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Apple Earnings: Why I'll Be Watching Guidance

Daniel Sparks, The Motley Fool

When Apple (NASDAQ: AAPL) reports its fiscal second-quarter results later this month, iPhone revenue and total revenue will be two of the most closely watched metrics. The quarterly update follows Apple's fiscal first-quarter flop, which included revenue that was nearly $7 billion lower than management's initial guidance for the period. The shortfall, Apple said, was a result of weaker-than-expected iPhone revenue.

But an additional metric may be just as telling when it comes to analyzing the health of Apple's business as well as the prospects for its eventual return to growth. Management's revenue guidance for its fiscal third quarter will give insight into whether the tech giant's declining revenue is moderating. Will Apple guide for another meaningful year-over-year decline? Or could revenue finally be trending closer to breakeven when compared with the year-ago period?

Apple CEO Tim Cook kicks off Apple’s March 2019 event.

Apple CEO Tim Cook. Image source: Apple.

About Apple's declining revenue

After posting 20% year-over-year revenue growth in its fourth quarter of fiscal 2018, Apple suddenly swung to a decline, as fiscal first-quarter revenue fell 5% year over year. The pullback was shocking particularly because the midpoint of Apple's initial guidance range called for fiscal first-quarter revenue to rise 3% year over year.

"Lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance and for much more than our entire year-over-year revenue decline," said Apple CEO Tim Cook in a Jan. 2 letter to shareholders in which the company released preliminary revenue figures far below expectations. The iPhone dragged on the quarter, with that product segment's revenue declining 15% year over year.

Apple apparently expects weak iPhone sales to continue weighing heavily on its year-over-year comparison for total revenue, as the company guided for fiscal second-quarter revenue to fall 3% to 10% year over year. But for Apple's fiscal third quarter, investors should look for this decline to moderate since the iPhone typically accounts for a lower percentage of total revenue during that period than it does during the company's first and second fiscal quarters.

This means any year-over-year decline in iPhone revenue will have a less pronounced impact on Apple's year-over-year comparison for total revenue in fiscal Q3 than it did in the first two quarters of the fiscal year. In addition, faster-growing segments less impacted by seasonality will likely have a greater influence on its year-over-year revenue comparison in fiscal Q3 than in the prior two quarters.

Growth in services could help

Apple's services segment in particular could help moderate the company's year-over-year decline in revenue as the year goes on. The segment is seeing rapid growth -- and is growing as a percentage of Apple's total revenue. This means it is beginning to have a meaningful impact on Apple's total revenue growth.

Services accounted for just 15% of Apple's trailing-12-month revenue, but it grew at an impressive rate of 27% year over year. Given the company's aggressive emphasis on its services business lately, this growth rate is unlikely to come down much in fiscal 2019. So, investors can expect Apple's services segment to help offset some of the declines expected in iPhone revenue throughout the year.

With all this in mind, investors should look for management to guide for fiscal third-quarter revenue in a range of somewhere around a 5% decline to breakeven on a year-over-year basis -- an improvement versus what management guided for its fiscal second quarter.

Apple will provide fiscal third-quarter revenue guidance in its fiscal second-quarter update after market close on Tuesday, April 30.

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Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy .