Apple expects to snap the negative growth run rate in fiscal 1Q17
Apple (AAPL) has been disappointing investors over the last few quarters with negative revenue growth rates. As the chart below shows, Apple’s revenue growth rates on a year-over-year (or YoY) basis have been hovering in the negative territory in the majority of the quarters in fiscal 2016. Thus, fiscal 2016 became the first quarter for Apple after 2001 in which it posted negative revenue growth.
Apple now expects revenues between $76 billion and $78 billion in the December ending quarter (or fiscal 1Q17). This equates to a nominal revenue growth of 1.5% at the mid-point of projection on a YoY basis. The success of iPhone 7 will be the main driver of growth for Apple in this year’s holiday season. The recently released new lineup for Mac is also making Apple optimistic about its growth prospects. The battery explosion issues that Samsung (SSNLF) Note 7 smartphone faced will also be of some help to Apple.
Apple expects a decline in gross margins for a reason
Although Apple expects nominal growth in revenues in fiscal 1Q17, it expects a decline in gross margins, another important metric that investors look forward to. Apple expects its gross margins to come between 38% and 38.5% in fiscal 1Q17 compared to 40.1% in fiscal 1Q16. Apple has defended this decline by saying that it continues to spend on new lines of products, which typically have lower margins.
Apple also mentioned that in 1Q16 it received a one-time award of $548 million in a patent infringement case. This award had a positive impact of 40 basis points on the gross margins last year. The strong dollar (UUP) has also affected its gross margins. Apple expects an impact of 60 to 70 basis points on its gross margins from currency headwinds. These are the main reasons why Apple expects a decline in gross margins for fiscal 1Q17.