Apple store. Image source: Apple.
Scheduled for October 27, Apple's (AAPL +0.72%) fourth-quarter earnings report is still a ways out. But as the date draws closer, investors might want to begin contemplating the implications of a metric likely to get tons of attention: guidance.
Why guidance for Q1 is important
Apple's reported guidance for its fiscal first quarter will arguably be the most interesting metric the company shares in its fourth-quarter report. Not only is Q1 seasonally Apple's biggest, thanks to the holidays and the fact that it marks the first full quarter of deliveries of its latest iPhones, but it typically previews management's general expectations for its latest iPhone.
This year's first quarter, in particular, is notable because the iPhone 7 cycle follows Apple's first fiscal year of year-over-year declines in iPhone unit sales, iPhone revenue, and total revenue. Some investors, therefore, will likely look to Q1 to preview whether or not the iPhone 7, which was launched with just two weeks left in Q4, could be enough to help Apple return to growth in Q1.
iPhone 7. Image source: Apple.
In other words, Apple's guidance has the potential to show investors a light amid recent headwinds. In Apple's second and third fiscal quarters of 2016, iPhone revenue fell 18% and 23%, respectively. With iPhone accounting for about 60% of Apple's total revenue, this weighed on total revenue growth; Apple's Q2 and Q3 total revenue fell by 13% and 15%, respectively. Even more, Apple guided for a year-over-year decline in revenue of about 9.7% in Q4.
So, can Apple's guidance for Q1 highlight reinvigorated growth?
What to look for
Investors are likely hoping Apple will guide for a record first quarter, but expectations for any meaningful growth are likely slim. While Apple has set a new quarterly record for revenue during Q1 every year since the first iPhone was launched, revenue only increased 2% in the first fiscal quarter of 2015. In addition, Apple's price-to-earnings ratio of just 13 suggests investors don't expect much growth -- if any -- from Apple. With these factors in mind, guidance for low single-digit year-over-year growth this year could be all it takes to satisfy investors.
For reference, Apple's first fiscal quarter revenue in 2016 was a record $75.9 billion. So, investors will likely be looking for guidance to slightly exceed this number in order for Apple to return to year-over-year growth during the important iPhone 7 cycle.
iPhone 7. Image source: Apple.
Interpreting Apple's guidance
Investors should keep in mind that Apple's guidance for Q1 could be more closely tied to the company's expected production ramp for the new iPhone than it is a forecast for demand. Typically, Apple's newest iPhone devices are severely supply constrained for several months after launch, and the iPhone 7 and 7 Plus don't look like they'll be an exception. Some of the iPhone Plus models, for instance, are currently showing estimated ship time frames of three to four weeks for customers who place an order today. And some of Apple's new jet black colored iPhones are showing shipping estimates in November.
But even though Apple's ability to ramp up production will likely be a key determining factor in the guidance management provides, it still can be useful to investors by at least providing some insight into the latest iPhone lineup's potential. Guidance for higher revenue, for example, would at least imply that demand for even a supply constrained iPhone 7 and 7 Plus can drive quarterly revenue to new highs.
Of course, investors should keep in mind that management's guidance for total revenue takes into account other products besides iPhone. So total revenue guidance isn't necessarily directly correlated with management's expectations for iPhone revenue. But since iPhone represents well over half of Apple's total revenue, it's usually a lead indicator.
