Will Non-iPhone Segments Drive Apple's (AAPL) Q2 Earnings?
Apple’s AAPL non-iPhone segments, namely Services, Wearables, Mac and iPad are expected to benefit second-quarter fiscal 2020 results, scheduled to be released on Apr 30.
The Services business, which includes revenues from the App Store, Apple Music, iCloud, Apple Arcade, Apple TV+, Apple News+ and Apple Card, became the new cash cow for the company. Services revenues accounted for 13.8% of sales in first-quarter fiscal 2020.
Moreover, the Wearables business, which includes Apple Watch, Beats and AirPods, is expected to have been in the spotlight. In the last reported quarter, revenues from these products accounted for 10.9% of sales.
Markedly, on Feb 17, Apple announced that it anticipates missing the revenue guidance for the fiscal second quarter due to iPhone supply constraints and lower demand in China, both on account of the coronavirus (COVID-19) outbreak in the country. For the quarter to be reported, the company had expected revenues between $63 billion and $67 billion.
Apple Inc. Revenue (TTM)
Apple Inc. revenue-ttm | Apple Inc. Quote
Apple’s flagship iPhone unit sales are expected to have been muted due to the coronavirus outbreak in China that significantly disrupted the supply chain. Hence, the performance of these non-iPhone segments will be eagerly watched by investors to measure the success of Apple’s revenue diversification strategy.
Click here to know how Apple’s overall first-quarter results are likely to be.
Will Apple’s iPad & Mac Portfolio Aid Growth?
Apple’s expanding non-iPhone portfolio with the announcement of new iPad Pro and new MacBook Air upgrades is noteworthy. (Read More: Apple Updates Portfolio Despite Coronavirus Shutdown)
However, the updates are unlikely to aid top-line growth due to closure of Apple Stores globally, except China.
Notably, Apple operates approximately 500 stores worldwide. Of the total, 52 are located in mainland China, Hong Kong and Taiwan, which are currently open. The company closed 458 stores outside Greater China on Mar 13 to decelerate the spread of the coronavirus (COVID-19).
Apple’s Mac sales are also expected to have been negatively impacted by a supply-chain disruption due to the coronavirus outbreak in China. Per IDC data, Apple saw its Mac volumes contract 20.7% year over year in the first quarter. Dell DELL was the only PC-maker, which reported a 1.1% improvement.
The Zacks Consensus Estimate for Mac revenues stands at $4.80 billion, implying a 13% decline from the figure reported in the year-ago quarter.
Moreover, the consensus mark for iPad revenues is pegged at $4.10 billion, suggesting 15.8% drop from the figure reported in the year-ago quarter.
Wearables Set to Report a Strong Q2
Apple is dominating the wearables and hearables market despite increasing competition from the likes of Fitbit FIT, Garmin GRMN, Samsung and China's Huawei Technologies and Xiaomi Corp. Strong adoption of Watch and AirPods is a steady key driver for this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Further, during the quarter, Apple received a waiver from the U.S. Trade Representative (USTR), which relieved its smartwatch, from tariffs imposed on exports by China.
The growth trend is likely to have continued in the fiscal second quarter owing to the solid uptake of Apple Watch Series 5, AirPods and Beats headphones.
Apple Watch Series 5 is expected to have gained a significant traction in the personal health monitor space on the back of health and fitness features like Cycle Tracking, the Noise app and Activity Trends.
Markedly, the consensus mark for wearables is currently pegged at $5.98 billion, indicating growth of 16.6% from the figure reported in the year-ago quarter.
Apple Legal Woes Worsened
Apple has been increasingly witnessing antitrust investigations and lawsuits regarding user privacy and the App Store. The company is also facing lawsuits in relation to health-monitoring features of Apple Watch.
During the quarter under consideration, Apple was fined a record €1.1 billion by French anti-trust regulators for engaging in anti-competitive practices. The regulators alleged that Apple favored Tech Data and Ingram Micro to align prices as well as limit wholesale competition for Apple products in France.
Apple was also ordered to pay a settlement of $500 million over intentionally inhibiting the performance of older iPhone models to preserve batteries.
Further, the U.S. Supreme Court rebuffed an appeal by Apple in a decade-long dispute wherein Nevada-based VirnetX — with less than $2 million in annual revenues — is fighting to collect royalties from Apple for secure communications technology used in the iPhone, iPad and Mac computers.
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