Apple Q2 preview: Can the smartphone cash-cow maintain momentum until iPhone 6 lands?

Apple Q2 preview: Can the smartphone cash-cow maintain momentum until iPhone 6 lands?

Summary: Expect a boring, quiet quarter. At least until the very end, when WWDC 2014 kicks off in early June. That's when the fireworks really begin.

TOPICS: Apple, iOS, iPhone, iPad
(Image: CNET/CBS Interactive)

All eyes on Apple on Wednesday when it reports its fiscal second-quarter earnings during a period in which it's done... 

Zip, zilch, nada, nothing.

Wall Street is expecting Apple to report second-quarter earnings of $10.17 per share — down by 1 cent per share from the same quarter a year earlier. Revenue is expected to land in at $43.55 billion.

Apple said at its fiscal first quarter earnings that its second quarter outlook would land somewhere between $42 billion and $44 billion, down on analyst expectations. That was enough to send alarm bells ringing for the first three months after the December holiday season, and its stock price down by more than 8 percent in after-hours trading.

Because Apple hasn't done anything as of late.

It's almost unheard of for a technology company to not release a new product or service in six months. Except that's exactly where Apple is at the moment.

iPhone: Modest growth, but risks remain

Apple is expected to sell about 38.8 million iPhones during the quarter, according to average analyst estimates compiled by Fortune. The iPhone accounts for just over half of the company's revenues as of the year-ago quarter, and critical to its bottom line.  

The high-end iPhone 5s and lower-priced iPhone 5c remain the company's cash cow — the former over the latter, anecdotally, even if figures weren't broken out in previous earnings. Apple's aggressive advertising campaign in recent months to get the fire lit underneath the iPhone 5c may be paying off. But what's in the device's future remains on analyst's minds.

Pacific Crest analyst Andy Hargreaves said he believes Apple has "latent pricing power that is likely to exploit during the iPhone 6 product cycle." That, he said, could be the company's secret profit sauce for the next iPhone.

He explained in a recent note to investors:

"This could offset the impact of higher cost of goods on a larger-screen iPhone, as well as increase gross profit per unit throughout the iPhone lineup. This would likely create upside to current expectations and drive [Apple] higher. If we are wrong and Apple does not increase pricing in the next cycle, a tick down in gross margin would be likely..."

Jefferies analyst Peter Misek concurred a price increase, but not necessarily for the same reason. He said a $50 average selling price increase would offset negative gross margin impact if the device were larger in size, and therefore more expensive to manufacture. He added:

"The possibility may at first seem farfetched in light of investor concerns regarding possible carrier subsidy and handset price cuts due to smartphone saturation and lack of differentiation. But we think this general lack of differentiation could be the reason why Apple may be able to get a price increase."

That, he says, will be on the heads of carriers, realizing that the iPhone 6 will likely be the "only headline-worthy high-end phone" launched this year, and they could lose subscriptions as a result.

iPad: Analysts expect a small decline

Apple is expected to sell about 19.2 million iPads during the quarter, according to average analyst estimates compiled by Fortune. That's just shy of a 1 percent decline year-over-year.

Although the iPad effectively carved out the tablet market when it launched in late 2010, the lack of growth is troubling some analysts. During the slow early months of the year, a slower growth was to be expected, considering following each December quarter there have been quarter-over-quarter declines as standard. But a full on decline? Apple needs to turnaround its tablet efforts if it wants to remain the dominant player in the space.

Analysts say this year's expected decline year-over-year is compounded by no iPad announcement in February, which many expected, following on from last year.

Mac: Holding off on the decline tipping point

Apple is expected to sell about 4 million Macs during the quarter, according to average analyst estimates compiled by Fortune. That figure is down from 4.1 million during the first quarter, but up from 3.8 million during the year-ago quarter.

It's good news in that it's a recovery from the four quarters of decline during 2013, but it's relatively stable overall. As the PC market continues to contract and decline rapidly, Apple's keeping its head firmly above the water with its own desktop and notebook range.

New Macs are expected to be revealed and launched the company's Worldwide Developer Conference (WWDC) in early June.

iTunes: Software, services need a bump

In the year-ago quarter, Apple made $4.1 billion in revenue from iTunes, including software and services from its other app stores. That's expected to rise by another 25-30 percent in the coming second-quarter earnings, based on previous reports.

Strong iPhone and iPad sales are one of the major driving factors to Apple's revenue gains from iTunes and the App Store. As the desktop market begins to dry up and the app and music market continues to expand, Apple will increasingly focus on the mobile and tablet market as methods to squeeze even more revenue. But the living room market remains vastly untouched, and Apple continues to work on its set-top box in efforts to monetize this space.

