Apple (AAPL) Q3 FY 2021 Earnings Report Preview: What to Look For

Focus on AAPL services revenue

Key Takeaways

  • Analysts estimate EPS of $1.01 vs. $0.65 in Q3 FY 2020.
  • Services revenue is expected to rise at healthy pace YOY.
  • Companywide revenue is expected to rise at robust pace amid heightened scrutiny from antitrust regulators and critics.

Apple Inc. (AAPL) has recently been enjoying some of its fastest earnings and revenue growth in recent years. But that stellar growth could slow if Congress passes legislation that would break Apple's tight control over which apps users install on their iPhones. These apps are a key driver of the company's fast-growing services revenue. Apple is also on the defensive in Europe, where it faces charges of antitrust violations for requiring rival music-streaming apps to sell content using Apple's own in-app payments system.

Investors will closely watch Apple's current financial performance, and how these antitrust moves might affect the company longterm, when it reports earnings after market on July 27, 2021 for Q3 FY 2021. Apple's 2020 fiscal year ended Sept. 26, 2020. Analysts expect robust growth in both earnings per share (EPS) and revenue, albeit slower than the torrid pace recorded in the previous quarter.

Investors will also focus on another key metric: Apple's services revenue. 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 a healthy pace, albeit slightly slower than in the previous quarter.

Apple's shares have outperformed the broader market over the past year. The stock's ascent since last summer has been marked by wide price swings. Some of the share gains in the second half of 2020 were shed between late January and early March of 2021. But the stock recovered to hit a new high earlier this month. Shares of Apple have provided a total return of 50.9% over the past year, well above the S&P 500's total return of 33.8%.

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

Apple Earnings History

Apple crushed analyst EPS and revenue estimates in Q2 FY 2021. EPS rose 118.6% while revenue grew 53.6% compared to the year-ago quarter. It was the fastest pace of growth for either metric in at least 15 quarters. Amid the strong results for the quarter, Apple announced that it was increasing its payouts to shareholders. The company's board declared a 7% increase in the dividend on its common stock and authorized an increase of $90 billion to its existing share buyback program.

Apple's stock dropped following its Q1 FY 2021 earnings report despite beating analysts' expectations. EPS rose 34.6% compared to the year-ago quarter, its fastest pace since Q4 FY 2018. Revenue grew 21.4% to hit a new quarterly record. It marked the fastest rise in at least 14 quarters. Apple noted that international sales accounted for about 64% of total revenue for the quarter.

Analysts expect another strong performance in Q3 FY 2021, although growth is expected to decelerate compared to Q2. EPS is expected to rise 55.7% as revenue is forecast to grow 23.2%. If Apple comes close to meeting those growth rates, the strong performance through the first three quarters of the year is expected to drive the fastest pace of growth in annual EPS and annual revenue in at least five years. Analysts are forecasting EPS for all of FY 2021 to rise 58.4% as revenue expands 29.7%.

Apple Key Stats
  Estimate for Q3 2021 (FY) Q3 2020 (FY) Q3 2019 (FY)
Earnings Per Share ($) 1.01 0.65 0.55
Revenue ($B) 73.5 59.7 53.8
Services Revenue ($B) 16.3 13.2 11.5 

Source: Visible Alpha

The Key Metric

As mentioned, 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+, and Apple TV+. 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. But Apple is finding itself in a position where it has to defend some of those lucrative services revenues. In addition to proposed antitrust legislation and charges from government regulators, Apple is also facing a lawsuit from video game maker Epic Games Inc. over similar issues related to its control over content distribution. If the charges stick, Apple may have to allow its users greater access to third-party apps on its devices, which could take a bite out of its services revenue and profits.

Apple has maintained healthy growth in its services revenue over the past several years, although that growth has been slowing. In FY 2017, annual services revenue grew at a pace of 34.3%. That pace slowed to 21.6% in FY 2018, then to 16.5% in FY 2019, and again to 16.2% in FY 2020. However, growth has begun to accelerate in FY 2021. Services revenue rose 24.0% in the first quarter of the year before accelerating to 26.6% in the second quarter. Analysts expect services revenue to rise 24.0% in Q3 FY 2021. For full-year FY 2021, analysts forecast that Apple's services revenue will grow 23.4%, which would be the fastest pace since FY 2017.

Article Sources
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  1. Wall Street Journal. "Apple’s Fight for Control Over Apps Moves to Congress and EU." Accessed July 22, 2021.

  2. Wall Street Journal. "EU Charges Apple With App Store Antitrust Violations in Spotify Case." Accessed July 22, 2021.

  3. Apple Inc. "Investor Updates: FY 21 Third Quarter Results." Accessed July 21, 2021.

  4. Visible Alpha. "Financial Data." Accessed July 21, 2021.

  5. Apple Inc. "Apple Reports Second Quarter Results." Accessed July 21, 2021.

  6. Apple Inc. "Apple Reports First Quarter Results." Accessed July 21, 2021.

  7. Apple Inc. "Form 10-K for the fiscal year ended September 26, 2020," Pages 1 & 2. Accessed July 21, 2021.

  8. CNBC. "Apple’s $2 trillion value is proof that Tim Cook’s services plan worked." Accessed July 22, 2021.

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