The Silver Lining You Might Have Missed in Apple’s Q1 2019 Results

by: - Last updated on: January 30th, 2019

It finally happened. The moment Tim Cook had asked his investors and everyone else to brace for.

For the first time since the iPhone’s introduction over a decade ago, Apple’s profits faced a downturn in a holiday quarter. Slightly above the lowered estimations of $84 billion (earlier, it was $89-93 billion), the company reported revenue of $84.3 billion in first quarterly earnings call — a 5 percent decline from the same quarter a year ago.

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More importantly, revenue from the category where Apple makes most of its money — the iPhone fell by a staggering 15 percent. Cook cited strong US dollar which led to high prices in several countries, its damage-control battery program (paired with iOS 12’s optimizations) which ended up severely affecting upgrades, China-US trade tensions among a few others.

But the simple, hard truth is and I’m sure we’ve all heard this before — people aren’t buying enough phones anymore. Smartphone sales have stagnated and even plummeted dramatically across the globe. The region where the market has shown an uptick, India, the average smartphone price is about $200 which is nearly four times less than Apple’s most affordable new iPhone.

However, Apple, for the past year, has scrambled in an effort to prepare for the day these losses will be even worse. And that shows in its Q1 results as a bright silver lining. While the company’s most lucrative lineup shows signs of a slump, its services and other hardware products have flourished.

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iPad revenues are up 17 percent, Mac has grown by 9 percent, wearables, home, accessories showed a 33 percent growth, and lastly, income from its suite of services has soared by more than 19 percent. Together as well as individually, they have produced a record-quarter for Apple’s business outside of the iPhone.

[pullquote]Apple Pay had more activations in its first week of Germany than Android Pay did in the entire year[/pullquote]

That’s not all. Apple’s host of services have witnessed a tremendous surge in the number of users and sales.

Apple Pay witnessed double the amount of transactions (over $1.8 billion) it did in the first quarter of 2018, Apple News set a new benchmark across the news aggregator industry with more than 85 million active users, Apple Music had its most fruitful three months crossing the 50 million paid subscriber mark, and much more. For perspective, here’s an interesting nugget of information from the call — Apple Pay had more activations in its first week of Germany than Android Pay did in the entire year.

The reason why services stand today as one of the most critical pillars in any technology company’s roadmap is that unlike categories like phones, they are not perishable. Maybe a couple of years down the road, most people might stop buying phones altogether but they will undoubtedly continue to invest in music and video streaming platforms, apps, in-app purchases, digital payments, you get the idea.

In addition, to further highlight how services will fill the void poor iPhone sales have left, Apple for the first time, reported its margin — a whopping 62.2%. The company has been consistently strengthening its position in the services market with a series of launches and the previous quarters are living proof of that. Both Q2 and Q3 2018 were record-breaking periods of Apple’s services division too. It’s forecasted to reach $14 billion by next year and I’ve little doubt Apple will fall short of that goal.

Moreover, Apple is planning to introduce a bunch of new services this year as well. A few reports suggest the company will announce a new video streaming platform for housing its range of original content and possibly, a gaming service too for rivaling the likes of Twitch and YouTube Gaming.

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Of course, Apple won’t leave the iPhone to die. That is still its biggest revenue-generating source and it will be a while before any of its other divisions will catch up to that level. To ensure it doesn’t face a crisis in the meantime, Apple says it will be adjusting iPhone pricing for countries where the weakened foreign currency has led the iPhone’s costs to skyrocket. India will especially witness an aggressive strategy from Apple with plans to manufacture its highest-end phones locally, bring first-party stores, and much more.

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