Apple Earnings Preview: Timing of iPhone5 Launch May Heavily Affect EPS

Apple

has only missed earnings once in the past eight years - last fall, ahead of a major product launch, back when analyst expectations were sky high. For its June quarter report on Tuesday, shareholders have the opposite problem. Apple is facing some of the lowest analyst expectations in recent memory. “Apple guided for its biggest drop in gross margins in a decade, and I really doubt that is going to happen” said Brian J. White, analyst with Topeka Capital Markets in New York. “So regardless of where sales come in, I see the EPS expectations as really low.” For the June quarter, expectations are for earnings of $10.35 per-share, up 33 percent from $7.79 in the same period last year. Revenue is expected to grow 30 percent to $37.2 billion, the slowest quarterly top-line growth in two years. Analysts are generally expecting iPhone unit sales of 28-29 million. For his part, White thinks the company may end up doing slightly better, and has modeled unit sales of 30.9 million The Street is partly banking on far weaker sales for the iPhone, a product that makes up more than half of the company's revenue. It is widely expected that customers may hold off iPhone purchases until the next-generation iPhone 5 comes out. The company has not announced a product launch date, but the device is anticipated to debut in October. Analysts are being careful not to be fooled twice. Customers delaying purchases for the launch of a new iPhone last fall was perhaps the biggest reason for the earnings miss. As a result, expectations for Apple's fiscal-fourth quarter are down as well. It is now assumed that sales of its key product will meaningfully slow until the new product arrives. Yet while analysts are making sure they don't get fooled again, what if Apple is playing a similar game, and winds up launching the iPhone earlier than expected – say in September? That might allow the company to start booking several weeks of iPhone sales in the current quarter, ended September, and help Apple to beat the lowered expectation for the current quarter. “Most everyone is talking October, but we think that it's going to be a September launch,” Topeka's White said. “No one – including us – has baked that into their earnings guidance at this point, but a sooner launch date could happen.” The product timing could be important for U.S. markets, given that Apple now represents almost 12 percent of the market cap for the NASDAQ 100. Apple's margin guidance for iPhones at the midpoint is 41.5 percent; it's worth noting however, that memory prices declined in the quarter - one of the factors that may help push margins for the device above that expected figure. Apple should still benefit from strong iPad product sales in the quarter. Few analysts expect that recent product launches from Microsoft

and Google

will slow down iPad demand. The new releases are smaller, less expensive, and less feature-rich, and are larger market share threats to Amazon's

Kindle Fire. To the contrary, Apple may eventually step up with its own smaller iPad, which White is calling the “iPad Mini." He has not modeled sales for such a device, but thinks that Apple could announce its own lower-cost, smaller iPad in time for the holiday shopping season. White believes that an”iPad mini” would take away 10-20 percent of sales for the full-fledged iPad, but would help open up more opportunities for Apple among schools and developing markets. Apple also will be subject to many of the macro factors faced by other U.S.-based multinational tech and manufacturing firms. That includes weaker results from Europe, slowed by the economy and unfavorable currency exchange rates. Apple generated 22 percent of its revenue from Europe in the previous quarter, and about 23 percent of its operating profit. The company's recent launch of new Mac PCs also may be in focus, amid a slowdown in global PC shipments.