And, mobile payments remain a key area Apple has yet to tackle. BMO analyst Keith Bachman said "more services, including potentially payments," could be one major catalyst for Apple's longer-term prospects.

Wells Fargo analyst Maynard Um said the next push will be to leverage the existing installed user base, including "driving usage of applications and services." He added:

"Giving away iWorks or iMusic for free, for example, is not to drive material revenue, but, rather, to give Apple more insight into the end user. Similarly, we believe the information collected by iDevices (like an eventual iWatch) will be for the purpose of knowing more about the habits and status of the end user."

Apple reports its fiscal second quarter earnings after markets close at 4pm ET on Wednesday.  

Topics: Apple, iOS, iPhone, iPad

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.


Log in or register to join the discussion
  • Logic?

    Curious about this blurb:

    "on the heads of carriers, realizing that the iPhone 6 will likely be the "only headline-worthy high-end phone" launched this year, and they could lose subscriptions as a result."

    How would they lose subscriptions? Are people going to revolt and stop using their iPhone if it doesn't have a lower price, huge screen?!? Everyone that rushed out to get a 5S is pretty much on contract until 2016 (stateside).

    Apple is facing the same issues all OEM's are. You cannot sell a new smartphone every year to people. The bulk of iPhones I see in use are still 4S. It meets the majority of peoples needs and is cheap. It's also a much easier phone to repair. Smartphones are like an appliance now - unless it breaks or you have money to burn people use it until it needs to be replaced.

    So Apple is stuck - do they increase the cost of the larger screen device (likely $249 - $399) or cave to carriers and lose some of the margin they get with the subsidy deal they have. Considering carriers are sitting on a ton of inventory and are trying to unload 5C and 5S I don't see them rushing to bend over for Apple anymore.

    The "upgrade" market is a small churn now. Likely less than 50 million people world wide which sounds large but is a drop compared to the overall 15-16 billion smartphone users. Apple needs their whole ecosystem to stay relevant and create lock in (PC, Phone, Tablet, TV, Ecosystem). It looks for many but more and more people are finding others can provide the same functionality and feautures (often better) for cheaper. Apple is heading to the same as their PC marker 7-10% with Android eating up the majority and others (Microsoft, Blackberry) getting their 1-3% scrap.
    • 100% correct. I was saying this would be the state of affairs last year.

      Its a no-brainer.

      Im absolutely positive that I was far from the only one saying this is exactly what would happen. How was I so sure this would happen? Easy. Firstly, it isn't rocket science, its common sense. Markets become saturated. Even IT markets that tend to have significant overspending due to constant repurchasing due to product upgrades will eventually stymie. Its inevitable. Eventually most of the "must have" and "really cool" new features will be found on a majority of the phones and there will be little startling to inspire future upgrading purchases when most people have a very good and functional working smartphone and don't care to spend more already on an upgrade that offers little new.

      Its common sense. Further, we have seen this already in the PC industry. It took a lot longer than smartphones, and rightly so as CPU, memory, storage capacity and video rendering started out in practical terms in its infancy when home and broad based workplace PC's began their climb to fame. Theres no question that all the afore mentioned hardware components for PC's grew incredibly more powerful, for simple example between 1997 and 2007, that 10 year spread was pretty remarkable in terms of hardware performance improvements. It was very inspiring to not only purchase a PC if you didn't already have one, but performance improvements were such that people could be pretty inspired to upgrade their hardware in regular fashion as well.

      And just as predictable as well, the pace of improvement in PC hardware eventually outstripped the desire for frequent upgrading as the hardware most people owned was eventually so good, even in middle of the road configurations, that the inspiration to upgrade to even newer hardware waned. And of course as years of public purchasing of PC's eventually mean that sooner or later the vast majority of the human race that can afford a PC eventually own one. And again, its not rocket science, sales slow. After awhile significantly.

      And now its smartphones. Of course there have been hardware improvements and will continue to be hardware improvements, but the disadvantage the smartphone market has had to work under was that it was already benefiting from the research and development that had gone on for years in the PC industry that allowed for some fairly decent micro sized components right off the hop, and within only a few years of further development most good quality smartphones have reached the "good enough" level that uninspires continued frequent upgrading. If not for the availability of cheap upgrading at some point during or at the end of a service contract there would likely be even slower sales. This of course is not something the PC market benefits from.

      This is all very mundane predictable stuff without something new or unusual happening in the market.

