Apple Earnings Preview: First Profit Decline in a Decade Expected

Apple is expected to announce a decline in quarterly profits for the first time in a decade this week, as the iPhone maker's share price continues its downward trend and analysts lower their expectations.

Analysts are expecting to see Apple post a profit of $9.53bn (£6.2bn) or $10.02 earnings per share (eps) from revenue of $42.2bn on tuesday, representing the company's first fall in quarterly profits since 2003, down from the same period last year when profit was $11.6bn, or $12.30 per share from revenue of $39.2bn.

Jefferies analyst Peter Misek expects even less from Apple, with his prediction being $41bn revenue and $9.52 eps.

Over the past four weeks, 14 Wall Street analysts have lowered their estimates for Apple's results, according to research conducted by Bloomberg, while its share price fell to $390 from the record high of $702 in September last year.

Apple will need to impress with new products if it is to reverse the current downwards trend, said Oracle Investment Research analyst Laurence Balter. "The market is in show-me mode for Apple. The market needs to see some evidence that the future looks bright because that candle is flickering."

Snuffed by huge growth from rival Samsung, Apple's candle will continue to flicker until the company launches new products; a possible smartwatch and Apple television, along with the usual yearly iPhone and iPad updates are all due over the coming months.

But even if CEO Tim Cook mentions future products, or at least hints that new products are in the pipeline, investors may remain unconvinced.

Lost credibility

Balter added: "Nobody believes the secret anymore. It was OK when Steve Jobs would say we have some great things in the product line, but right now that credibility has been lost."

Having enjoyed huge success with the iPod, iPhone and iPad over the last 10 years Apple could seemingly do no wrong, and this time last year talk of a $1tn valuation was rife, but the surge in investor confidence waned when the company adjusted how it presents quarterly predictions.

Where before Apple had given investors a single, conservative estimate for future profits (which was always beaten by a landslide, further buoying confidence and its share price), the company now offers a less conservative range for the following quarter's profit.

Last year, Apple's June quarter estimate was just three percent below actual results - followed by a $30 share price drop overnight - and for the next two quarters Apple only beat its estimates by 5.8 and 4.8 percent, while Wall Street had become used to results 20 percent above estimates, even if these estimates were artificially low.

As well as new products, Apple could look to win back investor confidence by returning more of its growing $137bn cash pile to shareholders, a move pressured by activist investor David Einhorn for some time.

Alex Gauna of JMP Securities likened Apple's recent performance to a falling knife. "The people who are brave enough to catch a falling knife properly, at the bottom of the decline like this, tend to be rewarded. Those who try to catch it too early will lose a finger," the analyst told Bloomberg.

Reality check

While Apple may well report its first fall in profits since 2003, no doubt pushing the share price down further, the company remains hugely successful and is still the world's largest technology firm with a projected profit for Q2 similar to what Google and Microsoft manage combined; Apple also commands 70 percent of all profits in the smartphone market, according to a report by Counterpoint Research. But with mounting pressure from Samsung and its Galaxy S4 due out this week, joining the impressive HTC One and a growing army of Windows Phone devices, the iPhone has more competition than ever before.

Apple will announce its Q2 results after the end of trading on 23 April.