Gears & Gadgets

Apple says iPhones were down 15% last quarter, but everything else was up 19%

Close-up image of phones prominently displayed on a wooden table in a brightly lit, streetside store.
Enlarge / iPhones are seen at an Apple Store in Tianjin, China.

Apple today shared its fiscal first-quarter revenue with shareholders. As investors feared and as previously warned, Apple posted revenue of $ 84.3 billion for the quarter ending in December, missing revenue expectations in the quarter by around $ 4 billion.

CEO Tim Cook primarily credited macroeconomic conditions in China and their impact on iPhone sales in that region for the failure to meet expectations. That said, the company reported that every part of its business besides the iPhone was up year over year, as was overall revenue in the United States and Europe. The quarter was its second best ever in terms of revenue.

Investors were waiting for the report with bated breath after the company announced earlier this year that it expected to miss its revenue target for the quarter. Apple stock has taken a considerable tumble in recent months thanks to fears about smartphone market saturation, trade tensions between the United States and China, and other unfavorable market conditions in China.

The elephant in the room: iPhone sales

The Apple executives on the call said that conditions like currency fluctuations relative to a strong US dollar greatly impacted iPhone sales in China and other emerging markets by driving up the cost for consumers, though the company made some efforts to discount its products in those regions to keep pricing closer to what it was a year ago.

China’s general economic slowdown and trade tensions with the US were also credited. Additionally, Cook said that iPhone owners just aren’t upgrading as much as expected. He pointed to Apple’s cheap battery-replacement program as one reason iPhone upgrades were down, but he also noted that smartphone subsidies which made it easier for consumers to take the leap have been reduced or eliminated in some countries like the United States and Japan.

The picture he painted looks like this: a customer who still has not bought a new iPhone since 2015 might have sought to upgrade late last year, but they found that their iPhone 6S was working just fine after a $ 29 battery replacement. Further, the hypothetical customer discovered that their carrier was not offering the same strong subsidies that it did at the time of the customer’s last purchase. They might have gotten the iPhone 6S for just a couple hundred dollars up front, but now they were looking down the barrel of a $ 1,000 purchase. Since their iPhone 6S had been rejuvenated by the battery replacement, they decided to hold on to it for another year, and Apple didn’t make a new sale.

It should be clarified though that not all users got replacement batteries, so that was just one factor. Cook noted that while investors might criticize the company for undercutting its sales with the battery-replacement program, “We strongly believed it was the right thing to do for our customers.”

When an analyst asked whether Apple feels it has pushed pricing too far, they were told that the iPhone XS was priced at the same point as last year’s iPhone X and that the iPhone XR started at a mid-point between the iPhone 8 and 8 Plus pricing in 2017 as well. Apple seemed to be suggesting that it was a non-issue because prices were not actually higher. Not noted, though: the absence of the iPhone SE, which offered a relatively low-cost entry point in prior years.

Apple did clarify that the iPhone XR was the top-selling iPhone in the quarter, followed by the iPhone XS Max, and then the iPhone XS. Overall, iPhone revenue fell 15 percent year-over-year.

Beyond that, Apple did not discuss specific iPhone unit sales numbers. But that was not a surprise. Recently, Apple announced it would no longer report iPhone unit sales numbers at all, but it did report some other new numbers in this call that it had not shared previously. Investors were told how many iPhones constitute the global install base for the first time: 900 million.

That figure is key for Apple’s services plans; the larger the install base, the larger the addressable market for services like Apple Music, the App Store, and the upcoming TV streaming service.

Services and other business

And speaking of services, Cook said services revenue reached an all-time high of $ 10.9 billion and said the company is on track to meets its goal of doubling its 2016 services revenue by 2020. To drive this point home, Apple pointed to 2018’s $ 41 billion in services revenue in calendar 2018 and contrasted it with just $ 8 billion in 2010. However, services growth in the quarter was on the low end compared to similar recent quarters, even if it was still progress towards the company’s goal.

Apple disclosed the number of Apple News readers for the first time in a while, saying that it has 85 million active readers, and that it has the largest audience of all news apps according to comScore. Cook also said that Apple Music now has 50 million paying subscribers. While answering an analyst’s question, Cook talked at some length about the company’s desire to invest more in content creation while alluding to the upcoming TV service, but did not get into specifics. (Coincidentally, The Information recently reported that Apple’s TV service is expected to launch this spring.)

Services weren’t the only story that was more positive than the iPhone figures. Every other part of Apple’s business was up year over year, with many setting new records in key markets like the United States, Europe, and South Korea. Mac revenue was up nine percent, setting a new all-time record. iPad revenue was up 17 percent. Wearables saw a 33 percent growth in total, thanks to strong sales of the Apple Watch and the continued runaway success of AirPods. Overall, Apple claimed 19 percent year-over-year growth for all businesses in aggregate, excluding the iPhone.

Many observers expected Apple to address the recently discovered bug that allowed FaceTime callers to hear recipients before those recipients accepted calls, given that it cut to the heart of Apple’s privacy-oriented marketing messaging. But the bug was never addressed by Apple on the earnings call, and none of the analysts who were afforded the opportunity to ask questions brought it up. Apple has disabled some features of FaceTime calling to prevent further abuse and plans to release a software update to fix the bug later this week.

Next quarter projections

Apple set expectations for second-quarter revenue at between $ 55 billion and $ 59 billion, with a gross margin between 37 and 38 percent. It also reported that it now has $ 245 billion in cash on hand, with a net cash position of around $ 130 billion. Those second-quarter revenue expectations are slightly below what investors and analysts predicted, suggesting that Apple has not fully navigated its way out of rougher-than-usual waters just yet. To that point, Cook said, “We don’t measure our success in 90-day increments. We manage Apple for the longterm.”

All this discussion of China’s economy muddied the narrative that some analysts and commentators have put forth that Apple faces tough times solely due to maturation and saturation of the smartphone market—the situation is more complex than that. But it’s clear from Apple’s current strategy that the company anticipates this issue regardless and is looking to other businesses to make up iPhone revenue.

After the report concluded, Apple stock was up slightly in after-hours trading, as the reported figures were not quite as bad as investors feared after Apple’s warning earlier this month.

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Tech – Ars Technica

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