Apple (NASDAQ:AAPL) is set to report fiscal fourth-quarter earnings after the close tonight. I happen to be expecting a miss in the September quarter relative to Apple's own guidance, which were incredibly bullish to begin with. When Apple provided its forecast back in August, it had the potential to be an all-time record for September quarter revenues. Initially, the bullish outlook suggested that the iPhone X may ship on time, particularly if you look at a detailed timeline of how 3D sensing suppliers are struggling to ramp up production.
When Apple officially confirmed that the iPhone X's launch would be delayed until November, that news called into question whether Apple could hit its guidance primarily on the backs of iPhone 8 and 8 Plus. Early indications point to soft iPhone 8 sales, as consumers hold out for the iPhone X. For context, here's how Apple has historically fared compared with its guidance.
Meanwhile, there is a constant barrage of supply-chain reports detailing production challenges, but shipping times on Apple's own site don't look that bad compared with prior years. Neither third-party media reports nor vague indications of shipping timelines are particularly reliable indicators to what's really happening with iPhone X production. The most meaningful indication that investors will get regarding iPhone X supply will come in the form of guidance.
The guidance game
In no uncertain terms, Apple's performance in the December quarter will absolutely hinge on iPhone X supply. Apple has said iPhone X demand is "off the charts," based on robust pre-order activity. The Mac maker is currently estimating that new orders will ship in five to six weeks, which already puts delivery into mid-December. There should be little question on the demand side of the equation.
The iPhone X production situation is evolving rapidly as component suppliers and contract manufacturers continue to improve production rates, and Apple leans more toward the conservative side with its financial forecasts, but in a matter of hours investors will get the clearest and most quantified indication yet as to how Apple itself thinks it will fare in the December quarter.
Last year, Apple posted revenue of $78.4 billion after selling a record 78.3 million iPhones. There's certainly enough demand for the iPhone X for Apple to overtake those record results, if only the company can produce enough unit volumes to meet that demand. Apple's guidance typically includes revenue, operating expenses, and expected tax rate, among other metrics that can be used to deduce net income, but revenue guidance will be the most important aspect of the forecast by far.
If the sales outlook looks soft, investors will know that it's because Apple's current assessment of the production ramp-up is weak. In contrast, if Apple's forecast includes the possibility of a new record in sales at the high end, investors can be cautiously optimistic that iPhone X production isn't as bad as the media has portrayed. Of course, management will provide some qualitative color regarding the iPhone X ramp, but investors should arguably focus more on the quantitative forecast.
We'll know in just a few hours how Apple thinks the December quarter will play out.