Apple may not have sold as many iPhones as investors and analysts hoped last quarter -- even with the addition of China Mobile as a distribution partner in the world's largest smartphone market -- because some customers may already be holding off and waiting for the larger-screen iPhone 6 rumored to be released later this year.
Analysts on average are expecting Apple CEO Tim Cook to deliver $43.5 billion in sales, and profit of $10.19 a share, when the company reports second-quarter earnings after the market closes Wednesday. That's down from the $43.6 billion in sales and $10.09 a share in profit the company had in the same quarter a year ago. Analysts are calling for gross margin, a key measure of profitability, of 37.6 percent.
A big part of the drop has to do with the iPhone, Apple's biggest moneymaker at more than half of sales. Apple has released a new iPhone every year since former CEO Steve Jobs introduced the device to the market in 2007. Consumers may be holding off on buying the current iPhone 5s and iPhone 5c, which each sport a 4-inch high-definition display, as they wait for larger-screen models in the second half of the year. Cook and company are reportedly gearing up to announce two new iPhone 6 models with display sizes of 4.7 and 5.5 inches.
"We expect a slight pause in near-term iPhone sales due to the faster global ramp of new models in late 2013 as well as anticipation of the larger form-factor iPhone 6," said Brian Marshall, hardware and data analyst for International Strategy & Investment Group.
There has been some speculation that larger iPhones could also steal sales from Apple's iPad Mini, with consumers opting to buy a bigger phone instead of buying Apple's smaller tablet.
After selling 55 million iPhones and 26 million iPads during the holiday quarter -- an Apple record for that time of year -- sales of its smartphones and tablets are expected to be lighter this time around. Analysts are anticipating about 38 million iPhones sold and about 20 million iPads, according to Toni Sacconaghi, an analyst with Sanford C. Bernstein & Co.
It's not just an iPhone pause that may be hurting demand for Apple phones. The company's biggest rival, Korean handset maker Samsung, may have wooed iPhone users over to its popular Galaxy smartphone with its new S5 model.
The pressure has been on Apple to enter new product categories instead of incrementally refreshing its existing product lines, especially while competition from other tech giants like Samsung becomes more fierce. The iPhone and iPad together account for more than 75 percent of Apple's sales, and Cook has been criticized for not branching off sooner into new markets, including smart TVs and wearables.
Apple and Samsung are embroiled in a long-running legal battle over alleged patent infringement in their mobile devices. One of Samsung's main defenses of its meteoric rise to smartphone prominence (it's now the largest smartphone seller in the world) is that the company offers consumers features that Apple's products don't have -- including larger screens. The Galaxy S5, released earlier this month, has a 5.1-inch display.
iPhone demand may also have been affected by a change in smartphone upgrade policies -- from 20 months to 24 months -- at AT&T and Verizon, the two largest carriers in the US, and a "weaker" than expected run rate for iPhone sales during the quarter from China Mobile, according to Sacconaghi. China Mobile, the world's largest mobile service provider, began carrying the iPhone in January after Cook spent years negotiating a pact. The iPhone is already sold through China Unicom and China Telecom, the other major carriers in China.
Investors and analysts may already be looking past Wednesday's earnings report to Apple's annual developer confab, which the company typically uses as a stage for new product announcements, including updates to the iOS mobile operating system that powers the iPhone and iPad, and updates to the Mac OS X software that runs its Macintosh computers. The Worldwide Developers Conference will be held June 2-6. Apple could unveil new hardware at that event or later in the fall, including those larger-screen iPhones.
Also, the company finally may be ready to unveil its long-rumored iWatch, a smart device that would mark Apple's entry into the wearable-device market. Rumors around an Apple wearable have intensified since CNET reported last week that Nike was putting the kibosh on its FuelBand fitness-tracking bracelet, possibly paving the way for an Apple-Nike partnership for a future device. Cook has served on Nike's board for the last nine years, which feeds the speculation.
Cook has said repeatedly that 2014 will be a year of product innovation for Apple, and he told investors in January -- after announcing earnings and iPhone sales that disappointed them -- that the company is still on track to enter new product categories this year. Analysts are holding him to his word. "Now is the time to invest in Apple for new product categories," Morgan Stanley analyst Katy Huberty told investors last week.
Apple's shares, down 5 percent this year, closed at $531.70 Tuesday in regular Nasdaq trading.
The company is hosting a conference call Wednesday to discuss its financial results. You can listen to it here.