Ahead of Apple Earnings, Are There Guidance Clues?

In just a matter of days, all eyes will be on Apple (AAPL 0.64%) as it steps up to the earnings plate on Wednesday. Some analysts have characterized this as Apple's most important quarterly release of the past decade. That's because shares have experienced a gut-wrenching 30% pullback since September, as investors seem to have lost confidence in the iPhone maker, even though there are no signs of deterioration in its fundamental business.

One way to form expectations for Apple is based on exactly what it tells you: guidance.

The guidance game
Apple plays the guidance game, but historically it has done so in a way that's almost comically low. The company also doesn't update guidance, so it's a one-time glimpse each quarter into what Apple expects to put up for the following quarter. Here are the more pertinent details what CFO Peter Oppenheimer provided on the last conference call, and how they compare against last year.

Source: Earnings conference call. Calendar quarters shown.

Q4 2011 is currently the record holder for both revenue ($46.3 billion) and net income ($13.1 billion). Let's dig deeper into the outlook for the top and bottom lines and see what investors can expect.

Up high
It's a safe assumption that Apple will beat its own guidance and as such will post record revenues. The company has already said it expects 80% of sales to be driven by products launched near the end of the year, most notably including the iPhone 5 and iPad Mini.

Since the beginning of 2010, Apple has beaten its own revenue guidance by an average of 15.7%. That would imply that the company could post revenue of more than $60 billion, which is well above the current consensus estimate of closer to $55 billion. On top of that, the amount by which it normally beats has been declining more recently.

Source: SEC filings and earnings conference calls. Calendar quarters shown.

For the past two quarters, Apple "only" beat its guidance by single-digit percentages. That could indicate one of two things. Either it actually disappointed its own internal expectations since it normally beats by much more, or its guidance is becoming more realistic. If the company meets the Street forecast, it will top its outlook by just 6%, which is about the same as its revenue beat in the previous quarter.

The curveball is that in Q4 2011, Apple beat its guidance by a whopping 25% thanks to the busy holiday shopping season -- its biggest beat in three years. If Apple gets another holiday boost, it could post a revenue blowout.

Down low
There's been some investor concern over the idea that Apple will post negative earnings growth in the fourth quarter, because of gross margin contraction related to its newly redesigned products. Since 2010, Apple's average EPS beat relative to guidance has been 36.7%. This, too, has been declining lately, which carries the same two implications as noted above.

Source: SEC filings and earnings conference calls. Calendar quarters shown.

Since there are a lot of moving parts before you get to the bottom line, there's also a lot more potential for fluctuations, including for some things that are out of Apple's control, such as foreign currency exchange movements.

Apple hedges most of these fluctuations, but last quarter, foreign exchange hedging expense was higher than it expected. This type of activity is included in other income and expense, which Apple guided to $380 million. OI&E has been more volatile lately, in part because of macroeconomic factors.

Operating expenses are usually predictable and right in line with guidance, typically plus or minus a few percent, but there should be no surprises to speak of.

Blowout hints
There are already a number of hints that Apple will have a strong quarter. AT&T (T 1.17%) has said it sold a record number of iPhones during the quarter, which means it moved at least 7.6 million iPhones. Verizon (VZ 2.85%) also reported that its 9.8 million smartphone activations were driven in part by a "higher mix" of iPhones.

Apple also saw a monstrous sequential increase to $21.1 billion in manufacturing and component purchase commitments, implying it was preparing for a monster quarter. Investors could easily have a blowout on their hands.