What To Expect Of Services In Fiscal Q2 Pre-Earnings With Apple

What To Expect Of Services In Fiscal Q2 Pre-Earnings With Apple ...

Investors must be curious to see what the Cupertino subsidiary has to share this week. Apple reports fiscal Q2 results on April 28, after the closing bell. earnings day in real time, via live blog, as we usually do.

So far, we have reviewed some of the highlights of the event: crucial, as well as the expected performance and segments. Today, we turn to services, a steadily increasing division that claimed 19% of total revenues last fiscal year.

Figure 1: Apple Pre-Earnings: What To Expect Of Services In Fiscal Q2

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Services: Expect increased capacity as expected.

Services have become an increasingly important business for Apple. Revenues in the past couple of years may be misleading, as the pandemic's stay-at-home trends and fresh products launched likely forced the iPhone and Mac to perform unusually well relative to services.

Apple's service revenues have increased in a constant period of time, from fiscal 2018 to 2021. This is more than double the total revenue gain, and substantially better than the revenue increase achieved by the iPhone, Mac, and iPad divisions.

Services: How does revenue growth differ from the one shown in the chart below? Over the past 13 quarters, the increase has ranged from 15 to 33%. In the same period, iPhone growth has risen from -21 percent to +66%.

Apple Services' Growth Figure 2

DM Martins Research

This flexibility is reflected in the recurring-revenue nature of the organization. For example, iPhone users, in turn, download from the App Store and make transactions regularly. Apple is a likely to keep the monthly cash flow flowing.

Service revenues are likely to be as high as usual. I anticipate a growth rate of 20%, if not a bit better. This would be consistent with the segment's quarterly average of around 22% since the start of fiscal 2019.

Apple TV+ might generate revenue, but as subscription businesses become a "slow bear", any gain here is likely to be reflected only in total paid subscriptions. This number was 785 million last quarter, up 165 million YOY.

The hidden positive of service performance

The performance of the services segment should not be limited to revenues. Historically, the segment has also provided margins of more than 70%, which is nearly twice as high as margins in the product segments.

This time, it is difficult to anticipate who service segment margins will be up two percent in percentage this year. The company is likely to increase service margins over time, as the business grows.

Because of tough comps, product revenue growth this quarter is unlikely to be very high. I anticipate an iPhone and Mac growth of 8% to 15%. As services increases at 20% or higher, the revenue mix should be favorable to margins.

A quick back-of-the-envelope calculation reveals that Apple's total gross margin in fiscal Q2 might increase by 50 basis point YOY, partly due to the revenue mix that concentrates more heavily on the services industry.

Sit back on Twitter.

Which of the following Apple segments you think will perform at the end of fiscal Q2, based on YOY revenue growth?

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Aside from that, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for assisting Apple Maven)

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