Apple's hidden multi-billion dollar business could be the star of Monday's earnings

Apple will announce its fiscal first quarter earnings on Monday afternoon.

Here's what you need to know, starting with Wall Street expectations, compiled from analyst estimates by Bloomberg:

Revenue: $77.4 billion, up slightly from $74.9 in the year-ago quarter.

Adjusted EPS: $3.22, down slightly from $3.28 in the year-ago quarter.

Gross margin: 38.39%, down from 40.1% in the year-ago quarter.

iPhones sold: 76 million, up from 75 million in the year-ago quarter.

iPhone average selling price: $688, down from $691 in the year-ago quarter.

The big story is that Apple has faced three consecutive quarters of overall year-on-year declines in revenue, which is expected to rebound this quarter if the iPhone - which accounts for two-thirds of Apple's revenue - and other Apple products had a big holiday season. The holiday quarter is Apple's biggest quarter.

Investors will also look closely at Apple's future guidance to see if there's soft demand for the iPhone 7 ahead of Apple's newest iPhone, which is expected to go on sale this fall.

But besides the numbers, there's one big thing that investors will be looking at from Apple's earnings: whether its services business, which includes the App Store, Apple Music, and Applecare warranties, is becoming Apple's second firehose of profit after hardware sales.

Services with a smile

Last year, as part of its fiscal first quarter earnings, Apple disclosed new supplemental data points to help investors and analysts gauge the size of its services business.

"I do think that the assets that we have in [services] are huge, and I do think that it's probably something that the investment community would want to and should focus more on," Apple CEO Tim Cook said last year.

But in the three quarters since then, Apple has not provided the same data points. It's possible that metrics that allow investors to break out Apple's services revenue into components like AppleCare and App Store may return this quarter.

Some of the best analysis on Apple's services business comes from Ben Schachter at Macquarie Capital. His takeaway? "The bottom line is that we think investors need to understand the dynamics behind how Services and the App Store impact the Apple model.," he wrote in a note distributed to clients in January.

"The oft underestimated and misunderstood Services segment has the potential to drive ~100 bps [=1%] of overall gross margin expansion per year for Apple," he wrote. "However, if one believes that iPhone units can grow with iPhone 8 and then be roughly stable going forward, we believe Services and Apps will become the growth engine for Apple."

Analysts expect Apple's gross margins will be down this quarter. But in the long run, here's how Schachter thinks services like the App Store will affect Apple's gross margin - perhaps Apple will provide disclosures again to support this model.

The reason investors need more data on Apple's services business is because some of it, like the App Store is recognized as net revenue - where Apple doesn't set the price and has to pay its suppliers - and some of it is listed as gross revenue, where Apple is only reporting its take (30 cents on a $1 app, for example.)

Cook said last year that by 2017, Apple's services business could be the size of a Fortune 100 company. It's already bigger than the average S&P500 company, according to Macquarie's research. In fact, if you count App Store gross, it's already bigger than Twitter, Facebook, and Amazon Web Services.

Apple is likely to emphasize this story, especially if iPhone sales come in under expectations. Credit Suisse analysts point out that Apple is likely to see the App Store grow for the 6th consecutive quarter.

Other lingering questions

Apple made a few investments during the past quarter that you can expect Wall Street to ask about.

Some things that Cook and CFO Luca Maestri may give additional information about:

• Why did Apple invest $1 billion into the Softbank Vision Fund?
• Why did Apple invest in a partnership with the world's largest wind power turbine maker in China?
• Did the Apple Watch have a big holiday quarter?
• Is demand for the iPhone softening in China?
• Does Apple still see India as its next big growth market? Estimates show it only sold 2.5 million iPhones in the entire country last year, and it's been striking deals with the government for special treatment.
• What Apple thinks the impact of its lawsuit against Qualcomm will be.
• Apple's next iPhone, expected to launch in the fall, is already garnering a lot of hype, because it's supposed to be redesigned and beautiful. Will Apple offer guidance suggesting slumping iPhone sales because of anticipation?
• Is Apple planning to move its workforce into its new $5 billion campus this quarter?
• How does Cook get along with President Donald Trump and his family? Does Apple expect a tax cut on overseas cash?

Apple reports earnings at 4:30 E.T. on Monday. Business Insider will cover all the news as it happens live.

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