Apple Inc (AAPL) Q2 2014 Earnings Preview: International iPhone Sales Creates Holding Pattern In Fiscal Second Quarter

 
on April 22 2014 8:58 AM
  • China iPhone Shanghai March 2013
    A woman uses an iPhone in Shanghai, China. Reuters
  • Apple
    Apple did not introduce any new products during the second quarter, but it made some changes to its existing device line-up. Reuters
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The upcoming earnings report of Apple Inc. (Nasdaq:AAPL) will likely disappoint retail investors, many of whom have grown impatient with the tech giant's flat iPhone sales, but professional analysts see a vibrant company with continuing huge innovative potential.

Analysts polled by Thomson Reuters expect, on average, the Cupertino, Calif., company, which is set to release its fiscal second-quarter earnings Wednesday after the markets close, to report net income of $9.1 billion, or $10.17 per share, compared with $9.55 billion, or $10.09 per share, in the January-March period of last year. Revenue is expected to be $43.55 billion compared with $43.6 billion in 2013.

Even though Apple's revenue is expected to be flat, Wall Street would not be surprised by strong iPhone sales. 

“Recent promotions, like those at U.S. carriers and retailers, and product adjustments, notably the introduction of an 8GB iPhone 5c in some regions, may have stimulated demand (for the iPhone) more than expected,” Katy Huberty, a Morgan Stanley analyst, wrote in a note recently.

She also cited “upcoming product launches, including iWatch, iPhone 6” and a larger iPad.

So the iPhone is doing fine, and Apple is set to release new products that are expected to tap new consumer markets.

UBS and Credit Suisse also believe the growth will come, though not until Apple’s fiscal fourth quarter.

UBS’ Apple analyst Steven Milunovich stated that Apple was in a “holding pattern,” as it relied heavily on the iPhone 5s and iPad Air sales to coast through the second quarter. “We expect March results a bit ahead of consensus but a mediocre June guidance given apparent lack of momentum at China Mobile and in the iPad category,” Milunovich stated in earnings preview. “New products should drive the story later this year and into next, including the iPhone 6 and potential new categories that are not in our estimates.”

Credit Suisse analyst Kulbinder Garcha mirrors the UBS analysis, stating that March earnings will be neutral due to “weak initial China Mobile sales.” Apple released the iPhone 5s on the Chinese mobile carrier in mid-January. Garcha also noted that iPad sales were losing shares “as low-end tablets continue to grow.”

Regardless of the lack of product releases in the second quarter, Apple is expanding its offerings, as its first wearable, the iWatch, is expected to debut this fall. The nascent wearable market is attractive to Apple, a well-documented innovator. Much as the iPad changed the landscape of tablets, the iWatch, if done right, has the potential to disrupt the wearable market, bringing health and fitness applications to the forefront of mobile technology.

“We believe the rumored iWatch will be Apple’s most important product this year,” KGI Securities analyst Ming-Chi Kuo recently said, “carrying much more weight than the iPhone 6, as market feedback for the product should reveal whether Apple still has the ability to continue making game-changing products with Tim Cook at the helm.”

Despite his involvement with major product releases like the iPad, CEO Tim Cook has been forced to live in the shadow of Steve Jobs since the founder died in October 2011. During Jobs’ extended period of failing health from 2004 to 2011, Cook occasionally acted as CEO and ran day-to-day operations. However, the iWatch will be the first major product release under Cook’s direct control, so it will serve as an indicator of where the company is headed.

Credit Suisse’s Garcha, however, is concerned over Apple’s lack of offerings in the lower-end smartphone market. “Long term we remain concerned with Apple’s decision to address only the high end of the smartphone market,” he said.

Apple is facing a long year before their next generation devices will launch. Kuo gave a possible timeline for the product releases, beginning in the fall. Considering the start dates are just under six months away, and Apple’s notorious tight-lipped policy on device information, much of the information is speculation. The only solid information will come at the Worldwide Developers Conference (WWDC), Apple’s annual developers’ conference, where iOS 8, Healthbook, Apple’s health and fitness centric app, and new Macbooks will most likely be discussed. 

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