Apple faces big earnings test with eyes on iPhone, service revenues, China, & what comes next

Every Apple earnings release has a way of feeling like the Super Bowl of corporate finance. That’s just part of the game when you’re the world’s most valuable company and expectations are stratospheric every time you take the field.

But the release of Apple’s Q1 2017 earnings later today carries particular weight for a company coming off a tough 2016. Last fiscal year, the company reported its first annual decline in revenue in over a decade. Every major category of hardware declined, in terms of units sold from the previous year.

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Historically, the first quarter is the big one for Apple. It rolls out a new iPhone in late September. Consumers gobble them up over the holidays. And the result is earnings magic.

Two years ago, on the heels of the bigger iPhone 6, the company set a corporate record for earnings in Q1 2015. Last year, Apple matched it, though that flat quarter was a harbinger of the declines it saw over the next three quarters.

So far, however, investors are giving Apple the benefit of the doubt. Despite steadily declining sales and revenues, Apple’s stock is up 16 percent over the last six months. That is the kind of faith that few companies could ever expect to see.

Now those investors will find out if Apple has at least steadied the earnings ship. The first question is whether the release of the iPhone 7 can help Apple at least match its performance of the past two years. At the moment, the analyst consensus is that Apple will meet and beat those sales figures. According to Bloomberg, Wall Street analysts believe Apple sold 76 million iPhones in the holiday quarter, up from 75 million the previous year.

Apple itself had projected back in October that it would see revenue of between $76 billion and $78 billion for Q1 2017, up a bit from $75.9 billion for the same quarter last year. The current analyst consensus estimate is $77.4 billion, closer to the higher end of that range.

Of course, the big star for Apple over the past year has been its Services revenues, which has been growing steadily, thanks to App Store sales and services like Apple Music. Services became Apple’s second largest category of revenue last year, ahead of Mac sales and iPads. And yet, the $6.3 billion from Services last quarter is still dwarfed by revenues from iPhone sales.

The challenge here is whether Apple can continue to accelerate growth of Services to give investors some optimism that the company can return to growth this year. With sales of Apple Watch and Apple TV failing to impress, Services offers the best short-term hope.

Investors will also be looking closely to see if Apple can stop the bleeding in China. A couple of years ago, the Chinese market exploded for Apple and helped drive its record earnings. But more recently, Apple’s revenue and market share have been sliding against cheaper Android phones made by local competitors. Apple continues to open stores and invest in China, but it’s also been turning an eye toward India as it searches for growth. Again, at least stabilizing its China revenue would be a win for Apple.

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For all this, there is a whiff of pessimism growing among stock analysts, as noted here by Fortune, which tracked a long list of reports that lowered estimates for annual revenue for the fiscal year ending in September. They are worried that Apple is fighting against a saturated smartphone market where the replacement cycles are getting longer and longer. That’s a trend not helped by the lack of must-have new features on the iPhone 7.

Still, many of these analysts are expecting a kind of holding pattern for the year as everyone waits for September and the release of the iPhone 8, the 10th anniversary edition. Of course, this means expectations that the iPhone 8 will be another game changer are going to be climbing throughout the year.

In other words, just more of the same hope and pressure that Apple will change the world.