What to Expect From Apple's Earnings

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple ) is set to report earnings on Wednesday the 23rd after the close. The stock has experienced a big pullback over the last months, and both bulls and bears are taking some very strong positions at this stage of the game, so this could be a make or break quarter for the company.

In fact, the next report may be the most important quarter for the company over the last several years, so let's take a look at some significant aspects to consider as the big date approaches.

The Negatives

Analysts are on average estimating sales of $54.54 billion for the last quarter of the year, while the earnings per share number is currently forecasted around $13.33. This figures will likely change over the next days, and they have been materially reduced over the last months.

The first round of forecast cuts came after Apple reported earnings for the quarter ended in September and disappointed analysts on its guidance for the coming earnings report. Apple forecasted sales of $52 billion and earnings per share of $11.75, which is much weaker than what analysts were expecting, particularly when it comes to profit margins assumptions.

Analysts are still forecasting figures way above guidance, which is quite logical considering that Apple is famous for providing very conservative guidance numbers. However, falling profit margins are one of the biggest concerns for the coming quarter, especially since management surprised everyone with such a pessimistic guidance.

New products usually have lower margins, and Apple has completely renewed its lines of products coming into the holiday quarter, so this will be a negative factor for margins. Besides, products like the iPad mini will likely have lower margins - or at least lower contribution per unit - than the previous iPad models. The company seems to be shortening its product cycle by launching two iPhone models per year, and this won't help margins in the middle term either.

Analysts have also been cutting their sales and earnings forecast due to iPhone 5 supply constrains in its first weeks in the market. This seems to be worked out already, and iPhone availability is much better at this stage, but it still could have negative consequences for the quarter.

Production problems and components restrictions don't bode well for margins either, and this is another negative factor adding to an already worrisome margin picture. Besides, Apple has been changing some key suppliers lately, and that's always a source of uncertainty and possible disruptions.

Some analysts have also expressed their concerns regarding the Apple Maps fiasco and its possible effects on brand image and iPhone demand. But this last factor has probably been overblown by analysts and the media, since the company quickly admitted the mistake and Google ) was kind enough to deliver a fantastic Google Maps application which is already working smoothly.

The Positives

Customers seem to be very pleased with their new iPhones in spite of the maps problem: a recent survey from Bernstein Research claims that Apple still ranks higher than any competitor when it comes to customer retention. According to the study:

95% of current iPhone users in Europe and North America plan on repurchasing an iPhone now, and 85% of iPad customers plan on repurchasing another iPad sometime down the line as well.

This is much better than the results obtained by competitors:

75% of Android users plan to repurchase another Android device, 58% of BlackBerry users plan on doing similarly, while just 37% of Windows phone owners intend on sticking with the platform.

This survey implies that the competitive landscape hasn’t changed much because of the mapping issue. Apple is still considered the high quality choice by most consumers, while Android phones come in second place. As for Microsoft ) and RIM ) investors, the results from the survey don't look pretty at all

One big tailwind should be the fact that Apple has entered the holiday quarter with plenty of new products to offer. This is likely the most optimistic factor to consider regarding the coming release. New products during the holidays should mean big sales growth unless production remains too constrained. Higher volume is a positive for margins too, so this is the heaviest reason to expect an earnings blowout from Apple in the next release.

Besides, Apple rolled out out the iPhone to more markets more quickly than ever: 100 countries in three months, this should be a positive for sales and margins. We don't know how fast Apple has managed to reach those 100 countries, but Tim Cook has stated that the company effectively reached them during the quarter.

Bottom Line

Sales are looking good overall, especially considering all those new products coming out on a holiday quarter.

Margins are a more complicated thing though; the company gave a very pessimistic guidance in the last quarter, and manufacturing problems are reason for concern too. On the other hand, higher volume should be a positive for profit margins, even if it doesn't completely compensate the negative factors.

The good news for Apple investors is that analysts have been getting increasingly bearish over the last months, and the stock is dirt cheap. When expectations are low, positive surprises become a distinct possibility, and Apple has plenty of upside room in that scenario.

acardenal owns shares of Apple and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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