Getting Prepped for Apple's Q1 Earnings

On Monday, Apple (NASDAQ: AAPL  ) announced the date of its fiscal first fiscal-quarter earnings date: Monday, January 27. Guiding for record revenue for the quarter ending at the close of the calendar year, Apple earnings show will be closely scrutinized by the Street. Though many metrics that Apple reports will be important, here are the two most essential metrics that will give investors a solid pulse on where Apple is headed: iPhone sales and gross profit margin.

iPhone 5s.

1. iPhone sales
Though Apple's iPad business has quickly become important to its business results since the first iPad was launched in 2010, the segment still pales in comparison to the iPhone. In Apple's fourth quarter, the iPad (Apple's second-largest product segment) accounted for just 16.5% of Apple's business. Comparatively, the iPhone accounted for 52% of revenue.

But Apple's revenue breakdown doesn't even do enough justice to the iPhone's impact on its business. Asymco's Horace Dediu estimated in July that the iPhone segment has a gross profit margin of approximately 46%. That's significantly higher than Apple's overall gross profit margin of about 37.5%. As the company's most profitable business segment, iPhone unit sales have an outsized positive impact on Apple's bottom line.

So how many iPhones can we expect Apple to sell? In the year-ago quarter, Apple sold a whopping 47.8 million iPhones. Considering that Apple expects revenue during the quarter to increase only about 3.6% (using median number on Q1 revenue guidance), Apple is likely only expecting a marginal boost to iPhone sales, if any; management may have attributed the bullish estimate for a record revenue quarter to iPad sales. After all, Apple CEO Tim Cook said during the Q4 earnings call that he expected it to be an "iPad Christmas."

2. Gross profit margin
Apple's gross profit margin has been a hot topic over the past two years as investors have watched it fall significantly from record highs.

AAPL Gross Profit Margin (Quarterly) Chart

AAPL Gross Profit Margin (Quarterly) data by YCharts.

The culprit behind Apple's declining gross margin has been attributed to a large number of new products, an aggressively priced iPad Mini, and the iPhone 5's higher cost than the iPhone 4s. While Apple has said that it expects its cost curve to improve over time, a shift in iPad sales composition that relies heavily on the iPad Mini looks like it will have lasting effects on Apple's gross profit margin. And an October-released iPad Mini that finally boasts a Retina Display shouldn't help.

So investors certainly shouldn't expect Apple's gross profit margins to rebound to their peak levels, but they do look like they are stabilizing. Even more, they could begin inching upwards -- albeit very slowly.

Apple guided for a gross profit margin between 37.5% and 38.5% in Q1. The median for this guidance would come just 60 basis points lower than last year's 38.6%. That's a big year-over-year improvement compared to the fourth quarter's decline of 300 basis points.

Considering the importance of Apple's gross profit margin in helping the company return to EPS growth, a gross profit margin below the median estimate would be disappointing.

Back to growth
Combining Apple's conservative valuation with its aggressive share repurchase program, it simply needs to grow the bottom line in line with inflation over the long haul to reward investors. That's why Apple's most crucial segment to bottom-line results along with the all important gross profit margin are such important indicators of Apple's potential -- Apple needs to return to bottom-line growth.

Though these two metrics are obviously important, it's also critical investors don't get too caught up in one quarter's results. Take the results with a grain of salt and simply consider it a pulse check on your long-term investment thesis for the stock.

Looking for stocks you can likely hold for decades? Start here:
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover the three companies we love. 


Read/Post Comments (10) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 07, 2014, at 3:45 PM, whyaduck1128 wrote:

    "Though these two metrics are obviously important, it's also critical investors don't get too caught up in one quarter's results."

    So why give us this headline? In fact, why write the article itself? If we're in for the long haul, we don't react much to one quarter's numbers. If we're not in for the long haul, why are we in MF?

  • Report this Comment On January 07, 2014, at 3:52 PM, Mathman6577 wrote:

    There should be a law against quarterly earnings announcements. Make it once a year or longer.

  • Report this Comment On January 07, 2014, at 4:14 PM, aeosfool wrote:

    Apple's earnings for most of 2013 declined a little from 2012 because they didn't introduce any new products for most of the year..which is very unusual.

    Their store traffic actually decreased because there was no reason to stop into a store to try out a new product...and when people stop in the store they usually buy the new product or another product that caught their eye while there. Also, Apple had very rapid growth, much faster than the other hgh flying techs that now have pe's several times theirs, for several years...so a pause was likely...especially with no new products.

