Apple Earnings: The 2 Main Areas to Watch


Apple earnings typically hit at about 4:30 p.m. EST. The earnings release will cap off what's been a wild quarter in the trading of Apple's stock that saw its shares plummet about 30% from highs reached in September, often with volatile streaks of up-and-down days not typically seen in companies of Apple's size. Just today, the company soared into the close in anticipation of earnings. With just minutes to go until their release, let's take a quick last-minute look at two areas that could have a big impact on Apple's earnings.

1. The headline figures: Sales, earnings, and guidance
What the market's immediate reaction will be based on: Any earnings release is quickly run through the filter of whether or not the company beat expectations. Apple is expected to post revenue of about $54.7 billion and earnings per share of $13.44. That'd lead to 18% higher sales than last year and 3% lower earnings.

What you should watch: Apple's recent plunge has been less about concerns over its sales, which are still seeing healthy growth over last year, and more about its gross margin declines, which have wiped out earnings growth. If Apple can post gross margins close to 40%, it'll likely beat expectations. However, the more important area to watch will be what Apple's guidance implies about next quarter's gross margins and margin comments on Apple's conference call after earnings.

Apple's margin decline is based in large part on the recent launches of the iPhone 5 and iPad Mini. As new products hit manufacturing lines, engineering difficulties mean initial product runs will be more expensive and subsequent runs will decrease in cost as those process improvements decrease manufacturing inefficiencies. With the iPhone 5 and iPad Mini having challenging builds due to innovations that were utilized to make them thinner and lighter, they were a large part of declining gross margins this quarter. Apple's forecast should be a better indicator of how serious the decrease of the company's gross margin is as a long-term concern.

2. Product sales
What the market's immediate reaction will be based on:iPhone sales are broadly expected to be about 48 million and 50 million in the quarter, with iPad sales estimates varying widely, but mainly concentrated in the 20 million to 25 million range.The iPhone figure will be the most closely watched and will drive the majority of Apple's revenue.

What you should watch: Early indications from American wireless carriers point to iPhone sales that could top expectations. One interesting wrinkle could be average selling prices on the iPhone and iPad.

Last quarter, the iPhone's average selling price was $636. The iPad saw an ASP of $535. The iPad ASP is set to drop significantly thanks to the introduction of the iPad Mini. However, the ASP on the iPhone could be interesting on its own. In last year's holiday quarter, the iPhone's ASP jumped to $659 from $643 in the preceding quarter. Early reports from Verizon show about 50% of users buying older 4 and 4S models to save money. More sales than expected of those older models could lead to lower-than-expected ASPs. If iPhone ASP dips significantly, it would be a drag on Apple's sales.

With the iPad, watching ASP trends could give a good feel for how meaningful the iPad Mini has become. Just remember to listen to commentary on Apple's conference call, as iPad Mini supply was constrained throughout the quarter, and CEO Tim Cook and CFO Peter Oppenheimer will give additional thoughts on the iPad Mini's availability and growth trajectory.

That's it for my quick look at Apple before earnings. Remember to check back to tonight and tomorrow for analysis on Apple's earnings and what they mean for investors going forward.

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Eric Bleeker, CFA has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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