Brief:

• Apple reported revenue growth of 1% to $53.8 billion for the three months ended June 29 as the tech giant offset slumping iPhone sales with improvements in services and other products like the Mac and iPod. While the revenue gain reversed two quarters of declines, the company's profit fell for a third straight quarter with a 13% decline to $10 billion.
• IPhone sales fell 12% to about $26 billion as consumers held onto their smartphones for longer and Apple faced stronger competition from Chinese makers of lower-priced mobile devices. Apple's services business, which includes the App Store and Apple Music, boosted sales by 13% to $11.5 billion, the smallest increase since 2015, The Wall Street Journal reported.
• The quarter was the first time since 2013 that iPhone sales didn't make up more than half of Apple's revenue, eMarketer Principal Analyst Yoram Wurmser said.

Insight:

Apple's return to revenue growth was a positive development for the company amid the ongoing slump sales of the iPhone, a device that powered its expansion for more than a decade. A key challenge is motivating customers to upgrade to its latest models, whose prices have risen since the first iPhone debuted at $499 in 2007 to an average price of about $800 last year, Quartz reported. Its flagship iPhone XS and iPhone XS Max sell for more than $1,000. Apple has made incremental improvements to the iPhone, but the product is widely viewed as not being nearly as innovative as it used to be. Until Apple introduces an iPhone with a 5G chip, as is expected next year, the company is unlikely to see a significant upgrade cycle.

Apple's services revenue is still growing, but at the slowest pace in four years. The company has made a major push into services to squeeze more revenue out of its installed based of active devices, which totaled 1.4 billion earlier this year. The company doesn't break out sales results for its services, and selectively discloses growth metrics. Paid subscribers to services like Apple Music, Apple News and iCloud storage grew to 420 million, Apple CEO Tim Cook said in an earnings call with analysts, which is up from 390 million in the prior quarter. Apple Pay's transaction volume has more than doubled in the past year to about 1 billion a month, and the service is now available in 47 countries, he said.

"Apple Pay is now adding more new users than PayPal and monthly transaction volume is growing four times as fast," Cook said.

Apple may spur stronger services growth with the launch of its Apple TV+ video-streaming platform and Apple Arcade streaming videogame platform later this year. Apple next month will introduce the previously announced Apple Card, a payment service that includes a physical credit card and contactless purchases with the Apple Wallet app. The company is looking to expand its podcasting business by investing in original content, per a report this month.

One of the biggest threats to Apple's services business is heightened scrutiny from regulators worldwide. The U.S. Justice Department opened an antitrust review to determine whether tech giants such as Alphabet, Amazon, Apple and Facebook unlawfully stifle competition. Apple faces lawsuits from customers and software developers over its control of the App Store, which is the only way for 900 million iPhone owners worldwide to download apps. Apple's prioritization of its own services is at the heart of an antitrust complaint by Spotify, the streaming music company that in March accused Apple of not providing a level playing field for competitors.

China has been a source of weakness for Apple as the country’s economic growth slows, trade tensions brew with the United States and Chinese smartphone makers offer lower-priced devices. Apple's sales in Greater China, which includes Hong Kong and Taiwan, fell 4% to $9.16 billion during the June quarter, but was considered a major improvement from the 20% drop in the prior two quarters. Apple has cut iPhone prices in China to be more competitive with rivals like Huawei and Xiaomi, but its market share fell 0.6 percentage point to 5.8% during the period quarter, per researcher Canalys.