First revenue decline expected since 2019

Analysts expect apple to post its first year-over-year revenue decline since 2019’s March quarter when it reports earnings on Thursday. There are a few contributing factors.

The company couldn’t build enough of its high-end iPhones when its primary assembly plant in China was shut down for weeks during Covid shutdowns. Customers in many regions already noticed in November that Apple could not promise Christmas delivery of a new iPhone.

Apple issued a rare warning to investors that month, explaining that manufacturing issues would lead to lower shipments than “previously expected.” It was a data point that prompted many analysts watching the stock to cut their estimates.

“We believe the biggest impact of the disruptions was felt in early to mid-November when wait times reached an extreme level (link) as wait times in the US for the 14 Pro and 14 Pro Max reached 34 days while wait times in China at the high-end hit 36 days,” UBS analyst David Vogt wrote in January.

Analysts polled by Refinitiv expect Apple to report just over $121 billion in revenue in the December quarter, which would be a slight decline from the company’s $123.9 billion from a year ago.

But the problems are not Apple-specific. The PC and smartphone markets are falling as consumers and businesses digest sales from the pandemic and cut costs to prepare for a possible recession.

The smartphone market saw an 18% drop in shipments in the fourth quarter, according to IDC, the worst decline ever recorded by the market research firm. The PC market fell 28% in the fourth quarter, according to the company. But many investors believe that Apple outperforms its competitors even in a growth market.

“While the state of consumer demand remains a near-term concern, we believe the underlying drivers of Apple’s model — a growing installed base and per-user spending — remain intact, and that the strength/stability of Apple’s ecosystem remains undervalued,” Morgan Stanley wrote analyst Erik Woodring in a note earlier this month.

Here’s what Wall Street expects, according to Refinitiv consensus estimates:

• Income: $121.19 billion
• Earnings per share: $1.94 per share
• iPhone revenue: $68.29 billion
• iPad revenue: $7.76 billion
• Mac revenue: $9.63 billion
• Other products revenue: $15.26 billion
• Service revenue: $20.67 billion

Apple has not provided guidance since 2020, citing uncertainty initially caused by the pandemic. However, the company usually provides a few data points that can give analysts a sense of how it’s doing.

Investors will want to know whether the shortage of iPhone 14 Pro models in the December quarter will drive demand in the March quarter now that supply has improved.

Analysts expect just over $98 billion in sales in the March quarter, according to consensus estimates, which means little growth year over year.

“While we think it’s well understood that Apple’s March quarter revenue should fall at a less-than-seasonal rate due to the postponement of iPhone demand from the December quarter to the March quarter,” Morgan Stanley’s Woodring wrote in a note last week, “The backdrop for consumer electronics remains challenging, with tablets, PCs and more discretionary products (ie wearables) all facing continued demand headwinds.”

But if consumer confidence erodes in the face of higher interest rates and shrinking savings around the world, Apple could suggest to investors that the company’s March quarter will be slow.

“While we do not expect the resumption of detailed guidance typical of Apple earnings pre-Covid, we expect the commentary to be cautious with respect to product demand across the board,” UBS’s Vogt wrote.

If management comments are soft, investors looking for good advice might want to look at Apple’s services business, which is profitable and has grown strongly for years. However, several data points in the fourth quarter, including Apple’s own App Store payouts, suggest a significant slowdown in App Store growth, although analysts are divided on the severity.

The App Store is one of the largest components of services, but it’s only part of the business, which includes online subscriptions, warranties and search license fees. Apple shares could push higher if services like Apple TV+ and Apple Music look like they’re generating a higher percentage of Apple’s revenue, DA Davidson analyst Tom Forte wrote in January.

Services are expected to total $20.67 billion in the December quarter, according to Refinitiv estimates, representing growth of 5.9%.

Analysts also want to see if the strong dollar continues to hurt Apple, given that so much of its sales are overseas. During the December quarter, the British pound, Canadian dollar and Japanese yen all weakened against the dollar. Apple management previously said the strong dollar would be a 10 percentage point drag on sales growth.