Apple expected to post third consecutive down quarter, but its forecast is more important

Apple is expected to post its third consecutive quarterly revenue decline when it reports earnings after the bell on Thursday. Wall Street expects $81.7 billion in sales, which would be down about 2.3% from last year.

Apple stock is up over 51% so far in 2023, hitting all-time highs. Investors see it as a safe haven with strong cash flow, despite worries about slowing demand for consumer goods, including PCs and smartphones.

Analysts will also want to hear about how the current quarter, which ends in September, is shaking out. Apple hasn’t given guidance since 2020, citing uncertainty, but it provides investors with some data points that they can use to determine whether Apple sees overall sales growing or shrinking.

The company’s forecast will be more important. It may give clues as to whether global economies are set up for a “soft landing” after two years of interest rate hikes.

The June period is typically Apple’s slowest quarter of the year, while its fourth fiscal quarter often captures back-to-school laptop spending, a few days of new iPhone model sales — which usually come out in September — and shows Apple’s momentum heading into the holiday season.

“What will matter most will be management’s September quarter,” wrote Morgan Stanley analyst Erik Woodring in July, adding that he expects Apple to guide to year-over-year revenue growth again.

Some analysts are eager to see Apple give data points on India sales. Cook traveled to the country in April and spoke about hopes for significant growth in the region. India became one of Apple’s top five iPhone markets during the quarter, according to analyst estimates.

“On the call, we look for additional details on its expansion in India, including its retail and manufacturing presence,” D.A. Davidson analyst Tom Forte wrote this week.

But Apple’s older growth driver, China, is likely to be closely watched as well. Greater China — including Hong Kong and Taiwan — is Apple’s third largest sales region, and it has reported two straight quarters of revenue decline, even as the region re-opened after years of strict covid lockdowns.

“In our conversations, most investors feel that a soft China could pose a risk to the numbers and further commentary, but we feel that Apple’s position in China is on a solid footing and that the company is likely to see only a small if any decline in its iPhone sales,” wrote Piper Sandler analyst Harsh Kumar.

Kumar said if China ends up being weak, it could be offset by strong sales momentum in India.

Apple mainly manufactures in China and investors will want to hear that the company has overcome many of the supply chain snags that have hampered sales over the past two years. If Apple stockpiled parts and has enough to make what it needs to produce, it could help margins, analysts say.

Apple’s profitable services division includes monthly subscriptions such as Apple Music, warranties under AppleCare, fees from the App Store, advertising revenue from search licensing agreements with Google, payments from Apple Pay, and other products.

Wall Street likes to see Apple’s services business grow regularly and smoothly, because the margins on services are so much higher than when Apple sells hardware. In particular, many analysts want to see services re-accelerate after a few quarters of weak growth because of lagging App Store software sales.

Apple suggested a 5% year-over-year increase in services, and FactSet’s estimates more than $20.7 billion in revenue. But analysts will want to see Apple signal more growth than that.

“For the Services business, we expect year-over-year revenue growth to accelerate from the +5% level expected in [fiscal third quarter,] with our checks suggesting online advertising has improved,” Deutsche Bank analyst Sidney Ho wrote.

Analysts will also likely ask about artificial intelligence, given the industry-wide obsession with the technology and a recent Bloomberg report that Apple is developing a ChatGPT-like AI model internally. Don’t expect Apple to gush about what it’s working on internally, though.

“With the official intro of Vision Pro, we expect Apple’s updated comments on its AI aspirations to be a focus (albeit likely very high-level),” wrote Wells Fargo analyst Aaron Rakers.

Apple reports its results by product line, which can give investors a look into which businesses are thriving and which ones are in a down cycle.

IPhone, iPad, and Mac sales are all expected to be down on an annual basis, with iPad sales projected to drop nearly 11%, according to FactSet estimates. Wearables, the product category with headphones and Apple Watch — and what will likely be the reporting category for Vision Pro when it goes on sale — is projected to decline less than 1%.

However, analysts expect Apple’s services business to grow 5.2% on an annual basis, which would be a bright spot for the report.

Here’s what Wall Street is expecting, per FactSet estimates:

• Revenue: $81.7 billion
• EPS: $1.19 per share

Here’s what to expect from the company’s product lines, per FactSet estimates:

• iPhone revenue: $40.2 billion
• iPad revenue: $6.4 billion
• Mac revenue: $6.3 billion
• Other products: $8.3 billion
• Services: $20.7 billion