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Earnings preview: Apple’s revenue growth may extend declining

Apple

Apple will report its fiscal third-quarter earnings after the US markets close on 4 August (APAC time). The tech giant rose about 56% from its January low and topped a 3 trillion market cap in early July, consolidating its position being the most valuable business globally. Apple has recently released its Vision Pro headset and was reportedly to develop its own AI large language model internally, a so-called Apple GPT. All the new development has added to the enthusiasm of Apple investors. However, Apple is still a hardware-driven business, and its iPhone sales remain the focus of its upcoming earnings report.

Q1 review

Apple’s year-on-year sales revenue declined 3% in the fiscal second quarter, following a 5.49% decline in the prior quarter. The two consecutive quarterly declines suggest that the tech giant is experiencing a challenging time amid the micro headwinds. But Apple topped analysts’ expectations in both its EPS and overall sales revenue in the March quarter, reporting at $1.52 and $94.84 billion, respectively.

In Apple’s last earnings report, iPhone sales rose only 1.5% from a year earlier due to a sales rebound in China after the country lifted its strict Covid-zero policy. All the other hardware sales dropped significantly, with Mac revenue down 31% to $7.17 billion and iPad down 13% to $6.67 billion. The service segment was the best performer, up 5.5% year on year, indicating the company may have been shifting its focus to software development from a hardware-concentrated business. Apple’ s finance chief officer, Luca Maestri, expects overall revenue will decline about 3% in the June quarter.

Business growing focus

Apple’s iPhone sales account for about 54% of its overall revenue in the fiscal second quarter. Hence, phone sales revenue will be key for Apple’s upcoming earnings. The fiscal third quarter is usually a weak season for Apple as buyers tend to wait for the new series of products to be launched in September. Plus, China was experiencing a bumpy period in its economic recovery due to weak domestic demands, which may have negatively impacted iPhone sales, given that the Great China market accounts for about one-fifth of Apple’s sales. But Apple expects to sell 85 million units of iPhone 15 this year, in line with its 2002’s target. It is reportedly to raise prices for iPhone 15 to improve its profit margin amid a decline in iPhone sales due to macro headwinds.

The service sales could stay the bright spot in its upcoming earnings report. The service division accounts for about 22% of Apple’s overall revenue, becoming a major contributor to Apple’s growth.  Apple services, like Apple Store, Apple Music, Apple TV, Apple Pay, and iCloud, have been growing at a stable pace in the past year. The development in Apple GPT may provide further potential for this division. 

Forecast by Bloomberg

EPS: $1.2, + 0.0% annually

Overall Revenue: $81.53B, - 1.7% annually

Product sales: down 4%, with a bigger decline in iPhone sales

Service Revenue: $20.7 billion, +6% annually

Operating margin: 27.7%, -9 bps

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