Apple earnings preview: iPhone still rocks, China woes bubble up

Sales of the company's blockbuster smartphone will likely remain strong -- even during the lowest sales period of the year. But a slowdown in China's economy could hit Apple.

Shara Tibken Former managing editor
Shara Tibken was a managing editor at CNET News, overseeing a team covering tech policy, EU tech, mobile and the digital divide. She previously covered mobile as a senior reporter at CNET and also wrote for Dow Jones Newswires and The Wall Street Journal. Shara is a native Midwesterner who still prefers "pop" over "soda."
Shara Tibken
5 min read

Apple's iPhone 6 and 6 Plus have been contributing to soaring financial results. CNET

The iPhone will prove as resilient as ever -- even if a potential hiccup is on the horizon.

That's the expectation for Apple when it reports its financial results for the third quarter Tuesday. Typically, the fiscal third quarter is Apple's weakest period of the year -- its newest iPhones are nine months old by the end of the quarter in June, and rumors about new devices coming in a few short months cause consumers to hold off on their purchases.

But this time around, Apple's blockbuster iPhone sales likely continued, according to analysts tracking the company. Research firms polled by Fortune estimated Apple sold 49.4 million iPhones in the period, up 40 percent from the same period a year ago. That's not as many as in the past couple of quarters -- including the 61.2 million iPhones sold in the March period. But it's also not shabby compared with rivals such as Samsung, which warned earlier this month that its June quarter profit likely would be lower than expected and would fall for the seventh straight quarter.

A big reason for the anticipated rise in Apple's smartphone sales is the popularity of the iPhone 6 and 6 Plus in China. The country surpassed the US to become Apple's biggest iPhone market in the March quarter, and it topped Europe as the second-biggest revenue generator overall after the Americas. China also was the only region detailed in Apple's earnings report in April, where second-quarter sales topped those of the first quarter, thanks to a boost from the Chinese New Year in February.

But China could become less of a sure bet for Apple if the region's economy slows and demand starts to dry up. Earlier this month, Gartner revised its annual growth forecast for smartphones downward, in large part because of the cool-down in the region.

"We have witnessed fewer and fewer first-time buyers in China, a sign that the mobile-phone market there is reaching saturation," Gartner analyst Annette Zimmermann said in a research note.

It's been a strong run for China -- and companies selling products in that country. China became the world's largest smartphone market in 2011 and now is home to more than half a billion smartphone users. The introduction of larger-screen phones with the 4.7-inch iPhone 6 and 5.5-inch iPhone 6 Plus (versus the 4-inch iPhone 5S) helped Apple gain a bigger presence in the country, as did a January 2014 agreement with China Mobile, the world's largest wireless carrier, with more than 800 million subscribers.

Analysts are sure to look for commentary from CEO Tim Cook on how China's economy could affect Apple and what that means for iPhone sales. Apple's smartphone line has made up more than two-thirds of the company's total revenue for the last couple of quarters. Apple didn't have a comment ahead of its report Tuesday.

"A slowing Chinese economy is a risk for Apple," UBS analyst Steven Milunovich noted. But UBS economists expect the Chinese stock market turmoil to have a limited impact on the region's overall economy. "We think Apple is OK for now, but we will watch the situation closely," Milunovich said.

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There also could be questions about the upcoming iPhones, likely called the iPhone 6S and 6S Plus. The new devices -- likely launching in September -- are expected to feature similar designs to the iPhone 6 and 6 Plus, which follows Apple's trend over the past generations of its popular smartphone. The off-year "S" model typically adds features that don't dramatically alter the overall design -- such as the Siri digital voice assistant, added to the iPhone 4S , or the TouchID fingerprint reader, which debuted with the iPhone 5S . Apple may include its ForceTouch technology in the new devices, allowing the iPhones to differentiate between hard and light taps on the display.

Apple plans to build more iPhones than ever before for the new models coming this fall, according to a report from The Wall Street Journal earlier this month. The company has asked suppliers in Asia to make 85 million to 90 million units of two new iPhones with 4.7-inch and 5.5-inch screens for release later this year, the publication said. Last year, Apple had asked suppliers to initially build 70 million to 80 million units of its iPhone 6 and 6 Plus smartphones -- which, up to now, have been the best-selling devices Apple has ever created.

Singing the same tune

Overall, Apple's third quarter likely followed the same trends as the second -- strong iPhone sales boosting results, and weak iPad demand remaining a drag. Analysts expect Apple to report per-share earnings of $1.80, and they anticipate revenue of $49.3 billion. Apple in April said its sales would likely total $46 billion to $48 billion.

Unsurprisingly, Wall Street believes iPad sales dropped again. Apple likely sold 10.7 million tablets in the quarter, down from 13.3 million a year earlier, according to a poll by Fortune. This would mark the sixth consecutive decline for Apple's iPad line -- a concern for a company that's becoming more and more reliant on its smartphones.

Consumers have been holding on to their tablets for longer and opting to purchase bigger-screen iPhones instead. And so far, the expected boost from business users seeking out the tablets -- particularly with Apple's partnership with IBM -- hasn't materialized. What may turn things around for the iPad is a bigger-screen "iPad Pro" that could hit the market this fall. But don't expect Apple to talk about that Tuesday.

Another topic top of mind for analysts is Apple Watch sales. Reports have characterized recent orders as dismal at best, with data tracker Slice Intelligence recently saying sales of the smartwatch tumbled 90 percent after the opening week.

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Apple doesn't plan to break out Apple Watch sales, but it could give some general thoughts on demand and on the reception of the device. Most likely, though, Cook will follow his typical line of saying everything is "fantastic."

"For Apple to hit our 26.3 [million] unit estimate through December, we believe that reviews will need to get materially more positive on the Watch after WatchOS 2.0 [which improves the device's apps] rolls out," said JP Morgan analyst Rod Hall. "We believe this is possible given the substantially better functionality in OS 2.0, but only time and reviews will tell in the early fall."

Apple also introduced its first subscription streaming-music service, Apple Music, at the end of June. The service may not be a huge moneymaker at first, but analysts believe it was an essential move for Apple to make as the market shifts away from purchasing songs to renting them.

Between the Apple Watch, the larger iPhone, and new areas of expansion like Apple Music or the company's presence in the world of cars, there remains reason for some to get excited.

"Apple's future prospects have never been brighter," said Cantor Fitzgerald analyst Brian White.