Apple earnings preview: eyes on services revs, margins and China

XRay

A whopper of a profits warning at the beginning of January has done nothing to dent Apple’s share price performance in 2019, which is +40% higher this year. So what happens now, with expectations reset lower? Here’s our quick take on what to expect as Apple reports its fiscal second quarter numbers after the close on Tuesday.

It’s all about the pivot away from iPhone unit sales to focus investor attention on Services revenues and the wider Apple ecosystem. Of course, iPhone unit sales won’t be reported. 

Q1 marked a 5% decline in revenues company wide as revenues from iPhone sales declined 15%. Total revenues from everything else plus services was up 19%.

Apple’s guidance

In its Q1 earnings update the company provided the following guidance for Q2: 

  • revenue between $55 billion and $59 billion 
  • gross margin between 37 percent and 38 percent 
  • operating expenses between $8.5 billion and $8.6 billion 
  • other income/(expense) of $300 million 
  • tax rate of approximately 17 percent 

Wall Street is anticipating EPS of $2.36 v $2.73 a year ago, whilst revenues are also seen declining from $61.1bn last year to $57.4bn.  

Dial back to the Jan warning from Tim Cook and it was China where the real trouble lay. We would expect some improvement here to be seen in this quarter’s numbers with demand for iPhones picking up again in the wake of price cuts. 

Services in focus

On Services, clearly the marked it eyeing another bumper jump in revenues, which were up 19.1% in the first quarter. But the impact on overall margins will also be important. The higher margins here should deliver ongoing support to group margins. For Q1, it reported Services margins of 62.8% against 58.3% in the year before.  

We’ll also be looking for anything relating to its suite of new products launched in March – credit card, streaming service, News+ and Arcade. Whilst only News+ was available after the launch event, we may get more of a feel of how these services will affect the bottom line – pricing will be of particular importance. Don’t hold out for much detail in the earnings report, although there could be something in the earnings call.  

Markets will also be eyeing capital returns. A year ago the company committed to $100 in buybacks and dividends over a two-year period. We may well Apple outline further capital returns via an increase in the dividend (10% is being talked about, against a 16% rise last year) and more buybacks. Even if the number are a touch soggy the prospect of more capital returns should keep investors on side. 

Average price target from the 36 analysts we track suggests a 3% downside to the current price at a little short of $200. Following a strong showing so far in 2019, Tuesday’s earnings may result in some changes to price targets on the upside. 

Key focus: Are Services revenues really going to continue to accelerate enough to offset the plateau in iPhone sales? Is there evidence of a bounce back in China?