- Apple offered new details on its business with its earnings report Tuesday.
- New figures showed just how profitable its services business is.
- The company now has 1.4 billion total active users of its devices, up 100 million last year.
Apple may have pre-announced its revenue shortfall in early January, but the company offered plenty of important updates and details about the state of its business, and of the broader economy, during its official earnings call on Tuesday.
From the state of consumer demand in China to the growth in streaming media, Apple’s business stretches across a wide swath of industries and markets. And Apple CEO Tim Cook shared important insight on many of these topics during the conference call with analysts.
How investors and analysts perceive those new items will likely be affected by their stance on the company going into the report; there were bits to feed both bulls and bears.
Here are the most important things we learned from the call:
Apple is really struggling in China.
We already knew that Apple was having a tough time in China – Tim Cook attributed the company’s problems largely to that country in his letter to investors earlier this month – we just didn’t know the extent of it.
Apple’s sales in the Greater China region plunged in its first quarter by $US4.8 billion, or 36%, from the same period a year earlier to $US13.2 billion.
Cook had already said that Apple saw declines in sales of each of its three major product lines – iPhones, Macs and iPads – in the country.
On the bright side, Cook said that Apple’s wearables products revenue increased 50% in China during the quarter. And, he said, Apple was growing its customer base in China: “More than two-thirds of all customers in China who bought a Mac or an iPad during the December quater were purchasing that product for the first time.”
Apple’s struggles in China extended to its services business.
Apple has pinned its hopes for the future on its services business, which includes things such as its commission on sales through its app store and revenue it gets from selling subscriptions to offerings such as iCloud.
Its app store sales revenue constitutes a large portion of its services sales, and a big portion of its app store revenue comes from the sale of games in China.
Unfortunately for Apple, Chinese authorities stopped approving new games last spring and that depressed app store sales and, in turn, Apple service’s revenue.
“We believe this issue around the approval of new game titles is temporary in nature but clearly affecting our business right now,” CFO Luca Maestri said during the call.
In the first quarter Apple’s services revenue grew at a 19% annual clip, at the low end of the growth its posted in recent quarters.
China isn’t the company’s only problem country.
On the conference call, Cook said the company is broadly having trouble in emerging market countries where the dollar has appreciated against the local currencies, making iPhones even more expensive than they would be otherwise.
In particular, Cook singled out Turkey, where the lira was down by 33% versus the dollar in the December quarter from the previous year. Apple’s sales there plunged by nearly $US700 million in the period from the year-earlier quarter, he said.
But Apple also is struggling in some developed countries. In Japan, it’s been hit by the decline of carrier subsidies, which helped to defray the upfront cost of phones, Cook said. Apple’s overall sales in the country fell 5% from the year-ago period to $US6.9 billion.
Consumers are taking longer to upgrade to new iPhones.
“Our customers are holding on to their older iPhones a bit longer than in the past,” Cook said.
The Apple CEO did not provide specifics about how much longer the upgrade cycle has become, but the comments represent an important acknowledgment about the changing nature of the company’s flagship business.
A recent Business Insider SurveyMonkey audience poll found that 1 in 3 iPhone owners in the US has not upgraded to a new iPhone because prices are too expensive or because they don’t feel the new models have enough must-have new features.
The company expects its iPhone problems to continue in the current quarter.
Apple’s iPhone revenue fell 15% in the holiday quarter due to the slowdown in upgrades. Cook attributed the decline to several factors:
- A strong dollar boosted iPhone prices in emerging markets.
- Wireless carriers are offering fewer and less valuable subsidies, effectively increasing the upfront cost consumers have to pay for Apple’s phones.
- And Apple’s battery replacement program, which allowed customers to swap out the power source in their phone for a minimal fee, has encouraged consumers to hold on to older phones longer, he said.
The company expects those factors to continue to depress sales in its second fiscal quarter, Apple CFO Maestri said. Overall, Apple expects that its overall second quarter revenue will fall by as much as $US6 billion, or 10%, from the same period last year.
Other parts of Apple’s business are actually doing well.
Refreshing its Mac computer lineup in October had a big benefit for Apple – the company posted record Mac revenue in its first quarter, pulling in $US7.4 billion in sales.
Apple said it also saw record revenue in its Wearables, Home, Accessories product category. Boosted by burgeoning Apple Watch and AirPod sales, that line of products saw revenue jump 25% to $US7.3 billion in the quarter.
Apple’s services business had mixed results.
As mentioned before, Apple’s services business’ revenue grew by 19% in the first quarter. That was up from the 17% pace in the fourth quarter last year, but well off the pace the business was running at earlier last year.
In addition to the problem with games sales in China, the services business was affected by the strong dollar, which boosted the local currency price for Apple’s services in some markets, and by a slow-down in the growth of sales of AppleCare, the company’s warranty offering, Luca Maestri said. A recent accounting change also made growth in the business appear lower than in the past.
On the flip side, the services business is highly profitable, as the company made clear for the first time in its report. The gross margin for the services business – the difference between the revenue Apple garners from those offerings and its direct costs of providing them – was 63% in the quarter, up from 58% in the year-ago period.
Apple’s user base is still massive, and growing.
As Apple officials themselves acknowledge, a crucial factor in the future of the company’s services business is continued growth in its number of users.
For the first time, Apple disclosed the size of its iPhone “installed base,” revealing that there are currently 900 million active iPhone users.
That’s up 75 million from the previous year, the company said. And the number of active users of its smartphones was up in all five geographic areas in which Apple segments its sales, the company said.
Including users of its Macs and iPads, Apple has 1.4 billion total users of its devices, up 100 million from the beginning of last year.
Apple’s paid music streaming service is growing, but Apple News is still relatively small.
Apple Music added around 10 million new paying customers since the summer and now has 50 million paid subscribers, Cook said. That’s still below Spotify’s 87 million paid subscribers, but Apple is making steady gains.
Apple News has some 85 million active users, Cook said. That’s not bad for a service that’s only available in three countries, but measured by the scale of free internet services like Google or Facebook, it’s still tiny.
Across all its services, Apple now has 360 million subscribers, up 120 million from a year earlier, Maestri said. It expects to surpass 500 million subscribers in 2020, he added.
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