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Apple Earnings: 3 Key Numbers to Watch

By Andrés Cardenal - Apr 23, 2016 at 6:41AM

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Investors will want to keep a close eye on iPhone demand, sales guidance, and any dividend announcement from Apple when it reports earnings on April 25.

Image source: Apple.

Apple (AAPL -2.46%) is scheduled to report earnings on April 25 for the quarter ended in March, the second quarter of its fiscal year. Variables such as iPhone sales, revenue guidance, and dividend announcements could be especially important in the coming earnings report. 

It's all about the iPhone
The iPhone generates almost 70% of total revenue, so this segment is absolutely crucial for Apple in terms of financial performance. The company is facing considerable challenges in this key business, and analysts will closely scrutinize iPhone sales volume and prices in different geographies. 

The iPhone 6 and iPhone 6 Plus models were launched in September 2014, and they produced booming sales growth for the company, as customers enthusiastically embraced the new form factors with larger screens. As a reference, iPhone revenue grew 55% during the quarter ended in March 2015, while total company-level sales increased 27%.

Comparisons in the coming earnings report will be remarkably difficult, and management is anticipating declining sales. The company's guidance is for revenue to be in the range of $50 billion to $53 billion, compared to $58 billion in the same quarter last year. For what it's worth, Wall Street analysts are on average expecting $52 billion in sales, so forecasts from analysts are in line with the company's guidance.

Demand for tablets and PCs has been quite lackluster lately, so there is little reason to expect much growth from these products. Apple is betting on expansion with new products and services such as Apple Pay, Apple Music, the revamped Apple TV, and Apple Watch. But even taken together, these areas will most probably have a modest impact on overall financial performance, though they could be important in terms of what they say about the company and its ability to drive sustainable growth. 

Innovation is key for Apple. If the company proves to investors that it can still bring successful new products and services to the market, this could provide more visibility about Apple's ability to produce consistent revenue growth beyond the iPhone.

Revenue guidance
The stock market is a forward-looking mechanism, and investment decisions need to be based on the future potential of the business, not past performance. For this reason, what Apple says about revenue and earnings in the coming quarter could be even more important than financial performance for the past quarter.

Comparisons will also be quite challenging in the June-ended quarter, since Apple reported a massive increase of 59% in iPhone revenue during that quarter last year. However, the company launched the new iPhone SE on March 30, 2016, and this could be a considerable plus in terms of revenue growth.

The iPhone SE has a 4-inch screen, and it sells for a competitively low starting price of $399. Price competitiveness could be a major advantage in emerging markets, where income levels are comparatively lower and the carrier subsidy model is not as extended as in the U.S. Emerging markets are still offering considerable room for growth. iPhone unit sales grew 18% in China, and overall constant-currency sales in India grew 48% last quarter, so management seems to be doing the smart thing by betting on these regions for future growth.

Interestingly, CEO Tim Cook said in the last conference call that nearly 60% of all iPhone users have not yet upgraded to the iPhone 6 or iPhone 6s. Perhaps a considerable portion of these users prefer the smaller devices, and the iPhone SE could be just what Apple needs to convince these customers to upgrade their models.

Dividend growth
Apple is maturing as a business, and this makes it harder for the company to produce rapid sales growth. On the other hand, a more stable and mature company also means an increased ability to distribute excess cash flow to investors via dividends, and everything indicates that Apple will announce a new dividend increase in the coming earnings release.

The company is committed to raising dividends on an annual basis, and it has announced dividend hikes in its earnings reports for the March quarter over the past three years. The dividend increases for 2013, 2014, and 2015 were 16%, 7%, and 11%, respectively, so most investors are probably expecting a dividend increase in the high single digits to low double digits.

Apple produces far more cash than it needs to reinvest in the business, so it makes sense to expect increased dividend payments from the company. Importantly, the size of the dividend hike can send an important signal to investors in terms of evaluating the level of confidence management has in its ability to generate consistently growing cash flows over the years ahead. The bigger the dividend increase, the higher the degree of confidence management is showing.

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