Apple (NASDAQ:AAPL) will announce second-quarter results today, after market close. Following the earnings release, the company will host a live conference call where Apple CEO Tim Cook is expected to provide greater perspective on the state of the tech giant's business and answer questions from analysts and investors. Here are some of the key topics likely to come up during the call.
How profitable is the Apple Watch?
Key to Apple's business model is a healthy up-front profit margin on the hardware it sells. The company's gross profit margin across its entire business is a no-joke 39%. In the last 10 years, the company's gross profit margin has ranged between 29% and 44%, well above any of its competitors in the consumer electronics hardware space.
Products have had major effects on Apple's profit margins in the past. The iPhone, which Apple has said is its most profitable business segment, was a key catalyst for lifting margins from levels around 30% before the iPhone to the post-iPhone levels of 40%. The launch of the iPad had the opposite affect. While helping revenue soar higher, the segment dragged Apple's quarterly profit margin down to 37% in mid 2013.
Investors will want to know how Apple Watch sales will impact Apple's gross profit margin. More specifically, investors will be curious about the cost curve for Apple Watch as well as where the average selling price may fall.
The biggest unknown in the factors affecting Apple Watch's profitability is average selling price. While the $349 starting price of the entry-level Apple Watch Sport is well below the $649 starting price for iPhone, Apple Watch has a wider range of pricing than iPhone. Pricing for the stainless steel Apple Watch models range from $549 to $1,099 ($150 more than the most expensive iPhone model). Pricing for 18-karat gold Apple Watches range from $10,00 to $17,000. The average selling price for Apple Watch will depend heavily on the portion of total watch sales these categories end up comprising.
While Apple won't report any Apple Watch sales for the second quarter, since deliveries began during the company's third fiscal quarter, Cook may give investors some early insight into how the business is panning out.
Could Apple Watch sales eventually trump iPad sales?
While Apple mostly avoids forward-looking projections, Cook has never been shy about his bullishness for iPad. Perhaps he will act similarly about his thoughts about the future of Apple Watch. After a few weeks of pre-orders and the first weekend of shipments, will Cook offer up his long-term outlook for Apple Watch?
A key benchmark for the potential of Apple Watch will be Apple's iPad segment. At about 12% of Apple's revenue and as the company's most recently launched product in an entirely new category, can the Apple Watch outperform Apple's last major product launch, and eventually surpass the segment in sales?
What's the status on Apple's services segment?
With the recent launch of Apple Pay, HBO's new Netflix-style cable-free service for Apple TV, and the continued growth in app sales, Apple appears to be trying to build its services segment into a formidable business. Investors will want more perspective on how Cook is thinking about Apple's services segment.
Apple's services revenue includes revenue from iTunes Store, the App Store, the Mac App Store, the iBook Store, AppleCare, Apple Pay, licensing, and "other services." During the company's most recent earnings release, Apple reported services revenue of $4.8 billion, up from $4.6 billion in the year-ago quarter. The segment accounts for approximately 6% of Apple's total revenue.
For more on Apple's upcoming second-quarter earnings report, including a look at analyst expectations, check out this earnings preview. A live stream of the conference call at 5:00 p.m. ET will be available here.
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Daniel Sparks owns shares of Apple. The Motley Fool recommends Apple and Netflix. The Motley Fool owns shares of Apple and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.