What to expect from Apple's fourth quarter earnings report

Due to the announced later today, Apple's fourth quarter results are expected by analysts to be a high point among tech company financial reports, with revenue buoyed by the introduction of the iPhone XS and iPhone XS Max and the product line's growing average selling price.

The quarterly financial results release and accompanying analyst call with CEO Tim Cook and CFO Luca Maestri will detail the three-month period that ran until the end of September. While typically not the highest revenue-earning quarter, it is sometimes used as a barometer for the following quarter, which benefits from the holiday sales period.

Revenue and Earnings

Apple's guidance for the quarter from its Q3 results forecasts revenue at between $60 billion and $62 billion, with a gross margin between 38 percent and 38.5 percent. Operating expenses were expected to be between $7.95 billion and $8.05 billion, and a tax rate of around 15 percent.

Apple's quarterly revenue and net profit

Analysts appear to be suggesting the revenue will be at the upper end of the range, with a Refinitiv analyst survey reported by CNBC putting the figure at $61.57 billion, and Wedbush analyst Daniel Ives suggesting $61.6 billion according to U.S. News.

For reference, Apple advised revenue was $52.6 billion for the same quarter in 2017, making both analyst predictions and Apple's own guidance indicating growth of between 14 percent and 18 percent.

Shipments

Apple hasn't provided guidance for device shipments, but that hasn't stopped analysts from making predictions. Surveys from StreetAccount and FactSet put Apple as selling 47.5 million iPhones, 10.53 million iPads, and 4.87 million Macs. UBS advised on Wednesday it believes there will be 46.7 million iPhone shipments, whereas Loup Ventures' Gene Munster puts the figure at 48.1 million and Wedbush's Ives suggests 48 million.

In last year's results, Apple achieved 46.7 million iPhone shipments, which at face value suggests the analysts see growth, but not by much. This may be deceiving, as 2017's results was also an increase from the 45.4 million iPhones sold in the period for 2016.

As advised earlier, the bulk of Apple's iPhone sales happen during the holiday season, so a small improvement in the report won't be unexpected. The main event is in another three months.

While the quarter also includes the launch of new iPhone models, their arrival late in the quarter means they have a smaller impact than a release from earlier in the period. Also, this will only apply for the iPhone XS and iPhone XS Max, as the iPhone XR didn't ship until October, meaning it will only affect the December quarter results.

iPhone Average Selling Price

Probably the biggest thing analysts will be looking for will be an increase in the average selling price (ASP) of the iPhone. As shown with the iPhone X last year and continued with the iPhone XS and the more expensive iPhone XS, the higher prices of the new models can help push the average selling price of iPhones upwards.

Graph showing changes in iPhone ASP over time

Munster proposed the ASP of the iPhone could be $791, far above his Wall Street survey expectations of $756. UBS puts the ASP at $750 with its own survey resulting in $741. The analyst also argues this demonstrates Apple is finding more ways to earn money from an existing user base rather than relying on sales growth to increase revenue. Analyst Tony Sacconaghi of Bernstein predicts an iPhone ASP of $800, which would be the highest ASP for iPhones.

Despite arriving late in the period, the iPhone XS and XS Max will make up somewhere in the region of 16 percent of iPhones sold in the period, UBS claimed, while a survey of customers indicated 36 percent would be paying more than $900 for their chosen iPhone model.

The bigger question for analysts is whether the introduction of the cheaper iPhone XR will temper the ASP at all in the next quarter's results, with its far lower starting price potentially lowering the ASP. Even so, Wedbush's Ives suggests most of the iPhone XR sales will be the $899 model, which will increase the ASP rather than reducing it.

Services

Apple's Services arm is continuing to have steady growth and is a considerable revenue source for Apple, with it expecting to increase even more in this quarter. The arm, which includes iCloud, Apple Music, the App Store, and other elements, has proven to be quite reliable over the quarters, and has become something worth noting by analysts.

Munster specifically has expressed this could be part of a paradigm shift in how investors look at Apple as a "hardware business performing increasingly like a software business," which he terms as "Apple as a Service." While Munster believes Services will be down from the previous quarter's 28 percent growth, he still believes there will be 20 percent growth for this quarter.

Apple's services revenue through the third fiscal quarter of 2018

Timothy O'shea of Jefferies Financial Group recently suggested the growth of the Services revenue will be ongoing, eventually resulting in it being 25 percent of revenue by 2020, and accounting for 40 percent of gross profit.

AppleInsider will offer full coverage of the earnings call later today, starting at 5 p.m. Eastern, 2 p.m. Pacific.