What Happened

Apple released earnings after markets closed on October 30th, 2019. It posted earnings of $3.03 a share. This beat consensus earnings estimates, and the company also slightly topped revenue estimates.

Apple's pivot to services seems to be progressing, albeit slowly. While product revenue was slightly down from this quarter last year, services revenue was significantly higher, pushing total sales higher as a result. While service revenue is still only 19.5% of overall revenue, that's up from 16.9% last year. Investors should be on the lookout to see if Apple can continue this pivot.

(Below is Investopedia's original earnings preview, published 10/29/19)

What To Look For

Apple Inc. (AAPL), whose flagship iPhone product has been the main driver of the company's stock, is scheduled to report results for Q4 of fiscal year 2019 after the close on Oct. 30. Apple is expected to announce flat revenue with earnings slipping 2.7%, according to consensus estimates.

Analysts' tepid forecasts illustrate Apple's challenge of diversifying its sales away from the iPhone, which once generated more than 60% of its sales. Now, Apple is looking to offset slowing iPhone volume by expanding sales of services and subscriptions. Compared to services, revenues generated by one-time sales of the iPhone and other devices, along with software, often can be volatile.

Apple's stock has been surging, reaching new all-time record high closing prices five times so far this month, the latest on Oct. 23. Apple is up by 56% in 2019, based on adjusted closing prices, while the S&P 500 Index has advanced by nearly 20%.

Apple

Apple's corporate revenue has been highly seasonal. Its fiscal Q1, which ends on December 31 and thus includes the holiday shopping season, accounted for 33% to 34% of total annual sales in the last two fiscal years. Sales in fiscal 2019 have been disappointing so far, with declines of 4.5% and 5.1% in Q1 and Q2, respectively, compared to the same quarters a year earlier. Sales slowed sharply to 1% in Q3, even though they beat the estimate by a small margin.

Apple's flagship product, the iPhone, was a big reason for that weak performance. It endured a 12% drop in sales in Q3. Apple's Q3 2019 EPS beat the estimate by 3.7%, although it was down by 6.8% from a year earlier.

Apple Key Metrics
  Q4 2019 (estimate) Q4 2018 Q4 2017
Earnings Per Share (in dollars) 2.83 2.91 2.07
Revenue (in billions of dollars) 63.0 62.9 52.6
Services Revenue (in billions of dollars) N/A 9.6 7.3
Services Revenue (% of total revenue) N/A 15.2% 13.8%
Sources: YCharts, Apple Investor Relations

The big question is how quickly Apple can execute its strategic goal of boosting revenue from services and thus reduce dependence on the iPhone. According to Apple's 10-Q report for Q3, services revenue includes sales from a broad range of sources, including the company's digital content stores and streaming services, AppleCare, Apple Pay, licensing, and other services. It also includes the amortization of the deferred value of Maps, Siri, and free iCloud services that are bundled into the prices of other products. Among the digital content stores are the iTunes Store and the App Store, while streaming services include Apple Music and Apple TV+.

Apple's latest quarterly numbers illustrate how hard it will be to make services the dominant driver of sales. In Q3, which ended on June 30, services revenue was $11.6 billion, a new all-time high but constituting only 21.3% of Apple's $53.8 billion in corporate revenue. While services revenue increased by 12.6% in Q3 from the same period a year earlier, it was essentially flat versus Q2, when the figure was $11.5 billion. In Apple's Q3 earnings call, CEO Tim Cook noted that the Q3 2018 report included a large one-time item which, if eliminated from the analysis, would have raised services growth rate to 15% in Q3 of this year. No matter what, one thing is clear. CEO Cook and the company may need to achieve more consistent, and faster, growth in services to fully transform Apple.