Apple's Holiday Forecast to Shed Light on Success of New iPhones

(Bloomberg) -- Apple Inc.’s earnings on Thursday will provide the first real insight into the success of the company’s new iPhones, especially the lower-priced XR model.

The focus will be on Apple’s fiscal first-quarter forecast covering the important holiday season, when the XR is expected to be a popular gift, luring owners of older iPhones to upgrade. Apple shares rose 0.2 percent to $219.38 at 2:26 p.m. in New York ahead of the results.

The world’s most-valuable public company is expanding more into digital services and has unveiled a slew of new gadgets and accessories in recent years. But the iPhone still looms large over Apple’s fortunes. The smartphone accounts for more than 60 percent of revenue and is the hub for most of the company’s other products. Wall Street expects Apple to sell 48.4 million iPhones in its fiscal fourth quarter and 77.7 million in the holiday quarter.

The iPhone XR is Apple’s biggest hardware bet of 2018. It retains the key advances of the first iPhone X -- facial recognition and an edge-to-edge display -- but is cheaper while being noticeably larger at 6.1 inches. Prices start at $749, at least $250 less than Apple’s high-end iPhones. Some reviewers criticized the LCD display, but many analysts expect the company has hit a sweet spot on the price tag.

"Guidance will be the most important driver of investor sentiment as it provides the first read on iPhone XR demand," said Morgan Stanley analyst Katy Huberty.

TF International analyst Ming-Chi Kuo recently raised his estimates for iPhone XR shipments due to the model’s relatively competitive pricing.

"We expect the iPhone XR to be the most popular iPhone in 2019, as consumers begin to see the phone in the wild and recognize its value," Gene Munster, a veteran Apple analyst at Loup Ventures, wrote in a research note.

Apple’s fiscal fourth-quarter results will capture about a week of sales of two of its three new iPhones -- the iPhone XS and XS Max. The iPhone XR didn’t go on sale until October and new iPads and Mac computers unveiled Tuesday will be available in early November.

Apple is expected to report revenue of $61.4 billion in the fiscal fourth quarter, helped by demand for the higher-end iPhone XS and XS Max models. Fiscal first-quarter sales, which capture XR demand, will be $92.7 billion, according to analyst estimate data compiled by Bloomberg.

While Apple shares fell roughly 3 percent in October, it has been among the best performing large technology stocks. Amazon.com Inc. and Netflix Inc. tumbled about 20 percent each in a month that saw the sector pummeled by rising interest rates, and concern over the economic outlook and tariffs. Apple’s resilience is all the more impressive considering the company is exposed to China at a time of escalating trade tension with the U.S.

Read more: Apple Options Suggest Outsized Earnings Move After Dodging Rout

Sales in Greater China accounted for 18 percent of revenue in the fiscal third quarter, down from 21 percent in the second quarter. Earlier this month, Goldman Sachs warned that weaker consumer demand in the country could hurt Apple.

"Much of Apple’s upside potential in our thinking was centered on Chinese demand for larger screen sizes," Goldman analyst Rod Hall wrote. "Should very weak consumer demand persist and impact the higher end of the market, Apple’s potential to beat and raise in fiscal 4Q is likely reduced."

The focus of Apple’s earnings call will probably be on iPhone average selling prices in fiscal 2019, said Munster. "While long-term iPhone unit growth will be in the low single digits, the company is finding new ways to make more money from their existing user base," he wrote.

When Apple launched new iPads and Macs this week, it raised prices and offered some tablets at almost $2,000. That’s a stark contrast to the rest of the tablet market, which has seen prices fall in recent years. Apple has also been raising prices on new iPhones, while most of the rest of the smartphone market experiences pricing pressure. The fanciest iPhone XS Max now costs $1,449.

Average iPhone selling prices will be $729 in the fiscal fourth quarter and $813 in the first, according to analyst estimates compiled by Bloomberg News. That’s up from $618 and $796 in the year earlier periods.

Just the numbers

• 4Q GAAP EPS estimate $2.78 (range $2.65 to $2.90)
• 4Q revenue estimate $61.44 billion (range $59.48 billion to $63.29 billion); forecast $60 billion to $62 billion
  • Services revenue estimate $10.18 billion (average of 4 estimates compiled by Bloomberg News)
• 4Q gross margin estimate 38.3%; forecast 38.0%-38.5%
• 1Q revenue estimate $92.74 billion (range $84.01 billion to $98.54 billion)
• 1Q gross margin estimate 38.6%

IPhones

• 4Q unit estimate 48.4 million (5 estimates)
  • ASP estimate $729 (4 estimates)
• 1Q unit estimate 77.7 million (5 estimates)
  • ASP estimate $813 (4 estimates)

Data

• 31 buys, 16 holds, 2 sells
• Avg PT $237.59 (8.2% upside from current price)
• Implied 1-day share move following earnings: 5.7%
• Shares rose after 7 of prior 12 earnings announcements
• GAAP EPS beat estimates in 11 of past 12 quarters
• Shares down 0.1% in past 5 days vs SPX Index up 1.0%
• Shares up 31.5% in past year vs SPX Index up 6.0%

Timing

• Earnings release expected 4:30 p.m.
• Call 5 p.m., (888) 254-3590; conference call website
• Follow Apple’s results on TLIV

To contact the reporters on this story: Jeran Wittenstein in San Francisco at jwittenstei1@bloomberg.net;Mark Gurman in San Francisco at mgurman1@bloomberg.net

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net, Alistair Barr, Andrew Pollack

©2018 Bloomberg L.P.