Here’s what to expect from Apple’s Q3 earnings

Apple is set to report earnings after the bell. Argus Research Senior Technology Analyst Jim Kelleher joins Yahoo Finance Live to discuss.

Video transcript

- Welcome back to Yahoo Finance Live. Let's take a look at shares of Apple right now, down about 1.5% ahead of their quarterly results. We are expecting that after the bell today. Remember, Apple in March saw its profits more than double on revenue. That rose by more than half. For this quarter, though, analysts expecting sales to top well over $73 billion. For more analysis, let's bring in Jim Kelleher, Argus Research Senior Tech Analyst. Jim, it's good to talk to you tonight.

Let me just first get your expectations as you look ahead to those results after the bell today.

JIM KELLEHER: Well, good morning and thanks for having me. Yeah, we're certainly looking for a strong quarter in the fiscal third quarter, which is the calendar second. You know, every year, because Apple is a consumer company in many ways, their sequential decline from the holiday quarter to this calendar second, it's fairly significant. But you're still going to get, you know, something on the order of above 20% annual revenue growth, and you could get EPS growth north of 50% year over year.

Again, not quite matching the fireworks in the fiscal 2Q, but still a strong quarter.

- You know, we talk so much about the hardware. As you mentioned, and kind of the holiday quarter slowdown once you move past it. But services, I suppose, are meant to be there to kind of, I guess, dampen that downturn. They're supposed to hold up regardless. I mean, what are you expecting to hear when we get the updates on the service side, given the fact that Apple's leaned to grow that side of the business quite a bit?

JIM KELLEHER: Sure, sure. And Apple is obviously growing out that part of the business with the investments in Apple TV Plus, and in Wallet, and health, and every other area they're involved in. You know, there's a concern for the long term as the court battle plays out between Epic Games and Apple, and at the heart of that court battle is the 30% fee that goes in the App Store.

So, you know, over time you could see that-- you know, there will be a court decision coming out of that related to-- in August. However, you know, for the long term, there's so much to the services part of Apple that we think it will overcome any potentially mandated change in the royalty structure in the App Store.

And we're looking for something on the order of mid teens growth in services year over year in the current quarter.

- Jim, that begs the question that I feel like is an ongoing debate with Apple, which is that what exactly does the stock trade on? Is it on the hardware, is it on services? We know the company wants to push the services narrative, but we have seen really strong sales for iPhones over the last year. How do you value the stock?

JIM KELLEHER: Well I think it trades-- is it a services company? Is it a hardware company? It's kind of an ecosystem company. It's a club, a closed club. And the two are very symbiotic. It's important that Apple continue to advance its devices business, not just iPhone, but particularly Mac, but also iPad to stay realistic in the education space. Obviously, wearables and other consumer type business is hardware based.

All of this feeds into the ecosystem that drives the services business, and we've seen, you know, Apple widen out its services, particularly with some of its investments like its TV service. And you know, we're going to see if they are going to have to make a move to match what Amazon Prime Video is doing, and acquire an asset library to better compete with the Disney's of the world, that have best asset libraries.

But for right now, it's hard to fault their services business and the diversity and the growth they're enjoying.

- Yeah, Jim, I know you also cover Intel. And we look at the chip side, and we had talked about how Apple's move away from Intel's chips, their M1 chips, you know, came at an interesting time, given the global shortage in chips right now. Curious to get your take on where that sector sits, what your thoughts are on Intel, and I guess maybe the impact of that Apple move in the wake of all those shortages. How you're assessing--

JIM KELLEHER: Well, just quickly, I do anticipate that-- you know, we saw the-- a year ago at the Worldwide Developers Conference, Apple announced it was moving away from Intel and its own M1 chip for Mac. At this year's worldwide developer conference, it introduced iPads with M1 chips, and we do anticipate that for iPhone 13 coming in September Apple will move away from its own A series bionic chip and go to an M2 chip that we think Taiwan Semi's building right now.

So very dynamic in the product space for Apple. You know, as for Intel, we all saw the news this morning, which I think was quite exciting, Pat Gelsinger is really being aggressive at Intel. He's announced, you know, the-- he's talking to over 100 companies to bring them into the foundry business, where they will act themselves like a merchant foundry.

They're also willing to outsource some of their production as they get past some of their production glitches. And we saw the announcement this morning that Qualcomm is one of the companies that will use Intel's foundries for its own production.

So this is plainly a very different culture at Intel under Pat Gelsinger than what we saw under Bob Swan, which was, they were in a constant defensive crouch. And Intel is obviously being much more aggressive here.

- Yeah, and Pat Gelsinger making it pretty clear on the earnings call that he will be aggressive when it comes to M&A. They see that as the key to their expansion, especially in the foundry business. Jim Kelleher, Argus Research Senior Tech Analyst, it's good to talk to you today. Appreciate your time.