Will Non-iPhone Segments Drive Apple's (AAPL) Q1 Earnings?

Apple’s (NASDAQ:AAPL) non-iPhone segments — Services, Wearables, Mac and iPad — are expected to have benefited its first-quarter fiscal 2020 results, scheduled to be released on Jan 28.

The Services business, which includes revenues from the App Store, Apple Music, iCloud, Apple Arcade, Apple TV+, Apple News+ and Apple Card, has become the new cash cow for the company. Services revenues accounted for 19.5% of sales in fourth-quarter 2019.

Moreover, the Wearables business, which includes Apple Watch, Beats and AirPods, is expected to stay in the limelight. In the last reported quarter, revenues from these products accounted for 10.2% of sales.

Apple’s flagship iPhone sales on a year-over-year basis declined in the last couple of quarters, a trend that most likely continued in the first quarter due to stiff competition from Chinese handset makers. 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 performance is likely to be.

Apple’s Updated Portfolio to Aid Growth

Apple began selling the new iPhone 11, iPhone 11 Pro and iPhone 11 Pro Max, and Apple Watch Series-5 from Sep 20. Additionally, the company’s 10.2-inch, seventh-generation iPad was made commercially available from Sep 25.

Meanwhile, Apple Arcade, a subscription-based gaming service, was also made available from Sep 19 in more than 150 countries. Moreover, the company launched Apple TV+ on Nov 1.

The first-quarter results are expected to have benefited from the expanded portfolio.

The Zacks Consensus Estimate for iPhone revenues stands at $51.39 billion, implying a 1.1% decline from the figure reported in the year-ago quarter. However, on a sequential basis, iPhone revenues are expected to jump 54%.

Moreover, the consensus mark for iPad revenues is pegged at $6.73 billion, suggesting 44.6% growth from the figure reported in the previous quarter but almost unchanged from the figure reported in the year-ago quarter.

Mac Sales Expected to Decline

In October, Apple launched macOS Catalina, which also brought Apple Arcade to Mac. Further, third-party developers like Twitter (NYSE:TWTR) and Post-it brought their iPad apps to the Mac App Store post the launch of Catalina.

However, despite a bullish PC market, Apple’s Mac sales are expected to have been negatively impacted by a supply crunch in the to-be-reported quarter.

The Zacks Consensus Estimate for Mac revenues stands at $7.35 billion, implying a 0.8% decline from the figure reported in the year-ago quarter but indicating growth of 5.1% on a sequential basis.

Apple Card Likely to Gain Traction

Apple Card is expected to have gained traction in the first quarter of fiscal 2020, owing to an expanded partner base that includes retailers like Uber (NYSE:UBER) , Walgreens, Duane Reade and T-Mobile. These companies already offer 3% daily cashback on Apple Card transactions.

In December, customers began using Apple Card’s monthly installment services to purchase new iPhones and pay for them over 24 months with zero interest.

Wearables Set to Report a Strong Q1

Notably, per IDC’s third-quarter (Apple’s fiscal fourth quarter) data, the company’s market share improved to 35%, beating Xiaomi, Samsung (KS:005930), Huawei and Fitbit (NYSE:FIT) in the top five list.

The trend is likely to have continued in fourth-quarter 2019 (Apple’s fiscal first-quarter 2020) owing to the strong adoption of Apple Watch Series 5, AirPods and Beats headphones.

Apple Watch Series 5 is expected to have gained significant traction in the personal health monitor space on health and fitness features like Cycle Tracking, the Noise app and Activity Trends.

Markedly, Wearables, Home and Accessories sales surged 54% year over year to $6.5 billion in fourth-quarter 2019. The consensus mark is currently pegged at $9.54 billion.

Apple’s Legal Woes Increase

Apple has been increasingly witnessing antitrust investigations and lawsuits regarding user privacy and the App Store. The company is now facing lawsuits over the health-monitoring features of Apple Watch.

In late December, the tech giant was sued by a New York University cardiologist over Apple Watch’s use of his patented heartbeat monitoring invention, per a Bloomberg report.

Zacks Rank

Apple currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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