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Apple, Inc. Guidance: The Good, the Bad, and the Ugly


Can the iPhone 7 bring growth back? Maybe it won't have to. Image source: Apple.

Investors had mixed reactions to Apple, Inc. 's(NASDAQ: AAPL) fiscal fourth -quarter results last night. Shares popped at the sight of better-than-expected iPhone unit sales, but quickly gave those gains back after investors saw a few cracks in the numbers. There was quite a bit to digest in terms of the Mac maker's outlook for the coming quarter, which is the fiscal first quarter. Let's look at the good, the bad, and the ugly.

The good: Apple expects revenue growth

Guidance calls for revenue in the range of $76 billion to $78 billion. This is a pretty strong forecast considering the fact that the Street was expecting just $75 billion in sales, and the fact that even the low end of that range would represent (a tiny bit of) growth from the $75.9 billion in sales that Apple brought in last time around. It wouldn't be much, but Apple investors should be grateful for any growth these days considering how large the business has become.

If Apple simply hits the midpoint of revenue guidance, it will be a solid achievement and it would break a string of three consecutive quarters of top-line shrinkage.

The bad: gross margin should be better

The Mac maker expects gross margin to be 38% to 38.5%. While that would represent a sequential increase of about 50 basis points at the high end, analysts were expecting more significant margin expansion in the fiscal first quarter. That's due to a thing that I like to call operating leverage (OK, other people call it that, too). When sales increase, companies with operating leverage see margins expand since it can spread fixed costs over more units, lowering average cost per unit.

This is not unique to Apple by any means, and some years exhibit greater leverage than others depending on what costs are doing in aggregate, but most were expecting rosier gross margin guidance -- especially since the aforementioned revenue guidance would represent an all-time record for the company, so you would think it would enjoy more leverage as opposed to less.

The ugly: iPhone units could still potentially decline

While revenue may still eke out a gain, it's quite possible that Apple will do so while simultaneously posting a decline in iPhone unit sales. This is a business with a lot of moving parts, and Apple is still severely supply constrained with the iPhone 7, particularly the 7 Plus. On the conference call, CEO Tim Cook declined to predict when Apple would reach supply/demand balance, and the company continues to sell every unit that it can make.

There are a couple of other factors that could contribute to Apple achieving sales growth without iPhone growth. The Mac has been slacking lately due to an aging lineup, which should be refreshed tomorrow and reinvigorate Mac sales. There's not a lot of historical precedent for the smartwatch market considering its youth, and the Apple Watch Series 2 could potentially throw a curve ball with better-than-expected sales. Services continue to march higher.

The market tends to focus too much on iPhone unit sales, which would be ugly if they fall short, but I'll take top-line growth any way I can get it.

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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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