Apple shares jump 6% on growth in services, despite drop in iPhone sales

Apple shares rose after the markets closed Tuesday despite issuing a sales warning.
Apple said revenue from services, which investors are counting on to fuel growth, reached US$10.8 billion, in line with Wall Street estimates.
Apple said revenue from services, which investors are counting on to fuel growth, reached US$10.8 billion, in line with Wall Street estimates.PHOTO: NYTIMES

NEW YORK (REUTERS) - Apple Inc on Tuesday (Jan 29) reported sharp growth in its services business and chief executive Tim Cook said trade tensions between the United States and China were easing, helping its shares up even after sales of its iPhone dipped in the holiday shopping quarter.

Apple said sales for its fiscal second 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.

The company's shares rose 6 per cent to US$163.50 in after-hours trading.

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

"If you were to graph up trade tension it's clearly less in January than it was in December," Cook told Reuters in an interview. "I'm optimistic that the two countries will be able to work things out."

SUBSCRIBERS UP

Apple said revenue from services, which investors are counting on to fuel growth, reached US$10.8 billion, in line with Wall Street estimates. Services gross margin hit 63 per cent.

The company said it now has 360 million subscribers to both its own and third-party services, and set a goal to expand that to 500 million by the end of 2020. It said it now has 1.4 billion active devices, an increase of 100 million from last year, and that 900 million of those are iPhones.

By contrast, streaming service Netflix Inc ended 2018 with 139 million paid subscribers and Amazon.com Inc has more than 100 million subscribers to its Prime shipping and content service.

However, Apple counts both subscribers to its own services as well as Apple device users who subscribe to outside apps or services using Apple's payment systems. Apple keeps up to 30 per cent of the payments it handles.

Apple's iPhone revenue declined 15 per cent year over year to US$51.9 billion. Cook said China's economic weakness hurt iPhone sales there.

He said Apple is rethinking how it prices the iPhone outside the United States after largely setting the price in U.S. dollars, which made the phones more expensive in local currencies.

"When you look at foreign currencies and then particularly those markets that weakened over the last year those (iPhone price) increases were obviously more," Cook told Reuters. "And so as we've gotten into January and assessed the macroeconomic condition in some of those markets we've decided to go back to more commensurate with what our local prices were a year ago in hopes of helping the sales in those areas."

OUTLOOK LARGELY BELOW WALL STREET

Apple said it expects revenue between US$55 billion and US$59 billion for the current quarter ending in March, largely below analysts' average estimate of US$58.83 billion, according to IBES data from Refinitiv.

 
 
 

For the quarter ending in December, Apple's busiest due to the holiday shopping season, Apple reported revenue of US$84.3 billion, slightly above analysts' average estimate of US$84 billion. Apple warned in early January that the quarter's sales would miss targets it gave in November.

Apple reported earnings per share of US$4.18 for the December quarter, compared with Wall Street's average estimate of US$4.17, according to Refinitiv data.

The company's investors have been closely tracking the company's share repurchase activity in hopes that it will help buoy the share price, which has fallen more than 30 per cent since November, knocking Apple off its throne as the world's largest technology company with a market value of more than US$1 trillion.

Apple said it returned US$13 billion to shareholders through dividends and buybacks in the quarter ended in December, a far smaller figure than the US$19.4 billion in stock it purchased in the previous quarter ended in September. Apple said its net cash position - its cash minus its debt - was US$130 billion, an increase from US$123 billion in the previous quarter. Apple has publicly said it plans to draw its net cash position to zero.