Coverage: Apple’s service business grows while iPhone slips

Apple Inc. reported sharp growth in its services business and Chief Executive Tim Cook said trade tensions between the United States and China were easing, helping the technology company’s shares up after hours.

Stephen Nellis of Reuters had the news:

Apple said sales for the current quarter would most likely be lower than Wall Street expected, a signal that it continues to face weak demand for its iPhone, especially in China, the world’s biggest smartphone market.

But investors focused on the company’s growing services, which include Apple Music and its App Store.

“The services number is good, and that is the growth engine going forward that people will continue to focus on,” said Ivan Feinseth, an analyst with Tigress Financial Partners.

Cook, who is in regular contact with U.S. President Donald Trump, said trade tensions with China, which may have depressed sales of its phones, were easing.

Jordan Novet of CNBC.com reported that it was the first time Apple had disclosed financials for its service business:

Apple said that in the first quarter of its 2019 fiscal year, the services unit had a 62.8 percent gross margin, which is the percentage of revenue left after subtracting the costs of goods sold. The company’s overall gross margin was 38 percent. In the year-ago quarter, the services gross margin was 58.3 percent, according to the numbersApple provided with its report.

Software-based products provide an opportunity for Apple to capture meaningful profit as iPhone sales reach a saturation point. Additional products that fall under Apple’s services category include AppleCare, Apple Music, Apple Pay and iCloud.

As Apple seeks to focus more on software that works across many devices, it faces competition from big technology companies like Google and Microsoft and more niche players like Dropbox and Spotify.

Chris Welch of The Verge noted that iPhone sales fell 15 percent during the holiday quarter:

Cook warned that underwhelming iPhone results were on the way earlier this month. The company briefly halted trading of its shares on January 2nd and lowered its holiday period revenue guidance, with Cook acknowledging “lower than anticipated iPhone revenue” in a letter to investors. “While Greater China and other emerging markets accounted for the vast majority of the year-over-year iPhone revenue decline, in some developed markets, iPhone upgrades also were not as strong as we thought they would be,” Cook wrote.

At the time, Apple projected revenue of $84 billion, as much as $9 billion below the high end of its original guidance ($89 billion to $93 billion). The downturn was attributed to weak iPhone demand. Cook cited the phasing out of carrier subsidies and strong US dollar as other factors impacting iPhone upgrades, and he suggested Apple’s battery replacement program is leading consumers to hold on to older iPhones longer.

But the company says China is the main challenge: Apple reported revenue of $13.17 billion in Greater China for Q1, down nearly 27 percent compared to a year ago. Apple has found itself embattled in China by smartphone makers who price their devices far lower than the iPhone, and the country’s economic slowdown is only complicating the outlook. Apple also leans heavily on China for manufacturing, so if the ongoing trade war between China and the US gets worse, it could take a heavy toll.