Apple offsets 17% drop in iPhone sales with services, wearables growth

Brief:

Apple's overall revenue fell 5% to $58 billion during the first three months of 2019 from $61.1 billion a year earlier as iPhone sales dropped 17% to $31 billion, per the company's Q1 financial statements. The tech giant made up some of that decline with growth in its services and wearables businesses.
Services, which include the App Store, Apple Music, Apple Pay and iCloud storage, expanded by 16% to $11.5 billion as subscriptions hit 390 million. The company aims to reach 500 million subscriptions to its own and third-party services next year.
Sales for the wearables division, which includes Apple's smartwatch, AirPods wireless headphones and HomePod smart speaker, grew by 30% to $5.1 billion. Analysts forecast that wearables will reach $21.76 billion in sales this year, Reuters reported. Apple predicts revenue of $52.5 billion to $54.5 billion for the current quarter, in line with last year's $53.3 billion.

Insight:

Apple's second straight quarter of declining revenue, the first back-to-back drop in more than two years, is mostly attributable to mobile users holding onto their iPhones for longer. The trend has negatively affected almost every major smartphone brand and is likely to continue through next year as consumers continue to grapple with the sudden surge in device prices. Apple's recent few slates of smartphones run north of $1,000, causing many people to hold off on upgrading due to the steep price.

The arrival of next-generation 5G service is set to compel more mobile customers to upgrade their smartphones as the advanced network requires the newest devices. Apple isn't expected to release a 5G iPhone until 2020, once the faster mobile service is available in more U.S. markets. But Apple also needs to generate more excitement for its brand with greater innovation and new hardware categories, such as augmented reality (AR) headsets, to urge more people to buy its devices.

Meanwhile, China is another trouble spot for the company, but is showing signs of stabilizing as the country grapples with slowing economic growth and trade tensions with the U.S. IPhone sales in Greater China, including Hong Kong and Taiwan, fell 22% in the just-ended quarter, a slight improvement from the 27% drop a quarter earlier. Apple cut the price of iPhones and began offering trade-ins and financing programs to make its devices more attainable for Chinese customers. Local manufacturers like Huawei and Xiaomi offer lower-cost smartphones, while Tencent's WeChat app acts like a miniature mobile operating system on Android-based phones, making their features more like Apple's iOS.

"We like the direction we're headed with the iPhone, and our goal now is to pick up the pace," Apple CEO Tim Cook said in a conference call with analysts.

Apple's services business is showing healthy growth as the company aims to monetize its installed base of more than 1.4 billion active devices. The company in March announced plans to expand its services into video streaming, gaming and magazine subscriptions, but most of those services won't drive revenue until they hit the market later this year. Apple TV Plus, an ad-free video-subscription service that carries original programming for a flat monthly fee, and Apple Arcade, a game-subscription service with more than 100 exclusive video games, won't arrive until the fall. Apple News Plus, a digital newsstand that charges $9.99 a month for unlimited access to hundreds of magazines and news providers, signed up 200,000 subscribers in its first two days.