Apple services business grows, CEO Cook sees China tensions ease
(Reuters) – 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 even as iPhone sales dipped in the holiday shopping quarter for the first time.
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.
“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.”
The company’s shares rose 6 percent to $163.50 in after-hours trading. They had fallen more than 30 percent since November on concerns about weak iPhone sales and a general decline in high-tech stocks.
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“It appears that the bears pressed way too hard on the negative bets and even this more negative report couldn’t drive the stock lower,” said Hal Eddins, chief economist for Apple shareholder Capital Investment Counsel.
Apple said revenue from services, which investors are counting on to fuel growth, reached $10.8 billion, in line with Wall Street estimates. Services gross margin hit 63 percent, up from 58.3 percent last year. Analysts previously had estimated the services gross margin could top 60 percent.
“They get more efficient as they get larger,” Cook told Reuters.
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.
Apple said it would start providing regular updates on the number of iPhones and overall devices in use – what is known in the tech industry as the installed base. The company stopped reporting unit sales of its iPhones this quarter.
By contrast, Netflix Inc ended 2018 with 139 million paid subscribers for its streaming video service and Amazon.com Inc has more than 100 million subscribers to its Prime shipping and content service.
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 percent of the payments it handles.
Apple’s iPhone revenue declined 15 percent year over year to $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 $55 billion and $59 billion for the current quarter ending in March, largely below analysts’ average estimate of $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 $84.3 billion, slightly above analysts’ average estimate of $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 $4.18 for the December quarter, compared with Wall Street’s average estimate of $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 falling share price, which has knocked Apple off its throne as the world’s largest technology company with a market value of more than $1 trillion.
Apple said it bought back $8.2 billion worth of shares in the quarter ended in December, a far smaller figure than the $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 $130 billion, an increase from $123 billion in the previous quarter. Apple has publicly said it plans to draw its net cash position to zero.
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