      And all this nonsense about waiting for Apple to come out with some new and interesting product is unreal. Its almost as if people have no concept at all as to how fortunate and unusual it is for a company like Apple to have such a breakthrough product. TAKE A LOOK AT THE MONEY PEOPLE.

      Its beyond fortunate and unusual, its freakishly fortuitous. Its not likely to happen again. Not just with Apple, but with any company. Its the most extreme example as far back as most of us alive could recall of a company getting such a mind blowing income stream from a product. And its not like the iPhone and iPad are distinctly different and unique products. They are in fact damn near identical in many respects. For example, if you didn't have the ability to invent and develop the iPhone it would be particularly odd to imagine you could invent and develop the iPad. The iPad isn't a whole lot more than a giant sized iPhone. Apple HAS NOT been out there creating a whole slew of new and inventive things over the years.

      Apple got a very lucky break in being the first to solve the screen real estate conundrum that had beleaguered the cell phone industry. It was a brilliant solution and well executed, I know, I owned an iPhone for years. But all the most important bits of hardware that goes into making such a thing work were not invented by Apple. Does this leave Apple in a slightly more precarious position than what most people think??

      Depends. On what your thinking.

      If you live in some Apple colored dreamland where Apple is a mighty industrial juggernaut of incredibly inventive minds that pump out fantastical inventions on a regular basis, and you believe that's what is needed to keep them afloat, then yes Apple is a lot more vulnerable to downturns then you appear to even have a clue of. Because that's not reality.

      Apple makes great PC's and got very lucky with their quick deployment of the iPhone and follow up product the iPad. It made them rich beyond any other company in the world. Its not likely to ever happen that way again.

      But Apple has billions on billions in reserve and still has a very strong and regular revenues stream in the gadget industry. Although that is certainly bound to continue to tail of until it reaches a realistic equilibrium given market saturation limitations in the market.

      Apple is not in trouble in any general sense of the word what so ever. But its very likely that their yearly income will have to slowly return to otherwise earthly levels befitting normal human companies. If they can come out with a few more interesting fairly successful new products in the coming years they will certainly benefit correspondingly.

      It seems pretty clear that far too many people don't realize what an especially unusual position Apple found itself in. Its like flying to the moon; then someone asks you right after if your going to Mars next. If you ask such a question you clearly have no idea at all what an incredible feat it truly was to make it to the moon and back.
      • Well I don't entirely agree :)

        First mobile phone users are not 15 billion - the world population is half that, if in some countries smart-phones are set to be more than people (maybe already happening), worldwide numbers are not so "rosy".
        Apple is not in an unusual position the way you describe it - even if the described scenario was true - Apple have some decades and they survived for years having a small share of worldwide computing devices. I suppose they are in a new position because of the opposite - they are more dominant than ever in some ways - like in profits from computing devices.
        Smartphones and tablets are still growing fast, obviously they are not growing like they used to, but that's not the same as saying Apple is doomed or about to hit a big wall. Microsoft is steadily growing profits and income with a traditional PC market that is way slower - yes they have to ingenious.

        Obviously Apple has no chance (at least is how it seems) to fight android for market share, but nobody was able to show that they would be making more money if they tried to grab share, probably only possible by decreasing prices or by licensing iOS to others (no way that is going to happen).

        Like in many other things in the world, future is inevitable. It's common to listen people that we are about to hit a wall - processor clock speed, pixel count, disk density, ... but the reality is that the next great thing becomes fashion and the world keeps spinning and growing.
        Wearables, IoT, next gen. TV, augmented reality, ... and who knows what more, will offer opportunities to companies like Apple. Apple has the means and have showed they have the skills to keep on being a very well succeeded company. The problem is not the lack of opportunities, the issue for Apple and all others is to be able to grab the right ones knowing that the competition is out there.

        I agree that Apple was very lucky, but luck only get to the ones that deserve it, many giants have fell, but when we are big it's easier to keep on being big and even become bigger.

        Apple has enough money to buy almost any tech company in the world, and if they keep on making the amount of money they are making for a few more years, even Google or Microsoft could be (by academic exercise) be bought.

