Apple Services Business Grows 19 Percent Amid Weak iPhone Sales

Tim Cook - Getty - H 2018
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CEO Tim Cook had warned investors that the quarter would be a disappointing one due to soft iPhone sales and a weakening economy in China.

A disappointing quarter for iPhone sales has placed renewed focus on Apple's growing services business.

During a three-month period where Apple saw a 15 percent decline in revenue from iPhones, the services business, which includes subscriptions to Apple Music and iTunes downloads, grew 19 percent to $10.9 billion in revenue.

All told, Apple reported fiscal first-quarter revenue of $84.3 billion, down 5 percent year-over-year, and earnings of $4.18 per share. Analysts were expecting revenue of nearly $84 billion and earnings of $4.17 per share. For the next quarter, Apple is forecasting revenue between $55 billion and $59 billion.

CEO Tim Cook had warned investors that the quarter would be a disappointing one due to soft iPhone sales and a weakening economy in China. Initially, Apple had projected revenue between $89 billion and $93 billion, but at the beginning of January lowered the projection to around $84 billion.

"While it was disappointing to miss our revenue guidance, we manage Apple for the long term, and this quarter's results demonstrate that the underlying strength of our business runs deep and wide," Cook said Tuesday in a statement. "Our active installed base of devices reached an all-time high of 1.4 billion in the first quarter, growing in each of our geographic segments. That's a great testament to the satisfaction and loyalty of our customers, and it's driving our Services business to new records thanks to our large and fast-growing ecosystem."

Even though Apple releases new iPhone models every year like clockwork, people are holding onto their phones longer and upgrading less frequently, leading to weaker phone sales. As a result, the Cupertino, California, tech giant has focused on other revenue streams, including the subscription fees and revenue share generated via its services unit. The company is looking to grow that arm of its business to $50 billion in annual revenue by 2020. (The segment's fiscal 2018 revenue was $39.8 billion.)

One way that Apple will look to draw more users into its ecosystem and keep them spending money there is via its forthcoming streaming video offering. It hired away Sony veterans Zack Van Amburg and Jamie Erlicht to buy up a portfolio of original series including marquee projects like Reese Witherspoon and Jennifer Aniston's morning show drama. The company has yet to reveal exact details about how it will distribute the programming to viewers.

Services, which is Apple's second-largest segment behind iPhones, hit record revenue in China during the final three months of 2018. Growth in the division is directly tied to people using Apple devices to listen to music, make payments or store their data in the cloud. During the period, a number of Apple's services had record performances, including the highest quarterly music revenue since the launch of iTunes and growth of the Apple News app, which has 85 million monthly active users.

Apple also revealed that it has an active install base of 900 million iPhones. Among those users, the percentage of people who pay for at least one service "is growing very strongly," CFO Luca Maestri said on a call with investors.

Cook also laid out how Apple will capitalize on the "acceleration" of cord-cutting and the breakdown of the cable bundle, noting that the company will participate through Apple TV, its AirPlay technology and third-party video subscriptions offered through its store. While the exec acknowledged Apple's push into original programming, he wouldn't disclose specifics about the plan, noting that "we've hired some great people that I have a super amount of confidence in. They're working hard and we'll have more to say on that later."

Apple shares closed the day down 1 percent to $154.68. The stock was up more than 6 percent during the company's call with investors.