Apple's second fiscal quarter results, now due to be reported on April 26, are likely to contain a lot of bad news -- though the company will still be reporting growth rates and profits any other company would be envious of. The problem is not that Apple is in any kind of trouble -- sales dropoffs are common following blockbuster holiday quarters -- it is that the rate of the dropoff will be bigger than last year, and may be more severe than even Apple has predicted, according to some analysts. However, other areas of possible growth -- such as Apple's "services" sector
-- could help bolster the overall financials, even if they can't replace the drop in iPhone sales.
Apple has already braced Wall Street for a difficult report that the company expects will include Apple's first-ever year-over-year decline in iPhone sales. In part, this can be blamed on spectacular sales of the iPhone 6 line in 2015, which answered long pent-up demand for larger-screen iPhones. Persistant rumors have suggested that the iPhone 6s will not endanger those sales records, though the line is still likely to be among the most successful individual brands of smartphone in the world.
Illustration of why 2016 has been a 'tough compare' year
Analysts have based their predictions on unconfirmed rumors of order cuts from Apple to its suppliers, and the somewhat more-reliable indication of falling profits and several of Apple's manufacturing and supply partners. During its last conference call, Apple guided for revenues of between $50 billion and $53 billion during the March quarter, but said it would be the "toughest compare" to year-over-year figures, with sales doing better in the June quarter on a y-o-y basis. However, some analysts are now questioning even that.
Despite the arrival of the well-received iPhone SE
in March, pundits from UBS and Rosenblatt Securities believe iPhone sales -- generally the only product Apple makes that Wall Street cares about -- will continue to compare poorly to the year-ago quarter for the June quarter as well. "We believe the market is too focused on iPhone SE's initial sell-in, and over-looked the iPhone 6s sell-through, said Rosenblatt's Jun Zhang, claiming that Apple cut planned production on the iPhone 6s by four million units.
UBS analyst Steve Milunovich, citing the poor performance of chip supplier TSMC, agrees that iPhone orders are on the decline -- even though UBS recently raised it's forecast of iPhone sales to be more optimistic, going from an estimate 42 million to 48 million units shipped, and well above the current Wall Street consensus of 44 million. At least one analyst, however, believes the rapid growth Apple's services business -- which includes the App Stores, iTunes, Apple Pay, Apple Care, and Apple Music -- could push overall financials up over the gloomier expectations.
Gene Munster of Piper Jaffray has revealed an analysis of Apple's mostly glossed-over services sector, noting that it saw double-digit growth of 24 percent in the its 2016 first fiscal quarter (the holiday quarter of 2015) year-over-year, compared to overall Apple revenue growth of two percent for the company as a whole in that quarter compared to a year ago. Munster told investors that iTunes alone is likely to have a 30 to 40 percent profit margin thanks to its strong growth as the iOS ecosystem continues to strengthen.
Overall, Munster believes that the profit margin of the whole services sector could be as high as 59.2 percent. While even continued growth would be relatively small potatoes compared to the kind of income iPhone sales bring in, it was responsible for nearly $9 billion in revenue in the December quarter, and is expected to rise to account for 10 percent of Apple's overall revenues by 2017. Apple Music alone, for example is likely to contribute $2.6 billion in revenue next year, assuming it hits 20 million subscribers (which it may have already come close to doing).
The growth won't save Apple's bottom line from falling iPhone sales (at least until the next flagship model comes along), but could buffer some of the expected drop and help the company hit its guidance. Other factors, such as strong foreign-currency headwinds, aren't expected to change anytime soon, but could also help Apple's overall fortunes a few years out.
Piper Jaffray has raised its estimate for Apple growth for 2016 to 14 percent, up from 13 percent, and its estimate of 2017 growth to 12 percent, up from eight percent. UBS' Milunovich is maintaining a "Buy" rating for AAPL, expecting slightly-above-consensus income for both the March and June quarters, with a target price of $120 per share. Rosenblatt's Jun is maintaining a "Neutral" evaluation, and did not mention revenue estimates for the current quarter in his memo.