Key Takeaways

  • EPS was $0.73 vs. the $0.69 analysts expected.
  • Revenue exceeded analyst expectations.
  • Services revenue was higher than the level analysts expected.
  • Apple reported a quarterly record for services revenue.

What Happened

Apple posted EPS and revenue that beat analysts' expectations for Q4 2020. Services revenue also surpassed expectations to reach a new quarterly record. EPS fell compared to the same quarter a year ago despite higher revenue.

"Apple capped off a fiscal year defined by innovation in the face of adversity with a September quarter record, led by all-time records for Mac and Services," said CEO Tim Cook.

(Below is Investopedia's original earnings preview, published October 26, 2020.)

What to Look For

Apple Inc. (AAPL) posted record financial results in its most recent quarter, Q3 FY 2020, as the company benefitted from the global COVID-19 pandemic. Demand for many of its products surged amid the growth of the work-from-home economy.

Investors will be watching to see if Apple can maintain that growth when it reports earnings on October 29, 2020 for Q4 FY 2020. The company's fiscal year ended in September. Analysts expect year-over-year (YOY) declines in both earnings per share (EPS) and revenue, marking the first drops since fiscal 2019.

Investors also will focus on a key metric in the Q4 results: the iPhone maker's services revenue. Apple has long been known for its hardware products, such as smartphones and computers. But it's aggressively diversifying by expanding revenue from services, thus reducing its dependence on hardware sales. Analysts expect Apple to report healthy growth in services revenue YOY.

Apple's success this year has been reflected in its stock, which has outperformed the broader market. Apple shares have provided a total return of 91.1% over the past 12 months, well above the S&P 500's total return of 15.3%, as of October 23, 2020.

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

The stock jumped after the company posted record quarterly results that beat analysts' expectations in Q3 FY 2020. EPS rose a robust 18.4% YOY, the second-fastest pace of growth in the past seven quarters. Revenue grew 10.9%, marking the fastest pace since Q4 FY 2018.

The growth was broad based across the company's geographic segments and in both products and services. It was also a definite improvement from the more modest EPS growth of 3.8% and anemic revenue growth of 0.5% posted in Q2 FY 2020. After Apple's July 30 earnings report, the stock advanced until early September. Since then the stock has drifted downward and sideways.

Analysts are currently forecasting a slump in revenue and earnings in Q4 FY 2020. EPS is expected to decline 9.3% YOY, the largest drop since Q2 FY 2019. Revenue is expected to fall 1.1%, the first decline since Q2 FY 2019. For full-year 2020, analysts expect EPS and revenue to rise 8.5% and 4.9%, respectively, an improvement from the annual declines posted for both numbers in FY 2019.

Apple Key Metrics
  Estimate for Q4 2020 (FY) Q4 2019 (FY) Q4 2018 (FY)
Earnings Per Share ($) 0.69 0.76 0.73
Revenue ($B) 63.3 64.0 62.9
Services Revenue ($B) 14.0 12.5 10.6

Source: Visible Alpha

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, and Apple TV+. Apple also generates services revenue from Apple Care, licensing, and other services, including Apple Arcade, Apple Card, and Apple News. 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. To bolster service sales, the company has introduced a large number of new subscription services, and is increasingly becoming seen not just as a hardware company but a major player in the software business.

Apple's services revenue has grown rapidly in recent years, with growth ranging between 25-40% in 2018. Even though growth decelerated the following year, services revenue was generating about 18% of the company's total revenue by the end of FY 2019.  The deceleration trend has continued in 2020, but services revenue is still rising at a robust pace. It grew 16.6% YOY in Q2 FY 2020 and 14.9% in Q3 FY 2020. Analysts forecast that services revenue will rise 11.5% in Q4 FY 2020, the slowest pace in at least the past four years. For full-year 2020, analysts expect services revenue to rise 14.9%, the slowest pace in the past five years.