Apple Earnings: iPhone Slips, Services Soar, Stock Spikes

What will Apple do after everyone who wants an iPhone has one? CEO Tim Cook may have definitively answered that existential question on Apple’s second quarter earnings call Tuesday, showing that the company knows how to extract cash from consumers--whether they upgrade their phones or not.

The Apple news of the day was that the company had, in its most recent quarter, its best performance to date in its services segment. With $58 billion in overall revenue, Apple said its services hauled in $11.5 billion in sales--more than from Macs ($5.5 billion) and iPads ($4.5 billion) combined.

But Apple is still an iPhone company, with $31 billion in revenue from its flagship product, despite a 17% drop in its handheld business. Still, there may yet be better days ahead for the company’s smartphone unit, as Cook noted that its declines were smaller in the final weeks of March. "We like the direction,” Cook said of the iPhone business. “Our goal now is to pick up the pace."

Before earnings call on Tuesday, Apple stock aapl had dropped 1.93%, closing at $200.67. But buoyed by the news of expectation-beating financials, the shares surged 5.00% in after-hours trading to $210.70.

The reason for optimism among Apple investors is the breadth of success the company announced for the quarter. Cook called Q2 2019 the best quarter ever for App Store, Apple Music, and iCloud, and revealed that AppleCare and Apple Pay set performance records for March quarter revenue. Apple Pay usage more than doubled year-over-year, setting a pace for 10 billion transactions in the 2019 calendar year.

Apple’s paid subscriptions, which include everything from iCloud storage accounts to peddling access to HBO Go’s video streaming service, are up from 120 million a year ago, to 390 million. That is an increase of 30 million in the last quarter alone. For perspective, music streaming service Spotify announced Monday that it had just reached 100 million paid subscribers.

A common refrain in Cook’s presentation was Apple’s ability to “eliminate the boundary between hardware, software, and services.” And that may be how the company frames its business from now on in light of hardware-slowing headwinds, like the processor constraints that caused a 5% decline in its Mac business. Overall, revenue from Apple’s hardware products declined 9%, while services revenue grew 16%, accounting for 20% of the company’s Q2 revenue, and one-third of its gross profit.

All these encouraging signs in Apple’s services unit come before the rollout of the company’s much-hyped Apple TV Plus and Apple Arcade products, in addition to its Goldman Sachs-backed Apple credit card, which Cook says has seen “significant” consumer interest. Apple News Plus, which was announced at the same March event as the other products, has already premiered, and the CEO said it is “at the beginning of the ramp,” referring to consumer interest.

When pressed for more details on Apple TV Plus and Apple Arcade, Cook was predictably quiet. But he did caution investors against underestimating Apple’s efforts in these spaces. "We wouldn't do a service if we didn't think it would be meaningful,” he said. “These aren't hobbies."

That’s not clear yet, but as Tuesday’s numbers show, when it comes to services, Apple definitely means business.