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Apple Seeks Life Beyond the iPhones

Posted on Wednesday, Jul 31st 2019

Apple (Nasdaq: AAPL) recently reported its third quarter results that surpassed market expectations despite a weak performance of the iPhones. Apple is trying to wean itself away from its dependence on iPhone sales and the recent quarter results suggest that it may be succeeding at that. It delivered strong performance on other segments including the wearables and its streaming service.

Apple’s Financials

Apple’s quarterly revenues grew 1% over the year to $53.8 billion, ahead of the market’s forecast of $53.5 billion. EPS for the quarter came in at $2.18, surpassing the Street’s forecast of $2.10.

By segment, iPhone revenues fell 12% over the year to $26 billion, recording the first quarter in a while since it accounted for less than half of the company’s quarterly revenues. Analysts were looking for iPhone revenues of $26.5 billion. Mac sales improved 11% to $5.8 billion, falling short of the Street’s estimated $5.8 billion. iPad sales grew 8% to $5 billion, in line with the market’s estimates. The biggest growth was recorded by the upcoming Wearables segment which reported a 48% increase to $5.5 billion revenues, and was significantly ahead of the market’s forecast of $4.9 billion. Services revenues also recorded an impressive 13% growth to $11.5 billion in sales, but fell short of the market’s estimated $11.9 billion.

For the current quarter, Apple forecast revenues of $61-$64 billion, ahead of the market’s forecast of $61 billion.

Apple’s Other Segments

According to a Counterpoint Research report, the global share of iPhones within the smartphone market has been falling. For the first quarter of the year, Apple’s iPhones accounted for 12% of the global smartphone market compared with 17% a quarter ago. Over the same period, Samsung saw its market share grow from 18% to 21%, and Huawei’s share improved from 15% to 17%.

To counter the slowdown in smartphone sales, Apple has been focusing on its other segments including Wearables and Services to drive revenues. Apple’s Wearables segment includes its Beats headphones, Airpods, and the Watch.

Within Services, the company set new all-time records for Apple Care and Music cloud services. It ended the quarter with over 420 million paid subscriptions to services across its platform and expects to grow that number to over 500 million by the end of fiscal 2020. Earlier this summer, Apple launched its all-new Apple TV app in over 100 countries. The updated app allows users to watch TV in a single app across iPhone, iPad, Apple TV, and select smart TVs. Apple TV’s membership is also growing and it reported a 40% growth in the US driven by improved content and a simplified user interface. Today, the Apple TV has content from over 150 leading content providers in a single place. By being an impartial TV content provider, Apple is able to offer its subscribers the ability to choose to pay only for the channels they want.

Apple also continues to expand the Apple Pay service. Last month, it launched Apple Pay in 17 additional countries, bringing it to a total of 47 markets globally. Apple Pay currently processes more than 1 billion transactions per month, which is more than double the volume of a year ago. It is driving higher transaction volume through several tie-ups. Apple Pay can now be used on the New York City transit and will be available on Chicago transit systems later this year. It is also an acceptable form of payment in China for Didi’s ride hailing services.

Within payment services, Apple is also currently testing a credit card, the Apple Card. The card is currently being used by Apple employees and is expected to be rolled out in August this year. The card has been integrated with other Apple devices and lives on the user’s iPhone, in the Wallet app. Users can sign up and start using the card right away.

The other major segment for Apple is its Wearables. Apple Watch is now reaching more than millions of new users and Apple noted that more than 75% of customers buying Apple Watch in the June quarter were buying their first Apple Watch.

Apple’s Acquisition

Earlier this week, Apple also announced the $1 billion acquisition of Intel’s modem business. The transaction is expected to close by the end of the current year and is Apple’s second largest acquisition so far. As part of the acquisition, Apple will get 2,200 employees from Intel for its smartphone modem business. Intel will continue to create modems for other devices including PCs, IoTs, and vehicles. Apple plans to leverage the acquisition to grow its portfolio of wireless technology patents to over 17,000 and to expedite its development of future products.

The acquisition also implies that if Apple wants, it can now produce its own 5G modems for its smartphones, and not have to rely on Qualcomm for the hardware. Apple has had quite a few rows with chipmakers in the past, and the ability to make them in-house will help it get bigger control of its product process.

Its stock is trading at $208.78 with a market capitalization of $960.6 billion. It had touched a record high of $233.47 in August last year. It has recovered from the 52-week low of $142 that it had fallen to in December last year, when most technology stocks fell.

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