Apple Q2 2019 Earnings Show iPhone Business Stalling, But Services Expanding at Rapid Pace

May 1, 2019 3oliver

The iPhone XS (left) and XS Max (right). Photo: Marcio Jose Sanchez (AP)

Everyone has a theory: Maybe it’s that iPhones are too expensive. Maybe it’s that Apple’s quality control seems weaker, or that they’ve alienated consumers by removing consumer-friendly features like the headphone jack. Maybe it’s that iPhones keep getting more and more expensive at a time when consumers have realized the price premium isn’t worth it in an age of excellent mid-range phones, or just that consumers are upgrading less often. Maybe it’s all of these, or something else entirely.

Whichever theory you ascribe to, Apple’s second quarter 2019 financial report is yet another weak showing for the iPhone brand. A Q2 2019 report released on Tuesday stated that the company’s quarterly revenue of $58 billion, down five percent from the same time period last year, included $31 billion in iPhone sales—down from $37.5 billion in iPhone sales the same quarter in 2018, per Ars Technica.

However, Apple’s other units did fairly well: iPad sales increased from $4 billion in Q2 2018 to $4.8 billion in Q2 2019, while its wearables, home, and accessories division went from $3.9 billion to $5.1 billion. Per the Verge, the company brought in “an all-time high” of about $11.5 billion from its services division. In general, Apple came out on the high end of its $55-59 billion projection for the quarter, a notable upgrade from its disappointing Q1 2019 results.

Apple also cited strong showings in its revamped trade-in and financing programs, per Ars Technica, with the company claiming “four times the trade-in volume than it did in March 2018” after it rolled out new programs in the U.S., Spain, Italy, the UK, China, and Australia. However, its real emphasis was on the number of existing Apple customers that could provide revenue, rather than hardware sales volume:

At the end of last year, Apple explained that it would not report iPhone unit sales per quarter, a decision that frustrated some but makes sense for Apple’s bottom-line. Instead, the company disclosed on its Q1 2019 earnings call that its global install base includes 900 million iPhones—and today’s earnings report shows that the company’s install base is comprised of 1.4 billion devices. Rather than focusing on how many new iPhones it has sold, Apple wants to now focus on how many iPhones are out in the world to show how vast its services business could be.

Per the Wall Street Journal:

Sales of the iPhone, long the biggest driver of its business, fell 17% to about $31 billion—an accelerated decline for a product that has been hobbled by smartphone owners holding on to devices longer and by competition from rivals in China offering lower-price, feature-rich handsets.

iPhone sales slumped from about 61 percent of Apple’s revenue quarterly revenue in Q2 2018 to 54 percent in Q2 2019. In Greater China, where the company has had difficulty pushing phones (in large part due to cheaper competitors like Huawei), Apple posted $10.2 billion in sales, down from the Q2 2018 tally of $13 billion. CEO Tim Cook Cook, however, said Apple saw “better year-over-year performance [in China] in the last weeks of the quarter.”

However, Apple also posted a strong showing globally in the wearables division (including products like Apple Watch and AirPods) in particular, which CNBC reported was up nearly 50 percent year over year. The Mac division came in at $5.5 billion, under a projected $5.85 billion, but Cook said it was a temporary blip due to “processor constraints” that does not indicate a projected dip in long-term revenue, per Ars Technica.

As TechCrunch noted, the math works out to Apple posting 16.1 percent of its Q2 2018 revenue from the services category, but nearly 20 percent in the Q2 2019—an affirmation that the company really is slowly but surely pivoting away from its historic reliance on the iPhone line. Apple chief financial officer Luca Maestri said the company now derives about one third of its net profit from services, TechCrunch wrote, while Cook said Apple was up to 390 million subscribers across all its services (30 million more than last quarter). Apple also estimated it will surpass half a billion subscribers by 2020, likely based on its projections for its forthcoming streaming video and gaming services.