Four major questions remain ahead of Apple’s most critical earnings report in years (AAPL)

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https://www.businessinsider.com/four-big-questions-apple-earnings-2019-1

Earlier this month,Apple dropped a bombshell that whacked its stock. Its revenue, the company said in a letter from Apple CEO Tim Cook , was going to be more than 7% lower than expected, during the company’s biggest quarter of the year, the holiday season.

Apple almost never misses its own guidance. Two months ago, Apple had not given any hint that it saw trouble brewing.

In the month since Apple’s surprise January 2 announcement, the stock has nearly completely recovered.

On Friday, Apple closed at 157.76, right around the level the stock was trading at before its bombshell revenue warning. In some ways, Apple’s shock announcement allowed investors and the street to process the bad news before earnings next Tuesday.

That doesn’t mean that Apple is out of the woods yet, though. Tuesday’s earnings are shaping up to be one of the most critical check-ins that Apple has faced in its modern era, since it released the iPhone in 2007.

Here are four open questions headed into Apple’s earnings.

How will investors react to losing a key data point?

Sean Gallup/Getty Images

One metric Apple used to give its investors was unit sales — as in, Apple sold 46.9 million iPhones in the quarter ending in September.

Now, Apple won’t provide that information anymore, it announced back in September. Instead, it will provide revenue and margin for both hardware products and its services business, which includes fees from App Store as well as subscriptions from Apple Music.

“When it comes to reporting, disclosing less information is a negative,” Loup Ventures founder and longtime Apple analyst Gene Munster wrote in an email last week. “That said, we support Apple’s move to align their reporting and, therefore, investor thinking with a strategic shift in their business to a more service-based model.”

Because Apple hasn’t provided numbers like gross margin for its services business before, whatever it ends up being could be a critical sign for some investors. Munster is expecting a 65% gross margin on services — whatever the number ends up being, it could provide some clues as to which services are driving growth in that category.

How will new accounting rules affect Apple’s services business?

Part of the reason that Apple gave for ending the disclosure of iPhone unit sales is that its services business is critical and needs to be seen differently by investors. It’s been on a tear, with $10.8 billion in revenue for the last quarter numbers are available, and Apple wants it to account for 60% of revenue growth over the next five years.

But there have been some recent accounting changes in how Apple reports the number, which could turn a beat in Apple’s services business into a miss, the Wall Street Journal reports . These changes are being made because of new revenue-recognition rules, but there is confusion about how the rules affect comparisons with the old numbers.

Depending oh which accounting rules are used, Apple’s services growth could be as much as 28% annually, or it could be just 18%, according to analysts quoted by the Wall Street Journal. Given that Apple has pinned its hopes on services as a big growth driver, investors will be closely watching the new disclosures.

Has China stabilized?

Apple CEO Tim Cook (C) arrives before a meeting with China’s Vice Premier Liu Yandong (not pictured) at the Zhongnanhai Leadership Compound, in Beijing, China, May 12, 2015.
REUTERS/China Daily

When Apple announced its massive revenue miss, it placed most of the blame on the Chinese markets.

“The Chinese economy, it seemed to us, began to slow, maybe, in the second half of the year. And it was on some sort of rational trajectory,” Apple CEO Tim Cook said in an interview with CNBC. “We believe, based on what we saw and the timing of it, that the tension, the trade-war tension with the U.S., created this more-sharp downturn.”

“I believe that’s temporary,” he continued.

Many took Apple’s revenue warning as a canary in the coal mine suggesting that the Trump Administration’s tariffs and threats to pass more tariffs was having a negative effect on the Chinese economy that could whack other American companies.

Investors and politicians will be watching closely for any commentary from Cook or CFO Luca Maestri suggesting that they see an impending improvement in Chinese demand for iPhones.

Are Apple’s sneaky price cuts working?

Apple.com

When signs emerged that Apple’s holiday quarter could be going poorly, people noticed that Apple seemed to be offering new promotions to reduce the price of its iPhones.

Apple doesn’t discount its products, especially new models that came out only a few months ago.

So instead, Apple started advertising trade-in deals. Turn in your old phone, and if it’s worth a lot, you can get an iPhone XR for $450, instead of the $750 it retails for. Apparently, it was a “fire drill” inside of Apple’s marketing division, Bloomberg reported .

The question for investors is whether trade-in deals are a reliable lever for Apple to increase demand for its flagship product. If it is, you can expect Apple to continue to offer different price segments through trade-ins, potentially making increased trade-in values permanent. If it didn’t, it might be a sign that Apple is losing its power to price its phones higher than the competition.

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