IPhone SE Success Is In Focus Ahead Of Apple Inc. Q2 Earnings

• Apple will report its Q2 2016 earnings results on April 25.
• The main focus will be on the success of the iPhone SE success, Apple Pay progress, and Apple Watch sales.
• Analysts expect a double-digit YoY decline.

Tech giant Apple Inc. (Nasdaq: AAPL) is expected to report its Q2 2016 earnings results next week amid the security scandal with the FBI, the expected decline in iPhone sales, and a broad concern of an upcoming sell-off. Since the beginning of the year, Apple stock has moved up and down together with the market, as shown in the chart below, and failed to outperform the S&P 500, yielding only 1.57% year-to-date.

Source: Apple Stock Price Chart by amigobulls.com

Last month, Apple launched its latest device in the low-cost iPhones series, the iPhone SE, which has attractive specs compared with the iPhone 6 and 6S, and a price point of $399 that is targeting the Chinese market. The rationale behind the iPhone SE is to increase the iPhone sales volume through the low-cost SE device while compromising on ASP, to halt the decline in iPhone revenues. According to Apple Insider, the SE is experiencing a bigger demand than Apple’s current supply, and some of the models are simply unavailable at the moment. This report brings some good and bad news for Apple – on the good news side, Apple is selling more SE phones than it predicted, and the bigger volume is driving more revenue. However on the bad news side, the SE sales are probably cannibalizing the iPhone 6 and 6S sales, which will push ASP down and support the general trend of declining iPhone sales.

As happens every quarter, the iPhone segment performance will be in focus. However, this quarter, investors should pay extra attention to the SE sales in China, India, and Brazil. If Apple sold more units than expected in these countries, it makes the SE a success story that could halt the revenue decline. However, it depends on the cannibalization rate. Apple usually doesn't reveal sales volume by model, but investors should pay attention regarding any cannibalization comments that could suggest how the iPhone segment will perform throughout the year. This is one of the focus areas for this earnings release.

Another declining segment is the iPad segment that Apple is trying to revive with the iPad Pro products. Apple launched a smaller version of the iPad Pro last month along with an extensive ecosystem that should strengthen the company’s offering; however, the general direction of this segment is down, and if Apple could somehow slow this decline, it would be nice.

Two of Apple’s smaller segments, the "other products" segment and the "services," will attract a lot of attention as they include some of the company’s emerging businesses like Apple Watch and Apple Pay which, so far, have failed to generate any significant revenue figures despite the hype and buzz around them.

Analysts’ estimates reflect a 10% YoY decline in revenues and a 14% drop in EPS YoY, which supports the iPhone decline thesis that will theoretically be halted by a potential success of the iPhone SE introduction with minimal iPhone 6/6S cannibalization. Although most of the attention will be on iPhone results, investors should also look at services and other product segments to see whether Apple Pay and Apple Watch will grow at an accepted pace.

These are the comparable figures to watch out for Apple Q2 2016 earnings:

Source: Dow Jones