How iPhone Sales Help Predict Apple's Projected Earnings

This article was originally published on the Motley Fool.

Next week, tech giant Apple (NASDAQ:AAPL) will report its third-quarter financial results. The quarter is taking place more than halfway through Apple's flagship iPhone cycle and will test Apple's ability to continue putting up big profits ahead of the smartphone's annual refresh.

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Apple is scheduled to report its third-quarter results on August 1. Here's what investors should watch when the quarterly update goes live.

iPhone sales

Launched last September, Apple's flagship iPhone 7 and 7 Plus are no longer the hyped, supply-constrained new iPhone models they were in the weeks after they hit Apple stores. As is usually the case when Apple reports its third fiscal quarter, iPhone sales are set to decline sequentially in Q3 2017. The big question, however, is whether iPhone sales during the quarter will increase on a year-over-year basis.

It's not certain that Apple will be able to grow its third-quarter iPhone sales on a year-over-year basis. In Apple's third quarter last year, Apple sold 40.4 million iPhones, down 15% from the third quarter of 2015. However, Apple's year-over-year iPhone sales have returned to growth since the company launched its iPhone 7 and 7 Plus, suggesting the tech giant can post another quarter of iPhone growth in Q3.

Given that the iPhone accounts for over half of Apple's revenue and that management guided for a 2.7% to 7.4% year-over-year increase in total revenue, management likely anticipated slight growth in iPhone sales. Investors should look for an iPhone unit sales-growth rate in the low single digits.

Revenue

With a string of quarters last year of declining revenue still fresh in investors' minds, it would be reaffirming to see Apple report revenue within its guidance range and subsequently extend its recent return to growth. Apple returned to revenue growth in its first quarter of 2017 after reporting three quarters in a row of year-over-year declines. Revenue growth in Q3 would mark Apple's third quarter in a row of year-over-year revenue growth.

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With the midpoint of Apple's revenue guidance typically proving to be somewhat conservative, investors should look for the company to report third-quarter revenue of $45 billion, toward the high end of its revenue guidance range of $43.5 billion and $45.5 billion. This would represent year-over-year revenue growth of 6.2%, notably higher than the 4.5% year-over-year revenue growth Apple posted in the second quarter of 2017.

Gross profit margin

Another key metric to watch will be Apple's gross profit margin. Apple's gross profit margin, or the tech giant's gross profit as a percentage of revenue, gives investors insight into Apple's ability to maintain its pricing power and economies of scale. Apple's fat profit margin, which has hovered between about 38% and 40% in recent years, is critical to the company's ability to continue raking in profits at current levels.

For Apple's third quarter, management guided for a gross profit margin between 37.5% and 38.5%. This compares to a gross profit margin of 38% in the year-ago quarter. Investors should look for Apple's gross profit margin to come in at the high end of this range. If Apple's profit margin comes in at the low end of guidance -- or below guidance -- investors should look for an explanation from management for the year-over-year decrease in the metric.

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Stay tuned at The Motley Fool for more Apple stock coverage, as well as for a Foolish take on Apple's third-quarter results when they go live after market close next Tuesday.

Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.