        As I see it, these are great times to be a tech. company (and that is true for decades :) )...
        • yes but

          Apple is not in any of the new markets. The only market they have is iPhone. Their computer sales are down (as they should be) and more consumers are waking up and realizing that iPhone isn't a top notch product. As this happens they will slowly fade back into irrelevance. Without steve jobs around... nobody cares about what they come out with. The Apple faithful iSheep will go purchase what they make, and thats about it.
          They have a few more generations of success and then they will start their decline. And no they cannot fight everyone else. But at the end of the day its not about the company that makes the most money (that is only due to iSheep). Its about the platform that wins. Because in the end Microsoft wasn't making more $ than Apple for the longest time. But eventualy Apple was about to go bankrupt. Because their big headed state of mind that they make the best stuff and they should own everything is just an inferior mindset. And yes they got super lucky and are now rich.
          But overall people don't care too much (worldwide) about their products.
          As other vendors flood the markets with products that have comparable features and specs at lower prices they will ultimately win regardless of how trendy Apple is.
          And the further they raise the price, the further they will get away from people owning their products.
          As was said before, the majority of people have iPhone 4S. I rarely even see a 5S, some people have 5's but thats about it. Most people cannot afford something astronomically expensive...
    • So true

      Not only are most people on contract but most people won't rush out to get the new iPhone. Because new devices aren't large leaps in tech anymore. And the iPhone hasn't been a headline worthy phone in generations now, yet people still go buy it. So they are really just delusional. As they increase the size of the iPhone they will just lose more and more customers. Because in the "big phone arena" they cannot compete. Put an iPhone against a M8 or a S5 and its destroyed in every single way (especially by the M8). The only reason someone would get an iPhone is either because they are a fanboy, or they want a small phone that is still a "flagship".
      As MFG's get their "mini" versions into the same world of specs as their flagships and iPhone's increase in size... then they will continue to lose marketshare.
      But it is funny to see their delusions.
    • 15-16 billion smart phone users?

      Ahem, last count there were "only" around 7 billion souls on this planet.

      From I can tell the rest of your comments are just as accurate (not)
      • Mobile Users

        Sorry for not being exact in my estimate

        My point is of the total population, people that upgrade yearly is a small segment. You certainly cannot run a business hoping for upgrades every year.
  • Apple is hugely profitable

    But the market conditions for tech companies can change overnight. Tim Cook has proven that he can build a world class supply chain that can successfully build and market great products. He still has to prove he can lead or even survive the next big market disruption that happens when a product category is created or reinvented. MS and BlackBerry both failed miserably to create a worthy competitor to the IPhone, leaving the door open for Samsung to be the "next big thing". Apple investors know that. Apple is not in any immediate danger but neither it's investors nor its customers can be happy with the "me too" market response that Tim Cook has delivered to date.
    • Samsung's history has been to

      emulate the market leader and establish themselves in a solid second place. It's worked for them, but they are not going to be the ones to disrupt any market.
      • you mean

        when they took over the TV market? By making better, more innovative products, that are of much higher quality, but for a lower price than Sony?
        yea that gave them a 2nd place. They shot to the top, because they made the best TV's.
        • Did Samsung disrupt the TV market?

          That's the parent's original point.
        • Also, Samsung is not the largest

          HDTV maker by market share. Vizio is.
      • key components

        does Apple have display or optical sensor or memory technology? NO! They are at the mercy of the Asian components suppliers who will inflate the price of old technology for Apple to buy and keep the best technology on their own products. Samsung builds ships, TV and fridge. Sony has their movies, music, gaming and digital camera and camcorder. Apple rely on iphone and ipad for revenue and have nothing else to fall back on.
        Nathane Grave
    • Yes well

      Also that Apple hasn't actually even made a single headline worthy device in years. And without Steve Jobs to take a rudimentary and boring, feature lacking product and use his RDF powers to distort reality and make it "magical", Apple will begin to circle the drain.
      • You mean other than the iPhone 5S

        and Mac Pro?
        • What were the big headlines of those devices?

          Why do you think the last few years have been peppered by articles about Apple losing its cool and questioning if Apple can innovate anymore.

          Cook even had to come out and say that Apple can still innovate and people will see so "soon". That was about a year ago.

          Point being that Apple has gotten boring.
  • Prediction: Apple will be spot on in its estimate

    but everyone will act like the sky is falling because analysts who are NOT Apple will post a higher estimate that Apple will then fail to meet.
    • That's why analysts pick the point they do

      This keeps companies like Apple from estimating on the "safe side", or less then they calculated they will do, so they can "widely beat the estimate".

      Analysts will try to give a "more accurate" sales numbers that will reflect the sales more closely.
    • Thats not how it works

      Stocks are based on just one thing called GROWTH
      estimates are just estimates and both companies and analyst play games about them.
      If u sold 10% higher then last yr then ur stock will do good.
      if u sold same as last yr then stocks will not do good.
      and if u sales go down then the heavens like fall.
      This applies to every company
      • Except Apple. Watch. Apple will

        show double-digit YOY growth and their stock will drop.