What to expect from Apple’s fourth-quarter earnings tomorrow

Are things looking up?
Are things looking up?
Image: Quartz/Dave Gershgorn
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It’s going to be a busy week for Apple.

Tomorrow (Oct. 25), the company will announce its fourth-quarter earnings for its fiscal year. Two days later, it’ll host an event to show off what many expect to be a refresh to its laptop and desktop computer lines. While the company may be ramping up for a big holiday season, with hopes of selling truckloads of its new iPhones and computers, tomorrow’s earnings call will reveal how sales fared over what has traditionally been Apple’s slowest period. In recent quarters, Apple has reported its first quarterly declines since it started selling the iPhone nearly a decade ago.

Whether the company was able to reverse that decline in the fourth quarter—which saw the release of its rather underwhelming new iPhones—remains to be seen. Here’s what to look out for on the call:

Are iPhone sales still falling?

iPhone sales account for the vast majority of Apple’s revenue, and they’ve fallen for the last two straight quarters compared with the same periods a year prior. While Apple did release its iPhone 7 and 7 Plus in the fourth quarter, they were only on sale for a few weeks in that period—and thus unlikely to make much of an impact on earnings. Furthermore, shortages of certain models probably dissuaded many customers from making new phone purchases in the fourth quarter. That being said, it’s likely CEO Tim Cook will give some indication of whether the iPhone 7 got off to a good start for the coming holiday season.

And what about overall revenue?

Apple’s overall revenue growth is relatively cyclical. Its biggest quarterly spikes happen in its first quarter, which coincides with the holiday shopping season. This past third quarter—its worst in nearly two years—saw revenue depart from the stegosaurus-shaped pattern that developed in recent years. Since there weren’t new products for most of the fourth quarter, it’s likely reported revenue will continue this downward trend.

In a research note, Morgan Stanley’s analysts expect revenue for the quarter to be lower than what they were a year ago. They’re expecting Apple to ship roughly 44 million iPhones in the fourth quarter (4 million fewer than a year ago) and roughly 74 million in the first quarter (roughly the same as the year before). Like many analysts, they are predicting a “supercycle” starting at the end of 2017, when Apple is expected to completely overhaul its iPhone, Mac, and iPad lines. Because of this, it’s possible many prospective customers are holding off until next year.

Can Apple make more money out of the same customers?

In recent quarters, as the majority of Apple’s business segments have stopped growing or contracted, the company’s services business—which likely includes sales of music and apps, iCloud and Apple Music subscriptions, and AppleCare—has been a bright spot in its earnings. Services now make up the company’s second-largest business segment, and at a time when the company is struggling to sell iPhones at the rates it has in the past, getting more revenue out of people who already own Apple devices could be a way to help prop things up until the impending supercycle.

How non-Western revenue is doing

Cook has said in the past that countries like China and India represent massive growth opportunities for Apple, especially when compared to more saturated, developed markets, such as Europe and the US. But Apple’s growth in China, in particular, has stagnated in recent quarters. The company has had to deal with regulatory hurdles for its services, and some speculate that demand for the iPhone 7 has been less than stellar. Furthermore, the same ecosystem of services that Apple sells in the US and Europe is not as fleshed out in China, which some suggest could lead the Chinese toward homegrown brands that are better able to provide access to local content and services. On the other hand, Apple has poured millions into the region recently through investments in Uber competitor Didi Chuxing and pledges to build new research and development centers in China. These moves could help Apple win over the local government and convince it to allow greater access to its citizens. Look for Cook to comment positively on the region, even if recent sales are underwhelming.

One more thing

Apple’s stock has been on the up pretty consistently since its last earnings call, with a sharp spike after the iPhone 7 was released. While Apple hasn’t released any information on how the phones have sold, it seems that demand was stronger than analysts expected—likely in part because Samsung, the company’s biggest smartphone rival, has been dealing with its new flagship phone exploding around the world. But whether this equates to an increase in revenue, or whether any non-iPhone business segment will throw up any surprises, remains to be seen.