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Factors That May Impact Apple's (AAPL) Earnings in Q4

Apple, Inc. AAPL is set to report fiscal fourth-quarter 2017 results on Nov 2 after the market closes.

Apple still depends on iPhone to drive its top line. However, a fast growing services segment is emerging as a big growth catalyst along with a resurgent iPad business (as seen in the last reported quarter).

For the fourth quarter of fiscal 2017, the Zacks Consensus Estimate for Apple’s earnings per share and total revenues are projected to be $1.86 and $51.171 billion representing an increase of 11.4% and 9.2% from the fourth quarter of fiscal 2016.

Fortunes Remain Tied to iPhone

Revenues from iPhone segment have become the mainstay of Apple’s top line. The segment constitutes about 60% to 65% of total revenues. The about-to-be reported saw the launch of the much awaited iPhone 8 and iPhone 8 Plus.

The new models were launched on Sep 22, 2017 and as a result will include sales for the first nine days only. Per media reports, iPhone 8 sales have been marred by the lowered iPhone 7 prices as well as the excitement around the iPhone X.

iPhone X and iPhone 8 carry a slight price difference. As a result, consumers are waiting for iPhone X or are more interested in iPhone 7 as it is not much different from its successor, add media reports. Also, decelerating iPhone sales are due to increased competition from cheaper handsets like Oppo and Vivo.

However, many analysts observe that unit volume metric has become a little less relevant as Apple is focusing on “aggressive pricing.” Both iPhone 8 (& 8 Plus) and iPhone X cater to high-end consumers. Increased price will help to cushion the topline in the face of lower volume growth and boost gross margins as well.

For the fourth quarter, the Zacks Consensus Estimate for total iPhone units sold is expected to be 46.423 million, up 2% from the actual figure reported in the fourth quarter of 2016. Total revenues from iPhone and related products and services are projected to be around $29.6 billion, up 5.2% from the actual figure reported in the prior-year quarter.

Fast Growing Services Segment

Apple’s Services segment, which includes revenues from Internet Services, App store, Apple Music, AppleCare, Apple Pay, licensing and other services, has become a fast growing segment. The company remarked that the segment is now the size of a Fortune 100 company, much earlier than the company had expected. Services segment has over 185 million subscribers.

Much of the growth comes from App store and this quarter isn’t going to be any different. Given the release of iOS 11, app store revenues are expected to benefit all the more as the App store has been revamped completely. There is now a dedicated games tab in the App store.

For the fourth quarter, the Zacks Consensus Estimate for revenues from iTunes, Sofware and Services stands at $7.613 billion, up 20.4% from the actual figure reported in the prior-year quarter.

Recovery Seen in iPad Business

Coming to the iPad business, Apple saw an impressive recovery in the iPad business in the last reported quarter. The iPad business has long been in doldrums. However, increasing sales in the United States, China and Japan, has helped to reverse the drop in unit sales. Sales of iPad witnessed a 32% surge to 1 million units in the U.S education market. iPad is gaining traction among schools driven by the wide range of multimedia features of the education specific iOS applications. Going ahead, a refresh of the iPad lineup will help to sustain the momentum seen in the business.

For the fourth quarter, the Zacks Consensus Estimate for revenues from iPad business stands at $4.32 billion, up 1.5% from the actual figure reported in the prior-year quarter. The Zacks Consensus Estimate for total iPad units sold is expected to be $9.948 million, up 7.4% from the actual figure reported in the fourth quarter of 2016.

What the Zacks Model Unveils?

Our proven model conclusively shows that Apple is likely to beat earnings estimates this quarter. Per our model, a stock with a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold), has higher chance of beating estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Apple currently carries a Zacks Rank #3 and has an ESP of +1.17%.

Apple Inc. Price and EPS Surprise

Apple Inc. Price and EPS Surprise | Apple Inc. Quote

Some Other Stocks With Favorable Combination

Here are a couple of companies which, as per our model, have the right combination of elements to post an earnings beat this quarter:

NVIDIA Corp. NVDA, with an Earnings ESP of +0.53% and a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

HubSpot, Inc. HUBS, with an Earnings ESP of +26.53% and a Zacks Rank of 2.

AMTEK, Inc. AME, with an Earnings ESP of +0.18% and a Zacks Rank of 3.

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