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For Apple, Growth Exists Beyond iPhones

Posted on Thursday, May 9th 2019

According to a recent Gartner report on global smartphones, for Q4 2018, Apple (Nasdaq: AAPL) reported its worst quarterly decline in phone sales since Q1 2016. With demand for entry level smartphones continuing to grow, vendors like Huawei are eating into both Apple’s and Samsung’s smartphone share. But Apple is turning the trend around by focusing on subscription-based services and the emerging trend of digital health. The efforts are being appreciated by the market as the stock climbed 5% post result announcement.

Apple’s Financials

Apple’s second quarter revenues fell 5% over the year to $58.02 billion, ahead of the market’s forecast of $57.54 billion. EPS for the quarter came in at $2.46, again ahead of the Street’s forecast of $2.36.

By segment, Apple’s iPhone revenues drove the declines with revenues falling 17% over the year to $31.1 billion, offset somewhat by 22% growth in iPad sales to $4.9 billion. iPad sales were driven by iPad Pro which was released late last year. Mac revenues continued to fall and reported a 5% decline to $5.5 billion. Apple’s big growth segments remain the Wearable Devices segment that grew 30% to $5.1 billion and the Services segment that grew 16% to $11.5 billion.

For the current quarter, Apple forecast revenues of $52.5-$54.5 billion, ahead of the market’s forecast of $52.1 billion.

Apple’s Subscription Services Business

With the smartphone market slowing down, Apple has been focusing on growth through other business segments. Services is now its second biggest segment and is also an important contributor to its margins. For the quarter, the services segment boasted of 64% gross margin, compared with Apple’s overall gross margin of 38%. The growth is fueled by the fact that Apple now has nearly 1.4 billion connected devices deployed globally.

During the quarter, Apple claimed that it reported the best ever performance for the App Store, Apple Music cloud services, and the App Store search ad business. It set new March quarter revenue records for AppleCare and Apple Pay. Apple Pay transaction volume more than doubled over the year and is now on track to reach 10 billion transactions this calendar year. Apple Pay is available in 30 markets, and Apple expects to grow it to 40 markets by the end of the year.

Apple Pay is seeing significant adoption in global transit systems. It has already been deployed in London, Tokyo, and Shanghai transit systems, and starting this summer, will be deployed in New York’s MTA system as well.

Within the services segment, subscriptions is a powerful driver for revenues. During the quarter, Apple announced that it has added 30 million subscriptions over the year to grow to a record high of 390 million paid subscriptions at the end of March. It continues to attract customers through a wide range of new services that are easy to use, are customizable, and ensure privacy and security. Some of the new subscription services launched this quarter include Apple News+ that will now include content from 30 popular magazines, leading newspapers, and digital publishers within the Apple News app.

Apple also previewed Apple Arcade, the first ever game subscription service for mobile, desktop, and the living room. Apple Arcade will offer more than 100 new games for players of all ages, with no ads or ad tracking, no additional purchases, and a promise to deliver user privacy.

Apple’s Digital Health Focus

Additionally, Apple is leveraging its growing wearables technology for advancement of health-based services. During the quarter, it introduced an ECG app on Apple Watch Series 4 to Hong Kong and 19 European countries including France, Germany, Italy, Spain, and the UK. The app was already launched in the US and has helped customers actively manage their health. Earlier this year, Stanford Medicine released an Apple Heart Study report that included the results from over 400,000 participants from all 50 states over a period of eight months.

It is also expanding its reach into other organizations and earlier this year announced that it was working with the US Department of Veterans Affairs to make health records on iPhone available to veterans. The service will be the first record sharing platform of its kind available to the VA.

The market is pleased with Apple’s performance and the stock climbed 5% post the result announcement. Its stock is trading at $202.86 with a market capitalization of $933.5 billion. It had peaked to a record high of $233.47 in August last year. It has recovered from the year low of $142 that it had fallen to in December last year, when most technology stocks fell.

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