Record services revenue lets Apple plot future beyond iPhone growth
Apple's results have confirmed that, while the days of double-digit smartphone growth are over, Tim Cook has a plan to withstand the slowdown.
The shares gained in late trading on Tuesday after it reported iPhone sales in line with analysts' expectations, gave a bullish revenue forecast and highlighted a surging services business. A new $100bn stock repurchase plan and higher dividend also helped. Shares remained strong in pre-market trading yesterday and were up 3pc at 4.42am in New York.
The numbers show CEO Cook's strategy of selling a growing array of services through a base of more than 1.3 billion Apple devices is working. The smartphone sector saw shipments fall 2pc in the past year, so it must evolve beyond its reliance on a device that still accounts for more than 60pc of revenue. "Slowly but surely, [Apple] is morphing into more than just an iPhone story and is displaying ability to sustain revenue growth irrespective of iPhone trajectory," wrote RBC Capital Markets analyst Amit Daryanani.
Apple reported iPhone unit sales grew just 2.9pc in the second quarter. But the premium priced iPhone X helped boost phone revenue growth by 14pc and cheaper iPhone models for emerging markets, and wearables like the Apple Watch, also drove revenue growth. Revenue from services surged 31pc to a record $9.2bn. The App Store, Apple Music, iCloud storage and Apple Pay all generated record sales, Cook said. The company is expanding 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 almost 20 million Macs in fiscal 2017 - it can sell users of these devices a growing list of services that integrate tightly with the hardware.
"Apple can support the stock as the investment thesis evolves from one of product cycle to services-led growth," wrote Dan Morgan of Synovus Trust.
An Apple Music subscription costs $10 per month (€9.99 in Ireland), and the number of paying users recently hit 40 million. The middle tier for iCloud storage costs $2.99 (€2.99) a month. The company now has 270 million paid subscribers across applications and its own services, up by 100 million from the same period a year ago.
Cook suggested new services are in the works. "This is just a huge opportunity for us and we feel very good about the track that we're on," he said.