Apple (AAPL +3.26%) just put a date on its second-quarter earnings release for its fiscal year 2018: May 1, after market close. It could be said that the tech giant's second-quarter earnings reports are just as crucial as the tech giant's important first quarter -- a period that includes seasonally higher sales from fresh iPhone launches and the holidays. What makes Apple's second-quarter update special is that it is released alongside management's annual update on its capital return program.
Of course, there's more to Apple's second-quarter report than an expected update on management's plans to return excess cash to shareholders through dividends and share repurchases. Investors will also want to check on iPhone revenue and the state of two important growth catalysts.
iPhone X. Image source: Apple.
iPhone revenue
Accounting for 62% of trailing-12-month revenue, iPhones remain central to Apple's business. Fortunately, Apple's iPhone business has been performing very well recently. In Apple's first quarter of fiscal 2018, iPhone revenue increased 13% year over year. This was particularly impressive since Apple's first quarter was one week shorter than the year-ago period. But investors will want to look for this momentum to continue in Q2.
For Apple's second quarter, investors should look to see whether Apple's robust year-over-year growth in iPhone revenue can persist. To post another quarter of double-digit year-over-year growth in iPhone revenue, second-quarter iPhone revenue will need to be $36.57 billion or higher, up from $33.25 billion in the year-ago quarter.
Catalysts
Apple's services and other products segments have been seeing surging growth. Adjusted to exclude the impact of an extra week in the year-ago quarter, Apple's services and other products segments saw revenue increase 27% and 47% year over year in Q2, respectively.
For Apple's services business, investors should look for a similar growth rate to the adjusted growth seen in Q1. Apple's other products segment, however, is susceptible to more volatility, thanks to greater dependence on the timing of product launches. While a repeat of the 47% year-over-year growth in other products revenue seen in Q1 is unlikely, Apple's strong momentum in the segment makes at least 25% year-over-year growth in the segment likely.
Image source: Apple.
Apple's capital return program
Apple management's capital return program update this year is particularly important, as it follows a recent change to tax law that made it possible for companies to repatriate abroad cash without paying hefty tax rates. With 94% of Apple's $285.1 billion cash plus marketable securities held abroad before the U.S. Tax Cuts and Jobs Act (Tax Act) enabled the company to repatriate its cash, it's easy to see why Apple benefits handsomely from the Tax Act.
Given Apple's strong cash position and its more than $50 billion in annual free cash flow, investors should look for another meaningful dividend increase and a boost to Apple's share repurchase program. With Apple's annual dividend payouts compounding at an average rate of 10.6% annually since it was initiated over five years ago, investors should look for another 10% dividend increase or better. Further, with just $34 billion remaining under Apple's current $210 billion authorization for share repurchases as of the end of the tech giant's first quarter, investors should expect management to authorize more cash for repurchases -- especially after the Tax Act.
