Can Apple's (AAPL) Non-iPhone Segments Aid Q1 Earnings?

Apple’s (NASDAQ:AAPL) non-iPhone segments — Services, Wearables, Mac, iPad — are expected to play a significant role in first-quarter fiscal 2019 results, scheduled to be released on Jan 29.

Notably, Apple’s flagship device, iPhone is expected to report lower sales in fiscal first-quarter earnings. The company’s fortunes are tied to iPhone, which is by far its biggest revenue contributor.

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 17.9% of sales in the fourth quarter of fiscal 2018.

Moreover, its Wearables business, which includes Apple Watch, Beats and AirPods, is expected to command the limelight. The business is part of Apple’s Other Products group that also includes Apple TV, HomePod, iPod Touch, and Apple-branded and third-party accessories. Other products accounted for 7% of Apple’s revenues in the last reported quarter.

Hence, the performance of these non-iPhone segments would be eagerly watched by investors to get a measure of the success of Apple’s revenue diversification strategy.

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

Non-iPhone Businesses to Aid Top-Line Growth

Notably, Apple expects revenues, excluding the iPhone business, to grow almost 19% year over year in the first quarter, including “record revenues from Services, Wearables and Mac.” In his Jan 2 letter to investors, CEO Tim Cook stated that less exposure to emerging markets has been beneficial to these businesses.

Moreover, Services is expected to benefit from the increasing size of installed base, which grew more than 100 million units in 12 months. Apple expects Services to generate revenues of $10.8 billion in the quarter. In the last reported quarter, Services revenues surged 31% year over year to $9.55 billion.

Further, Wearables are likely to grow 50% year over year, 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.

Additionally, Mac revenues are expected to grow year over year, driven by the launch of MacBook Air and Mac mini. In September, Apple introduced macOS Mojave, which comprises new features like Dark Mode, Stacks and a completely redesigned Mac App Store.

Similarly, launch of iPad Pro is expected to drive iPad revenues despite supply constraints. Notably, active installed base of iPads reached a new all-time high in the last reported quarter.

App Store to Aid Services Momentum

Apple’s Services segment is expected to benefit from robust spending on subscription-based applications such as Netflix (NASDAQ:NFLX) , Tencent Video, Spotify and Tinder. In the last reported quarter, paid subscriptions surpassed $330 million, increasing more than 50% year over year.

Apple also recently stated that customers spent $1.22 billion during the 2018 holiday season, which drove services revenues to record level. Multiplayer games, including Fortnite and PUBG, were among the top downloaded games over the holidays.

Apple Lost Share in Wearables Market

However, it seems Apple is losing dominance in the wearables market. Per IDC’s third-quarter data, the company lost the #1 spot to Xiaomi. Fitbit (NYSE:FIT) , Huawei and Samsung (KS:005930) took the third, fourth and fifth spot, respectively.

Apple Watch Series 4 accounted for only 20% of total Apple Watch shipment in the reported quarter. Moreover, supply constraints are expected to hurt Apple Watch 4 shipment growth in the fourth quarter.

Smart Speaker Sales Not Impressive

Apple is experiencing low sales of its smart speaker HomePod, owing to its late entry into the market, which is currently dominated by the likes of Amazon (NASDAQ:AMZN) and Alphabet’s (NASDAQ:GOOGL) Google.

Per Strategy Analytics, the two companies accounted for more than 50% of the smart speaker market share, as global shipment surged 197% year over year to 22.7 million units in third-quarter 2018.

Apple sold 1.1 million HomePods and gained market share of 4.8%, which placed it toward the bottom part of Strategy Analytics’ list.

Nevertheless, international expansion is expected to help Apple strengthen its footprint in the smart speaker market. HomePod, which was launched in the United States, Australia and the U.K. earlier this year, is also now available in Canada, France, Germany (launched in June), Spain and Mexico.

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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