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Apple Q2 FY2022 Earnings Report Preview: What to Look For

Focus on AAPL services revenue

Key Takeaways

  • Analysts estimate EPS of $1.43 vs. $1.40 in Q2 FY 2021.
  • Services revenue is expected to rise YOY, but at a slower rate.
  • Overall revenue is expected to grow but at a much slower pace than in recent quarters.

Apple Inc. (AAPL) reported its strongest earnings and revenue growth in recent history in FY 2021, driven primarily by rapid increases in product sales. But the company's overall growth is slowing sharply, and Apple now is focusing on its services business again for leadership. Analysts expect services revenue to grow at double the pace of the company's overall revenue in the current fiscal year. Growth in services revenue has a major impact on Apple's profits because sales of advertising, the App Store, and Apple TV+, and other services generate dramatically larger margins than the company's products. It's no wonder that Apple is now working on a subscription service for its iPhone and other hardware devices.

Investors will be focused on whether Apple can revive last year's strong growth when it reports earnings on April 28, 2022 for Q2 FY 2022. Apple's 2021 fiscal year ended in late September, which is why it is now reporting its fiscal second quarter for 2022. Analysts are not optimistic. They expect both earnings per share (EPS) and revenue to grow at their slowest pace in six quarters.

Investors will also focus on Apple's services revenue, a key metric as alluded to above. The iPhone maker has long been known for its hardware products, such as smartphones and computers. But it is aggressively pushing towards a higher-margin, less seasonal services-based revenue, thus reducing its dependence on hardware sales. Analysts expect Apple's services revenue to rise at its slowest pace in six quarters. Despite this, services revenue is expected to increase at more than triple the pace of the company's overall revenue.

Shares of Apple have outperformed the broader market over the past year. The stock began the first nine to ten weeks of the past year underperforming. But it has mostly outperformed since early July 2021. The stock's outperformance gap especially began to widen in mid-November 2021. Apple's shares have provided a total return of 17.1% over the past year, well above the S&P 500's total return of 2.6%.

One Year Total Return for S&P 500 and Apple
Source: TradingView.

Apple Earnings History

Apple reported Q1 FY 2022 earnings that beat analysts' expectations. EPS rose 24.8% compared to the year-ago quarter, marking its slowest rise since earnings declined in the final quarter of FY 2020. Revenue grew 11.2% year over year (YOY), its slowest pace since Q4 FY 2020. Apple said that its revenue for the quarter reached an all-time record high, driven by recent launches of new products and services.

In Q4 FY 2021, Apple beat its earnings forecast but missed on revenue. EPS increased 68.2% YOY, a rapid pace but still sharply lower than the +100% growth rates posted in the previous two quarters. Revenue grew 28.8% compared to the year-ago quarter, continuing a deceleration trend that began in the previous quarter. The company said that it set new revenue records across all of its geographic segments in FY 2021. Services and Mac revenue also reached new all-time highs.

Analysts expect Apple's financial performance to moderate considerably in Q2 FY 2022. EPS is expected to grow 2.2% compared to the year-ago quarter, sharply slower than the previous quarter's pace. Revenue is forecast to expand 5.3% YOY, its slowest pace since the final quarter of FY 2020. For full-year FY 2022, analysts expect EPS to increase 9.5%, the slowest annual pace since earnings declined in FY 2019. Annual revenue is expected to grow 8.4%, which would be the slowest pace since FY 2020.

Apple Key Stats
  Estimate for Q2 FY 2022  Q2 FY 2021 Q2 FY 2020
Earnings Per Share ($)  1.43 1.40 0.64
Revenue ($B) 94.4 89.6 58.3
Services Revenue ($B) 19.8 16.9 13.3

Source: Visible Alpha

The Key Metric

As mentioned above, a key metric investors will focus on is Apple's services revenue. Its services include the company's digital content stores and streaming services, such as its various App Store platforms, Apple Music, Apple Arcade, Apple News+, Apple TV+, and Apple Fitness+. Apple also generates services revenue from AppleCare, advertising services, cloud services, and other services, including Apple Card and Apple Pay. The company first began to focus on its services business in 2015, when growth in iPhone sales started to slow. Profit margins on services sales are dramatically larger than on Apple's hardware profits. That means that each dollar of added service sales disproportionately boosts Apple's profits compared to hardware sales. One estimate pegs Apple's App Store operating margin at 78%. The gross margin for its search-advertising business is estimated to be even larger than for its App Store business. Services revenue, however, still makes up a significantly smaller share of Apple's overall revenue.

In three of the last four years, services revenue has outpaced Apple's products revenue. In FY 2018, the company generated $39.7 billion in services revenue, up 21.6% compared to the previous year. Growth slowed to 16.5% and 16.2% in the two subsequent fiscal years. It then accelerated to 27.3% in FY 2021, the one year out of the past four where products revenue grew faster. But Apple's services revenue is set to outpace products revenue again this year. In Q1 FY 2022, services revenue rose 23.8% YOY, faster than the 9.2% pace of growth for products revenue. Analysts expect Apple's services revenue to grow 17.0% YOY in Q2 FY 2022. For full-year FY 2022, analysts are currently forecasting Apple's services revenue to expand 17.2%. By contrast, the company's annual products revenue for FY 2022 is expected to rise 5.7%.

Article Sources

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  2. Bloomberg. "Apple Is Working on a Hardware Subscription Service for iPhones."

  3. Apple Inc. "Investor Updates: FY 22 Second Quarter Results."

  4. Apple Inc. "CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)," Page 1.

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  9. CNBC. "Apple’s $2 trillion value is proof that Tim Cook’s services plan worked."

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