Apple Q2 earnings: Services margin, China demand, buyback

Apple reports fiscal second-quarter results on Thursday after the close. The story this quarter is less about the iPhone cycle and more about margin architecture. Services revenue, now roughly a quarter of total sales, carries gross margins above 70%. Hardware margins average about 36%. A shift of one percentage point in mix toward services is worth roughly $800 million in gross profit on the current revenue base, Morgan Stanley analysts wrote in a note this quarter.

China demand is the open variable. Greater China sales in the fiscal first quarter fell 11% year on year to $18.5 billion. Currency headwinds and competition from Huawei cut into high-end share. Wall Street models a low-single-digit recovery in the March quarter. The base is easy: the year-ago period saw a 13% decline. A China number below the recovery case would erase the stock's 15% year-to-date gain, several analysts said.

Capital return is the floor. Apple repurchased $90 billion in stock in fiscal 2024. It plans to be the largest dollar-value buyer in the US market this year. A $110 billion authorization at the April board meeting is the consensus expectation among sell-side firms that track the company. That liquidity backstop is why the stock trades at 29x trailing earnings despite flat unit sales growth.

The hard question is the iPhone 16 cycle. Sell-through data from January and February points to a 3% volume decline in the March quarter, according to checks by TF International. The base case for most analysts is a mild improvement in the June quarter. Replacement demand from the 13-series base is the catalyst. That is not a growth story. It is a replacement story, and the replacement rate is slowing. Carriers have tightened upgrade promotions, several analysts noted.

Services remains the margin lever that offsets hardware pressure. The App Store, Apple Music, iCloud, and the advertising business together grew 14% in the December quarter. The question for Thursday is whether that growth rate holds. App Store net revenue was flat sequentially in the March quarter, Sensor Tower data shows. That suggests a deceleration from the holiday peak. The guidance range Apple gave for services growth was 9 to 11 percent. That range is achievable. It does not represent an acceleration from the December quarter's 14% growth.

Apple's own guidance is the real deliverable. The company stopped giving unit sales numbers years ago. What it offers on Thursday is a revenue range for the June quarter. That range will tell investors whether the iPhone 16 cycle has legs or whether the stock's multiple depends entirely on capital return.