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Services Segment Help Stabilize Apple, For Now

Posted on Wednesday, May 6th 2020

The coronavirus crisis has done little to hurt big tech players such as Amazon, Google, Microsoft, and now Apple (Nasdaq: AAPL). Recently, Apple announced its second quarter results, and while the company shied away from giving a guidance, its performance inspired confidence in the market. But the crisis is far from over, and the current quarter may be challenging.

Apple’s Financials

Apple’s second quarter revenues grew 0.5% over the year to $58.3 billion, significantly ahead of the market’s forecast of $54.54 billion. EPS grew 4% over the year to $2.55, surpassing the Street’s forecast of $2.26.

By segment, iPhone revenues fell 7% to $29 billion. Mac sales fell 3% to $5.4 billion and iPad sales dropped 10% to $4.4 billion. Revenues from Wearables grew 23% to $6.3 billion. Apple’s big success was driven by the services segment that saw revenues grow 17% to $13.4 billion.

According to an IDC report, the coronavirus pandemic resulted in the smartphone market dropping 12% globally. While Apple also saw a decline in its overall iPhone sales, its global smartphone shipment only dropped a modest 0.4% over the year and it expanded its market share from 11.8% last year to 13.3% during the quarter.

Despite the current global crisis, Apple feels confident of its business. Its active installed base of devices reached a record high during the quarter. It generated operating cash flow of $13.3 billion during the quarter, up $2.2 billion over a year ago.

For the third quarter, Apple did not provide any forecast. The market is looking for revenues of $51.54 billion for the June ending quarter with an EPS of $2.07. Apple admitted that the last part of March and the first part of April were very depressed, but it is seeing some pickup in the second half of April.

Apple’s Product Upgrades

The virus had begun to impact the global economy as early as February this year and it had hurt Apple’s supply chain in China as well. But despite the slowdown, Apple managed to release some new product upgrades during the quarter. The biggest release was that of the new 13 inch MacBook Pro that comes with a Magic Keyboard. Priced at $1,299 for consumers, the new MacBook Pro runs on Apple’s 10th generation processors, gives up to 80% speedier graphics performance and boasts of 256GB storage for the base model.

Earlier in March, Apple had also announced the release of its most advanced iPad, the new iPad Pro. The iPad Pro features an improved A12Z processor, updated camera, a liquid retina display, and can also attach to Apple’s Magic Keyboard. Last month, Apple had also released the second-generation iPhone SE, a 4.7 inch iPhone. These were all significant launches considering that the company was dealing with supply chain issues and its teams were expected to work remotely. The analysts are still expecting Apple to announce its iPhone 5G versions in September this year.

But besides products, Apple’s success story for the quarter lies in its Services segment. In the quarter, Apple’s services subscriber base grew to 515 million, while its installed base, defined as a measure of the number of iPhones, iPads, and computers in circulation, grew to 1.5 billion. Apple News reached 125 million monthly active users as it elevated its information from reliable sources through a special COVID-19 vertical. The remote working and lockdown conditions drove usage for services like FaceTime and Messages to new all-time records.

Its stock is trading at $297.56 with a market capitalization of $1.3 trillion. It touched a 52-week high of $327.85 in February this year. The stock was trading at 52-week low levels of $170.27 in May last year.

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