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5 August 2019

Crisis at Apple as profits fall along with iPhone revenues

Apple’s results in recent quarters have reflected a dramatic change in the company’s fortunes. It had turned almost into a one-trick pony, with a huge percentage of its revenues coming from the iPhone, but in its fiscal third quarter, the handset was no longer the largest single revenue source, for the first time for seven years.

iPhone revenue fell by 12% year-on-year from $29.5bn to $26bn, and for the first time since 2012, the product family accounted for less than half of total revenue. The fall has been rapid. The iPhone accounted for 62% of total revenues in the first nine months of fiscal 2018. In the first nine months of this fiscal year, the figure is down to 48%.

It was also the only segment not to grow – Mac sales increased from $5.3bn to $5.8bn; revenue in the Wearables, Home and Accessories segment jumped from $3.7bn to $5.5bn; and even the iPad, which had some challenging years in 2017 and 2018, saw its revenue rise above $5bn for the first time.

There are pluses and minuses to the shift to a more varied set of products and services.  The company is diversifying its sources of income by boosting its services offerings, but it lacks a new ‘killer device’ to extend its famous integrated hardware/software user experience – the source of its control over its customers and near lock-ins.

Excluding the iPhone, revenue across the company’s other product and services segments was up 17% year-on-year, helping to deliver a return to overall revenue growth – albeit of only 1% – after two consecutive quarters of decline. Total revenue was $53.8bn.

That is the positive side of being less reliant on the iPhone but the downside is seen in the profits figure. Profits continued to fall, down 13% from $11.5bn in the year-ago quarter to $10bn, as Apple has to get used to the shift away from its fabulously profitable handset –  which has often accounted for around half of the smartphone industry’s total profits – towards highly competitive services. Some of that decline was attributed to a 15% increase in R&D expenditure, to $4.3bn, which could result in much-needed new devices or services that could drive new sales.

CEO Tim Cook said the services division reported double-digit revenue growth across all five of Apple’s geographic regions in the quarter, which ended on June 29, and grew by 13% year-on-year to $11.45bn. He added that Apple was on track to double its services revenue this fiscal year, compared to fiscal 2016, when it was $24.3bn, and to attract more than 500m paid subscriptions in 2020.

CFO Luca Maestri said upcoming new products in the services unit, including Apple Card in August, and Apple Arcade and Apple TV Plus later in the year, will “help us carry on with the momentum we have in services”, though he acknowledged that in the short term, new services are more important for increasing the customer base, while generating new revenue takes longer.

Apple will now be looking for a revenue and profit boost later in the year from updates to the iPhone XS, XS Max and XR line-up, and in 2020, from the expected 5G iPhone. Apple is not yet making any comment about timing or features for a 5G handset.

“We don’t comment on future products,” said Cook on the earnings call. “With respect to 5G, I do think most people would tell you, it’s the extremely early innings of it. And even more so on a global basis. So we couldn’t be more proud of what our line-up is and we’re excited about the great pipeline of both hardware and software and we wouldn’t trade our position for anyone’s.”