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For Apple's Q3 earnings, it's all about the next iPhone

When Apple reports is fiscal third quarter results on Tuesday, Wall Street will actually be looking for hints about the upcoming iPhone.

Apple iPhone X Sale goes on sale at NYC flagship store
Sarah Tew/CNET

When it comes to Apple's fiscal third-quarter earnings report Tuesday, the only thing that really matters is what it says about the next iPhone.

And while Apple doesn't give many -- or really, any -- details about its next iPhone during earnings calls, it gives small hints. CEO Tim Cook occasionally will make comments like Apple's expecting an "exciting fall," but that's as verbose as he gets. Still, financial analysts read the tea leaves to estimate how many devices Apple thinks it can sell in its September quarter, which usually includes the first week or two of new iPhone sales.

That means that when it comes to the fiscal third quarter, which covers the three months that ended in June, Apple gets a pass. It's Apple's smallest in terms of contributing to annual sales. By the time the period ends each June, Apple's newest iPhones are already nine months old. Case in point: the iPhone 8 and iPhone 8 Plus were introduced in September 2017.

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During the quarter, people no longer line up at Apple Stores but instead wait for the next phones to hit the market, likely in September. Last year, the iPhone X came out in November, a couple of months later than normal. Apple customers want the latest and greatest -- or to buy the older models at lower prices. History has shown that whenever Apple introduces a new iPhone, it cuts the prices of its previous models.

The fiscal third-quarter results "are likely to mean little to investors barring a significant surprise to iPhone units, gross margins or services trajectory," says Toni Sacconaghi, an analyst with Sanford C. Bernstein. "Investor focus has shifted to iPhone demand in FY19 with the next generation iPhones."

Apple declined to comment ahead of its earnings report.

iPhone moneymaker

Cook has been making efforts to expand beyond the iPhone, but Apple still gets most of its money from the popular smartphone. In the second quarter, it sold 52.2 million iPhones, which accounted for 62 percent of sales. (Services, Macs and iPads and "other products" like AirPods contributed to the rest of revenue). But Apple surprised almost everyone that quarter by reporting strong results despite fears that slowing demand for smartphone had finally caught up to the Cupertino, California, company.

At the time, Apple noted that its iPhone X, which hit stores Nov. 3, was the best-selling device every week of the quarter, even though it was the most expensive phone Apple's ever made. The 5.8-inch device starts at $999, or $300 more than the 4.7-inch iPhone 8 and $200 more than the 5.5-inch iPhone 8 Plus.

With the iPhone X, Apple redesigned its popular smartphone for the first time in three years, getting rid of the home button to expand the touchscreen and adding a new Face ID technology. It touted the iPhone X as "the future" of mobile." Analysts predicted it would drive a "supercycle" that would reinvigorate excitement in the sluggish smartphone market, which has seen worldwide demand slip as people hold on to their devices longer. That didn't quite happen, but sales also haven't completely stalled, like some feared.

For the third quarter, which Apple will report on Tuesday after the market closes, analysts estimate the company sold 41.8 million iPhones, according to Sacconaghi. That's compared to 41.03 million in the same quarter in 2017.

Sales are projected to be $52.3 billion, up 15 percent from a year ago, according to Yahoo Finance. Earnings should rise to $2.18 a share from $1.67 last year.

Apple is expected to introduce three new iPhones in September, including the possibility for a model considerably larger than the iPhone X and another that's significantly less expensive.

But smartphones are no longer a fast-growing business for Apple. The "iPhone is becoming a stable business," Loup Ventures' Gene Munster noted, instead of the company's biggest growth driver. Unit sales won't soar each quarter like in the past, but they'll be flat to up about 5 percent, he estimated, as consumers steadily replace their phones.

Because so many people have iPhones, Apple's services business -- which includes the App Store, Apple Music and iCloud -- is where we'll likely will see a big leap. In the second quarter, Apple's services revenue jumped 31 percent to $9.19 billion while iPhone unit sales rose only 2.8 percent.

"We have the best pipeline of products and services we've ever had," Cook said during Apple's second quarter earnings call on May 1.

Tuesday may give us the first glimpse of just how great that pipeline really is. 

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