Apple’s results confirmed that while the smartphone industry’s days of double-digit growth are over, CEO Tim Cook has a plan to weather the downturn.
Shares gained after the company reported iPhone sales in line with analysts’ expectations, gave a bullish revenue forecast and highlighted a booming services business. A new $100 billion (about Rs. 6.68 lakh crore) share buyback plan and a higher dividend also helped. The stock jumped 3.2% to $174.52 (about 11,700 rupees) at 9:33 a.m. in New York.
The numbers show Cook’s strategy of selling a growing range of services through a base of more than 1.3 billion Apple devices is working. According to Strategy Analytics, the smartphone industry has seen shipments drop 2% over the past year. The company must therefore evolve beyond its dependence on a device that still represents more than 60% of its income.
“Slowly but surely, [Apple] turns into more than just an iPhone story and shows its ability to support revenue growth regardless of iPhone trajectory,” RBC Capital Markets analyst Amit Daryanani wrote in a research note.
The company reported that iPhone sales grew only 2.9% in the fiscal second quarter. While the flagship iPhone X may not have matched the hype of its launch late last year, the device’s starting price of $999 (about Rs. boost phone revenue growth by 14%.
Cheaper iPhone models for emerging markets and wearables like the Apple Watch also drove revenue growth.
“Near-term growth will come from higher iPhone X prices, a cheaper iPhone SE update, selling more services like Pay to its premium subscribers, and increasing production of its surprisingly popular Watch wallet,” said analyst Neil Mawston. at Strategy Analytics.
Services revenue jumped 31% to a record $9.2 billion (about Rs 61,450 crore) in the quarter. The App Store, Apple Music, iCloud storage and Apple Pay all drove record sales, Cook said. The company expands these offerings with original videos and a news subscription service.
As long as Apple continues to sell around the same number of devices each year – 217 million iPhones, more than 40 million iPads and nearly 20 million Macs in fiscal year 2017 – it can sell to users of these devices a growing list of services that integrate tightly with the hardware.
“You need to start thinking about Apple differently going forward,” wrote Dan Morgan, senior portfolio manager at Synovus Trust Company, in a recent note. “Apple can back the stock as the investment thesis shifts from a product cycle to services-led growth.”
An Apple Music subscription costs $10 (about Rs. 670) per month (unless they’re on a family plan), and the number of paying users recently hit 40 million. The mid-tier for iCloud storage costs $2.99 (around Rs 200) per month. The company now has 270 million paid subscribers across apps and its own services, up 100 million from the same period a year ago.
Cook suggested that new services are in the works and that Apple’s installed base of devices has grown by double digits over the previous year. “It’s just a huge opportunity for us and we feel very good on the track we’re on,” he said.
Thanks to this new stream of recurring revenue, the health of the smartphone industry becomes less relevant to Apple. Several iPhone vendors and makers have reported disappointing results in recent weeks, raising concerns that Apple’s numbers may be weak. But these companies aren’t taking advantage of Apple’s expanding service offerings.
Some Asian vendors rallied after Apple’s report, with South Korea’s LG Innotek Co. up 7.3%. But the reaction was mixed for most partners given the limited iPhone sales growth.
Synovus’ Morgan recently estimated that services will drive about 60% of Apple’s revenue growth over the next five years. That’s a big change from the previous half-decade, when 86% of the company’s growth came from iPhone sales.
“The services segment will grow between 13% and 20% annually over the next five years, driven by continued growth of existing services as well as new, innovative services,” wrote Gene Munster, co-founder of Loup Ventures. and veteran Apple analyst. in an email following the results on Tuesday.
Cook hinted at additional sources of growth in terms of geographies and product categories. He said India is an attractive new market for iPhones, similar to China several years ago.
“There are obviously huge opportunities there for us and we have an extremely low share of that market overall so we’re putting a lot of energy into it,” Cook said on Tuesday’s call with the analysts.
Still, he dismissed the idea that the smartphone market has become saturated. There were still half a billion feature phones sold globally last year, he noted. “Over time, every phone sold will be a smartphone, so it seems to us that with so many feature phones sold, that’s a pretty big opportunity,” the CEO told analysts.
Cook also discussed additional opportunities in healthcare. “This is an area of great interest where we believe we can make a big difference,” he said on the call. Apple has continued to add new health tracking features to the Apple Watch and ships its iPhones with an app to manage health data and records.
© 2018 Bloomberg L.P.
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