    All this changed late in the Sept qtr/early in Dec qtr...and they should have grown their sales nicely. I ipad mini should really add to this as they actually raised the price of the new model while lowering the old model's price slightly...overall the margins should be there.

    The one thing people are forgetting is that Apple is again deferring a huge chunk of income from the iphone over 2 years..this hurts income and profits the first few quarters and then starts to help their earnings and profit margin going forward. That along with more people in the stores for what should be a year of new products, not just refreshes at the end of the year...should make 2014 a year of solid growth for Apple...and as you mentioned, their stock is priced for zero growth...when most other tech stocks are priced for near perfect spectacular growth...especially the ones that haven't earned a penny yet.

  • Report this Comment On January 07, 2014, at 4:23 PM, TMFDanielSparks wrote:

    @whyaduck1128

    A "pulse check" is always smart. Especially in a fast-changing industry like smartphones. If numbers vary dramatically from expectations, it may be time to reevaluate your thesis.

  • Report this Comment On January 07, 2014, at 5:15 PM, JbUps wrote:

    Unfortunately this stock is going to get beaten down by Mr market no matter what their numbers are for the quarter. If they come in on the low end, we do I need to say more. If they come in on the high end or even blow it out, it will some how be spun as a negative (ie - this is as good as it gets, it can only go down from here) The market makers have established the narrative that Apple is currently nothing more than a hand set maker which is now a commodity and therefore subject to pricing pressure. Many of us don't believe this simplistic view of their business model but that doesn't matter. It's what the market believes and thus you have a declining share price in the face of so many possible catalysts. We may be in for more pain until Apple comes out with something new that defeats this commodity narrative.

  • Report this Comment On January 07, 2014, at 6:43 PM, dwilh51183 wrote:

    ANY WAY YOU NEW CUT IT, APPLE'S RESULTS WILL BE BETTER THAN CHIPOTLES, AMAZON'S, GOOGLE'S, AND EVERY OTHER COMPANY IN THE WORLD ! QUIT MAKING EXCUSES AND TRYING TO TRASH APPLE. APPLE MAKES MORE MONEY AND SALES THAN ANY COMPANY IN THE WORLD, 75 BILLION IN SALES FOR 3 MONTHS IS UNHEARD OF BY THE TOP 15 COMPANIES IN THE S AND P 500...AND AAPL OUTSELLS THEM ALL COMBINED. THE STOCK SHOULD TRADE AT 1500 A SHARE , AND NOT THE 550 AREA IT DOES NOW

  • Report this Comment On January 07, 2014, at 6:51 PM, bnquail wrote:

    How long do we have to hear this crap? Google and Amazon can only dream of a profit margin like Apple's. Apple's fundamentals are better than any of the others. What does market share matter if you're not making money. Apple makes more than Google and Amazon put together, and has for many years. now.

  • Report this Comment On January 08, 2014, at 10:00 AM, GirlsUnder30 wrote:

    The article below describes one way Apple will reduce costs:

    http://caps.fool.com/Blogs/its-kinda-corning-to-discuss/9105...

  • Report this Comment On January 09, 2014, at 8:29 AM, Mathman6577 wrote:

    I think JbUps said it very well. An analogy would be the Oscar or Grammy awards. The "best" song, movie, or director sometimes doesn't win the award. Sometimes the best company (Apple, etc.) doesn't win the best stock award with investors. Sometimes the "in" company (i.e. Google, Amazon, etc.) wins the stock prize. It's very disconcerting that some people/analysts prop up a company that actually loses money (e.g. Amazon). However, there is nothing that can be done about it.

  • Report this Comment On January 13, 2014, at 10:20 PM, Patrisa wrote:

    There is an old saw, "Those who can - do; those who can't - teach." In APPL's case we could change that to "Those who can - do; those who can't write articles". We have to ask ourselves, if these "writers" are so smart, why are they not spending their time investing instead of taking pennies per word?

    Have you noticed how many disclaimers admit that they don't hold the particular stock and don't plan to hold that stock. I keep wondering whether or not they hold ANY stock. I am really surprised that this is coming form the MF. I would have expected it from Seeking Alpha.

Add your comment.

DocumentId: 2786296, ~/Articles/ArticleHandler.aspx, 7/28/2014 12:47:40 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement