Pondering Apple's Earnings

 | Jul 23, 2013 | 9:00 AM EDT  | Comments
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There is just enough disagreement to make Apple's (AAPL) earnings interesting when they are released Tuesday after the New York close.

There is one view that Apple will either disappoint on June quarter earnings -- or even worse, disappoint and then lower guidance for the September quarter. Another view -- and it is definitely a minority view -- is that there is the possibility that Apple will beat expectations for iPhone sales in the quarter.

First, let's look at the downside possibilities.

Recently, a number of key Apple suppliers (or suppliers for other smart phone makers) have either missed earnings projections or guided down for the September quarter. On July 18, Taiwan Semiconductor (TSM), which manufactures chips for Apple and Qualcomm (QCOM), guided to 3% to 5% sequential revenue growth for the September quarter instead of the 6% sequential growth Wall Street was projecting.

The consensus Wall Street projection for Apple's earnings stood at $7.31 a share for the quarter as of Monday, July 22. But with the range of earnings forecasts running from a low of $6.92 a share to $7.89 a share, you don't have to search very hard to find an analyst predicting a slowdown in iPhone growth in the quarter.

The consensus Wall Street projection for Apple's earnings stood at $7.31 a share for the quarter as of Monday, July 22, but with the range of earnings forecasts running from a low of $6.92 a share to $7.89 a share, you don't have to search very hard to find an analyst predicting a slowdown in iPhone growth in the quarter. The consensus already has a lot of bad news built in since it is looking for a 21.6% drop in earnings from the June quarter of 2012.

Second, let's take the upside view.

Until late last week there were no upside possibilities, according to Wall Street projections. But, then Verizon (VZ) reported 3.9 million iPhone activations in its second quarter, well ahead of expectations. Those sales at Verizon could translate into sales of as many as 30 million iPhones in the quarter, according to Morgan Stanley. That's a big jump from the 26.5 million or so in sales expected by the Wall Street consensus. (Last week Skyworks (SWKS), a supplier of components to Apple also reported better- than-expected results.)

The number of iPhones that were sold in the quarter is a critical component to Apple's earnings. The volume of iPhone sales will set the product mix for the quarter and determine Apple's margins for the June period. Wall Street has become very sensitive to Apple's margins in recent quarters.

Worries have proliferated that, first, the iPad mini with its lower margins was cannibalizing sales of higher margin iPad models. Second, there are concerns that Apple would be forced by competitors to come out with lower margin iPhone models.

In its last earnings call Apple told Wall Street to expect gross margins to fall between 36% and 37% for the June quarter. Wall Street will be listening carefully to the conference call to hear Apple's projections for the September quarter margins. The analyst consensus now is looking for 36.6% gross margins in the September quarter.

The other big conference call issue will be Apple's comments on the potential delay -- if any -- in the launch of the next generation iPhone during the September quarter. There's been enough talk of component delays to raise fears that the iPhone launch could be pushed off into the December quarter. Such a delay would certainly raise questions about how deep a cut in sales the problem might produce.

Apple is scheduled to report earnings after the New York close on Tuesday, July 23.

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