By Daisuke Wakabayashi 

Apple is scheduled to report results for its fiscal third quarter after the market closes on Tuesday. Here's what you need to know.

EARNINGS FORECAST: Earnings of $1.39 a share is the consensus of analysts surveyed by Thomson Reuters, compared with $1.85 a share a year earlier. The company hasn't provided earnings guidance for the quarter but in April said it expected gross margin to range between 37.5% and 38%.

REVENUE FORECAST: Revenue of $42.1 billion is expected by analysts, compared with $49.6 billion reported a year earlier. In April, Apple forecast quarterly revenue between $41 billion and $43 billion.

WHAT TO WATCH:

-- SEPTEMBER OUTLOOK: The story for Apple's current generation of iPhones is mostly written. The iPhone 6S and 6S Plus had huge shoes to fill to replicate the success of the iPhone 6 and 6 Plus. They failed to do so, resulting in the first-ever decline in iPhone sales. Sluggish demand from China and new policies from U.S. mobile carriers, which is prompting iPhone owners to hold on to older phones for a longer period before upgrading, are also factors in the slowdown. But Apple's revenue forecast for the quarter ending in September will say a lot about what the company is expecting for its next iPhones. Apple historically tends to introduce its new phones in mid-September, allowing a week or two of sales for those newer models to be included in its fiscal fourth-quarter results. The September-quarter outlook could indicate whether Apple is looking at the current iPhone slump as a blip or something more sustained. Analysts are expecting revenue of $45.7 billion in the September quarter, according to Thomson Reuters.

-- IPHONE SLIDE: The single biggest catalyst for Apple's earnings remains the iPhone. It accounts for two-thirds of Apple's revenue and is the biggest profit driver in the company. That's great when iPhone sales are booming, like last year, but bad news when iPhone sales fall, like in the three months ended March. That was the iPhone's first quarterly decline since the product's introduction in 2007. Analysts are expecting another decline for the June quarter, despite seemingly strong demand for the smaller-screen iPhone SE, which was released on March 31. According to 30 estimates collected by FactSet, analysts are forecasting that Apple sold 40 million iPhones during the June quarter, down 16% from a year earlier. The less-expensive iPhone SE is also expected to depress the average selling price of iPhones ($642 in the March quarter) as well as push down gross margins.

-- SERVICES LOVE: For the past few quarters, as iPhone sales have slowed, Apple has pushed the growth of its services business front and center. Apple CEO Tim Cook says its services business is underappreciated, due in part to the success of its hardware products. The idea is that Apple's loyal customers live much of their digital lives through Apple's services, resulting in additional revenue long after a device is sold. In the March quarter, Apple reported that revenue from the App Store, iTunes, streaming-music subscriptions and mobile payments grew 20% to $6 billion even as iPhone sales declined. Apple started breaking out revenue from its services business earlier this year to highlight that services are growing at a steady clip. Gene Munster, analyst at Piper Jaffray, estimates that the company will report services revenue of $5.9 billion in the June quarter, an increase of 18% from a year earlier.

Write to Daisuke Wakabayashi at Daisuke.Wakabayashi@wsj.com

 

(END) Dow Jones Newswires

July 26, 2016 00:17 ET (04:17 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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