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Three key things to watch in Apple’s earnings

Apple Inc. reports earnings after market close Wednesday marking one of the few occasions when the "most important quarter in the company's history!" hype may be justified. Once everyone's market darling, in the post-Jobs era Apple stock has been under increasing pressure.

In aggregate, Apple is expected to report profits of $13.57 (U.S.) per share on sales of $54.88-billion. Under the surface, three aspects of the report will be pivotal to the outlook for what is still the world's largest company by market capitalization:

  • Profit margins. Since the 1980s, expanding profit margins have been the hallmark of growing, dominant companies in the technology industry. Declining margins, on the other hand, have been the first sign that stiff competition is eroding market position. Apple’s margins have been arguably the primary factor behind the stock’s recent $200 per cent fall. Gross margins peaked at 47.4 per cent in March 2012 and declined to 40.04 per cent in the most recent quarter. Collecting projections from 65 analysts covering the stock, Bloomberg predicts a further decline to 38.65 per cent will be announced Wednesday.
  • Asian revenues. CEO Tim Cook has shown some very un-Apple-like anxiety over the company’s deteriorating market share in Asia, first hinting at a new low cost iPhone for the Asian consumer and then retracting the idea. (Mr. Cook did make it clear that China is a priority, and announced special, China-only financing plans for major purchases through the online Apple Store.) Meanwhile, however, iPhone sales in China have fallen to sixth place among smartphones and overall, revenues from Asia declined from 26 per cent of the total in the second quarter of 2012 to 21 per cent in the third quarter.
  • iPhone sales in general. Apple is increasingly dependent on the iPhone, which generates just under half of total revenue. It appears, however, that the popularity of the device is on the wane as Android and Samsung smartphones continue to gain market share. If IPhone sales disappoint, this could be another sign that the novelty has worn off and Samsung has made further inroads into Apple territory.
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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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