Apple (AAPL -2.12%) earnings have been scheduled. After market close on Tuesday, July 26, the tech giant will report its fiscal 2016 third-quarter results as well as provide guidance for Q4. Ahead of Apple's results, here's an early preview of what to expect.
The most prominent storyline of the quarter will almost certainly be yet another quarter of declining revenue. On a year-over-year basis, Apple said in its second-quarter results that it expected third-quarter revenue in the range of $41 to $43 billion, representing a decline of about 15% from the year-ago quarter.
Similar to management's expectations for Q3, Apple's second-quarter revenue was down about 13% compared to the year-ago quarter, marking the beginning of a trend in year-over-year declines Apple shareholders are hoping is temporary.
While possible declining iPad and Mac sales may play a role in driving Q3 revenue lower, the main segment negatively impacting Apple's top line will probably be the iPhone. As Apple's largest product segment by far, accounting for about 65% of revenue, an expected year-over-year decline in iPhone sales will likely be the main reason behind an overall year-over-year decline. This would continue a trend of falling iPhone sales in Q2. iPhone unit sales fell from 61.2 million in the second quarter of 2015 to 51.2 million, or about 16.3%, in the second quarter of 2016.
Apple's declining iPhone sales can be largely blamed on the iPhone 6s' failure to live up to the monster upgrade cycle last year, spurred by Apple's first foray into smartphones with displays larger than 4 inches, including the 4.7-inch iPhone 6 and its 5.5-inch iPhone 6 Plus. In the second and third quarters of Apple's fiscal 2015, iPhone sales soared 40% and 35%, respectively. This growth makes for a tough comparison for Apple in 2016.
There may be some hope that Apple could alleviate some of this expected year-over-year decline in iPhone sales. Apple launched a new, lower-cost iPhone in the middle of its usual iPhone launch cycle -- a phone that could particularly appeal to more price-sensitive markets like China. But given that the phone was supply constrained for most of the quarter, it's unlikely to have a big impact on Apple's sales.
The consensus analyst estimate for Apple's third-quarter revenue suggests analysts believe management's guidance is spot-on. On average, analysts expect Apple to report third-quarter revenue of $42 billion -- right in the middle of the company's guidance range for the quarter.
What's more worrisome than analysts' expected year-over-year decline in revenue, though, is the consensus analyst for Apple's EPS. On average, analysts expect EPS of $1.39 -- down a whopping 25% compared to the year-ago quarter. The outsized decline expected in Apple's EPS metric is likely due to expectations for much of Apple's declining revenue to be driven by iPhone; as Apple's most profitable product segment, the direction of iPhone sales has a disproportional impact on business results.
Given the severity of the decline expected in EPS, this may be one of the most closely watched metrics when Apple reports results.
Overall, since a reported decline in Apple's business is almost certain, investors will really be tuning into the tech giant's third-quarter results to see just how severe the decline was -- and to look for a glimpse of hope from management for revenue to turn upward in the upcoming quarters.
Apple will report its results after market close on Tuesday and will host a live conference call to discuss the quarter's results at 2 p.m. PDT on the same day.