Apple (AAPL) Q2 Earnings To Benefit From Non-iPhone Segments

Apple’s (NASDAQ:AAPL) non-iPhone segments — Services, Wearables, Mac and iPad — are expected to play significant roles in the second quarter of fiscal 2019, scheduled to be released on Apr 30.

The Services business, which includes revenues from Internet Services, App Store, Apple Music, Apple Care, Apple Pay, and licensing and other services, has become the new cash cow for the company. Services revenues accounted for 19.1% of sales in first-quarter 2019.

Moreover, the Wearables business, which includes Apple Watch, Beats and AirPods, is expected to stay in limelight. In the last reported quarter, revenues from Apple TV, Apple Watch, Beats products, iPod, and Apple-branded and third-party accessories accounted for 8.7% of sales.

Notably, Apple’s non-iPhone businesses grew 19% year over year in the last reported quarter. However, non-iPhone segments’ strong performance was not enough to drive the top line in the last reported quarter. Net sales decreased 4.5% year over year to $84.31 billion, primarily due to weakness in iPhone sales, which fell 15% and accounted for 61.7% of total sales.

Hence, performance of these non-iPhone segments in the second quarter will be eagerly watched by investors to measure the success of Apple’s revenue diversification strategy.

Click here to know how Apple’s overall second-quarter performance is likely to be.

Non-iPhone Businesses to Aid Top-Line Growth

Services business is expected to benefit from the increasing size of installed base. Moreover, the segment is expected to benefit from robust spending on subscription-based apps such as Tencent Video, Spotify (NYSE:SPOT) and Tinder.

Additionally, Mac revenues are expected to benefit from the launch of MacBook Air and Mac mini. The company also bolstered its iMac line-up in the last reported quarter.

The 21.5-inch iMac features 8th-generation quad-core, and for the first time, 6-core processors, which will help it perform up to 60% faster. Additionally, the 27-inch iMac, which can deliver up to 2.4 times faster performance, is available in two variants (9th-generation 6-core and 8-core processors).

However, sluggish PC market is expected to hurt Mac sales. Notably, worldwide PC shipments declined 4.6% year over year in first-quarter 2019, per Gartner.

Apple Updates iPad Portfolio in Q2

Apple also launched the ultra-thin iPad Air that measures 10.5 inches diagonally and is supported by Apple Pencil. Moreover, iPad Air performance is expected to be 70% better, due to the A12 Bionic chip and Apple’s Neural Engine.

Apple also launched the new 7.9-inch iPad mini that delivers “three times the performance and nine times faster graphics.” The device is 25% brighter and has the highest pixel density among any of the iPads, powered by the advanced Retina display with True Tone technology.

However, since both the devices were launched toward the end of the quarter, they are not expected to have a material impact on sales.

Apple Dominating Wearables Market

Further, the wearables business is likely to grow, driven by robust adoption of Apple Watch and AirPods. Notably, total revenues from wearables surged more than 50% year over year in the last reported quarter.

According to Strategy Analytics' report, Apple Watch maintained its #1 position with 51% global smartwatch market share in the fourth quarter of 2018. Samsung (KS:005930) was positioned at #2, followed by Fitbit (NYSE:FIT) and Garmin (NASDAQ:GRMN) .

Toward the end of the March quarter, Apple started rolling out watchOS 5.2 update in its Apple Watch 4 along with electrocardiogram (ECG) app and irregular heartbeat or atrial fibrillation (AFib) detection feature in 19 European countries and Hong Kong.

Notably, the ECG app and the AFib detection feature were launched in the United States in December. Apple Watch 4, which is an FDA-approved device, is also equipped with an in-built accelerometer and gyroscope, which track the wrist trajectory and impact acceleration for fall determination.

Apple Watch's European Availability to Boost Market Share

Although the European roll out will not materially impact second-quarter results, the expansion is expected to boost Apple Watch's market share. The ECG and AFiB features are expected to provide Apple a competitive leverage over the likes of Xiaomi, Huawei, Samsung, Garmin and Alphabet (NASDAQ:GOOGL) division Google in the smartwatch and wearables markets.

Further, Apple’s new AirPods are powered by the new H1 chip and expected to provide 50% more talktime compared with the earlier version. Due to the H1 chip, the new device is likely to have better connectivity with iPhone or iPad. The model also offers hands-free support due to integration with Siri. However, the updated AirPods will not materially impact second-quarter fiscal 2019 results.

Apple currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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