough in that note, Daryanani checked back in Monday morning and specifically said that Apple is positioned to miss expectations with its guidance the holiday quarter. And, he said, it doesn’t matter in the long run.

“Simplistically, whatever Apple guides for Dec-qtr is a reflection of their supply and not true end-demand, hence we see potential for Dec-qtr guide being below Street but we see upside to march-qtr expectations as supply eventually catches up,” he wrote.

What could matter is what Chief Executive Tim Cook says about the rollout in Thursday’s conference call, as his words will be parsed tightly by anxious investors.

“What we think matters is Apple’s commentary around supply constraints and path/timeline to alleviating them,” Daryanani wrote.

What to expect

Earnings: Analysts on average expect Apple to report net income of $9.7 billion, or $1.87 a share, according to FactSet, up from $1.67 in the same quarter a year ago. The consensus on Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of $1.90 a share.

Revenue: Analysts on average expect Apple to report sales of $50.69 billion, up from $46.85 billion a year ago, after the company issued a quarterly forecast of $49 billion to $52 billion in its last earnings report. That total would give Apple’s full-year revenue a boost from $215.6 billion in 2016 to $227.4 billion, after the company’s revenue declined in the 2016 fiscal year for the first time since the first iPhone was launched. Estimize contributors on average expect slightly higher sales of $51.44 billion.

Stock movement: Apple hit record intraday prices Monday before recording its first closing high since Sept. 1. Shares have gained 44% in 2017 through Monday, as the Dow Jones Industrial Average DJIA, +0.16% which counts Apple as a component, gained 18.6% and the S&P 500 SPX, -0.07% increased 15.3%.

Apple has not exactly been a powerhouse after earnings reports, however. Shares have declined in the session after earnings in six of the past 10 quarters.

Analysts on average rate Apple stock the equivalent of buy, with 30 rating it overweight or buy, six rating the stock a hold, and only one calling it a sell, according to FactSet. The average price target is $179.28, 9.3% higher than Friday’s closing price.

What to watch for: iPhone sales and the first-quarter forecast will be the most anticipated disclosures from Apple, as investors and analysts try to ascertain how many iPhone 8s Apple sold when they launched in late September, and how many iPhone X units the company expects to sell before the end of the calendar year.

“We view the upcoming September quarter…and early November earnings call (day before official iPhone X launch) as the drumroll around guidance for the December quarter with all eyes on tracking consumer/supply chain data points of iPhone X heading into its official launch,” wrote Daniel Ives, chief strategy officer and head of technology research for GBH Insights.

Analysts are currently modeling for record quarterly revenue of $85.8 billion for Apple’s first fiscal quarter, after pushing back expected revenue from the fourth quarter in response to Apple’s delayed launch of the iPhone X. Analysts on average expect Apple sold 46 million iPhones in the fiscal fourth quarter, which would mean a full-year total of about 216 million iPhones, up slightly from 212 million in the 2016 fiscal year. While that is a small gain, it could be a psychologically important one after iPhone unit sales declined in 2016 for the first time.

Apple also discloses unit sales of its iPad tablets and Mac personal computers, though they aren’t tracked as closely as the iPhones. The iPad surprisingly enjoyed its first year-over-year growth in units sales in the third quarter thanks to Apple’s efforts in the education and enterprise space. Early third-party analyses of PC sales in the back-to-school quarter showed Apple sales steady to slightly improved from the previous year, so any color executives give about whether they see the iPad or the Mac as their best offering for education will be of interest. Analysts on average expect that Apple sold about 10 million iPads and 5 million Macs in the third quarter.

Apple’s two other segments beyond iPhones, iPads and Macs are expected to show the greatest revenue growth by percentage in the fiscal year: Software and services, and “other products.” Software and services, which includes the cut Apple takes on apps and subscriptions purchased through its App Store as well as offerings like Apple Music, is now the second largest segment for sales behind the iPhones, as CEO Cook loves to point out. Analysts on average expect the software and services segment to produce fourth-quarter revenue of $7.56 billion, which would mean an annual total of slightly more than $29 billion.

Apple’s “Other products” category is made up of sales of the Apple Watch, accessories like Beats headphones, and the iPod. While Apple does not break out smartwatch sales individually, a big move in this segment could signal early adoption of the new Apple Watch Series 3, which launched about a week before the end of the quarter like the iPhone 8 and is the first Apple smartwatch to offer cellular connectivity even when the paired iPhone is not nearby.

Analysts on average expect Apple sold $2.8 billion in the segment, which would put it at $12.5 billion for the year.


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