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Apple, Inc. Earnings: 5 Key Areas to Watch

By Daniel Sparks – Oct 14, 2016 at 2:33PM

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With management expecting another quarter of declining revenue, investors will look for a glimpse of a road back to growth.

Apple's (AAPL 1.56%) fiscal fourth-quarter earnings report is less than two weeks away. After getting rescheduled because of a "scheduling conflict," Apple is now set to report the results for its most recent quarter on Tuesday, Oct. 25 instead of a previous date of Oct. 27. Since the company is expected to report its third quarter in a row of declining revenue, the pressure is on.

When Apple releases its quarterly results and provides a business update for investors in the conference call following the release, here are five important areas to watch.

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1. Revenue

Management said in its third-quarter update that it expected fourth-quarter revenue in the range of $45.5 billion to $47.5 billion. Notably, this represents a meaningful year-over-year decline of 11.7% to 7.8% compared to the year-ago quarter.

Apple's recent revenue decline has been primarily due to lower iPhone sales during fiscal 2015 as the iPhone 6s and 6s Plus struggled to live up to iPhone 6 and 6 Plus sales. And this will likely be what may drive another decline in the company's fourth quarter.

Given that Apple's guidance is usually fairly accurate, investors can rely on management's own expectations as a barometer for what to expect when the tech giant reports results.

2. Earnings per share

Since Apple's year-over-year revenue declines have recently been driven mostly by declining iPhone sales, which is Apple's most profitable product segment, the company's earnings per share have been declining even more rapidly than revenue. In Apple's third quarter, for instance, earnings per share fell 23% on a 14% decline in revenue.

A similar trend is likely to persist in Apple's fourth quarter. This is likely why the consensus analyst estimate for Apple's fourth-quarter earnings per share is just $1.65, representing a 15.8% decline compared to earnings per share in the year-ago quarter -- and worse than the 11.7% to 7.8% decline in revenue Apple management is anticipating.

3. Gross profit margin

Apple management said in the company's third-quarter update that it expected gross profit margin in the final fiscal quarter of 2015 to be between 37.5% and 38%, down from a gross profit margin of 39.9% in the year-ago quarter.

Given that Apple's healthy gross profit margin is not only critical to the company's uncanny levels of profitability, but also a key sign of Apple's ability to sell its products at a premium price to a large customer base, investors should look for this important metric to at least be in line with management's expectations.

4. iPhone sales

Since iPhone revenue accounts for well over half of Apple's revenue (64% in the trailing 12 months), investors might want to check in on this critical product segment.

Data for chart retrieved from Apple's quarterly SEC filings in the trailing 12 months. Chart source: Author.

It's difficult to pinpoint exactly where iPhone revenue will come in for Apple's fourth quarter, particularly because Apple launched its iPhone 7 and 7 Plus with several weeks before the quarter ended, and about a week earlier than it released the iPhone 6s and 6 Plus in the year-ago quarter. But iPhone's third-quarter year-over-year revenue decline of 23%, along with management's guidance for a decline in total fourth-quarter revenue, suggest investors should brace for another sharp decline in revenue for the segment.

5. Guidance

Apple's revenue guidance for its first fiscal quarter of 2017 may be the most interesting area to watch when the company releases its fourth-quarter update. It will preview what Apple expects from the first full quarter of iPhone 7 and 7 Plus sales and show whether or not revenue declines could reverse in the important holiday quarter.

The number against which investors will be judging revenue guidance is $75.9 billion. This is the revenue Apple reported in its first fiscal quarter of 2016.

Apple's fourth-quarter results will be released on the company's investor relations portion of its website shortly after market close on Oct. 25. On the same page, investors will also be able to find a link to the Apple's live question-and-answer session with analysts to discuss the quarter's results. The live conference call is scheduled to start at 2:00 p.m. PDT.

Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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