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Apple’s Subscription Services Bet Paying Off

Posted on Monday, Nov 4th 2019

Apple (NASDAQ: AAPL) last week reported results that surpassed all expectations driven by strong performance from its Wearables and Services segments. Its stock hit a record high following the results and Apple is now a $1 trillion company.

Apple’s Financials

Apple’s fourth quarter revenues grew 1.8% to $64 billion versus analyst estimates of $62.99 billion. EPS was $3.03 versus analyst estimate of $2.84.

By category, Apple’s Q4 iPhone revenues declined 9.2% to $33.4 billion versus analyst estimates of $32.42 billion. iPad revenues grew 17% to $4.6 billion while Mac revenues fell 4.7% to $7 billion. Wearables revenue grew an impressive 54.4% to $6.5 billion. Services segment, which includes AppleCare warranties and subscriptions like iCloud, grew 18% to $12.5 billion, beating analyst estimates of $12.15 billion. Apple has over 450 million paid subscriptions and its subscription revenue grew an impressive 40% in the quarter.

Revenue from Apple Pay more than doubled and it recorded over 3 billion transactions. Apple Pay is now live in 49 markets around the world with over 6,000 issuers on the platform.

By region, revenue from Americas grew 6.5%, Europe fell 3.2%, Greater China declined slightly, Japan declined 3.8%, and Rest of Asia Pacific grew slightly.

For the fiscal year, revenue declined 2% to $260.2 billion compared with $265.6 billion a year ago. Net income was $55.2 billion or $11.89 per share. iPhone sales declined 13.6% or by 22.5 billion to $142.4 billion. Wearables and Services segments somewhat offset the decline, and fiscal 2020 sales are expected to recover to 2018 sales.

For the first quarter that includes the holiday season, Apple forecast revenues of $85.5-$89.5 billion, in line with the analyst estimates of $86.92 billion.

The following chart, courtesy CNBC shows how Apple has steadily reduced its dependency on the iPhone.

Apple’s New Streaming Service

Apple last week launched its Apple TV+ streaming service at $4.99 per month. It can be accessed through the TV app on Apple’s devices as well as smart TVs and set-top boxes made by companies like Roku, Samsung, and Amazon. Apple is also streaming its shows on its website for people using Safari, Firefox or Chrome browsers.  

Apple will be spending about $6 billion on original content over the next few years. It has paid $240 million for two series of the Morning Show comedy starring Jennifer Aniston.

On the other hand, Netflix spent an estimated $15 billion on creating and licensing content this year and expects to grow that by 20% in 2020. Netflix currently has over 158 million subscribers while its largest competitor Amazon has 100 million subscribers.

Apple is getting into the streaming market when it is getting too crowded. Disney, which already has a vast library of content from the popular Marvel, Pixar, and Star Wars franchises, is about to launch its service at $6.99 per month. CNBC parent NBCUniversal and AT&T’s Warner Media are planning to launch services early next year.

Apple needs to look out for competition even in the wearable segment after the recent acquisition of Fitbit by Google for $2.1 billion. Apple has about 36% of the smartwatch market while Fitbit has a 5.5% share.

Its stock is trading at a record high of $255.82 with a market capitalization of $1.1 trillion. It hit a 52-week low of $142 in December last year.

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