Apple Loses Its Thrill, But Applaud the New Drill

(Bloomberg Opinion) -- Boring is a good look for Apple. 

The company that was once a seemingly impossible combination of rapid growth and eye-popping profits has settled into a new phase of life. It's now clear that Apple Inc. won't return to the iPhone-selling mania of a few years ago. Higher product prices and the regular introduction of new gadgets are patching over its growth holes. Profits, while still grand, are less perky.

Apple is less thrill and more financial guile, and that's perfectly fine. Apple doesn't stay out late on the weekends anymore. Apple perches on the sofa with a cup of chamomile tea and a cardigan. It's a different reality but a sensible and good life. 

At this point last year, investors were predicting that Apple's 10th anniversary iPhone models would result in a surge of sales not seen since Apple's hard-partying days of 2015. That prediction was dead wrong. Through the first nine months of its fiscal year, Apple sold 0.4 percent more iPhones than it did in the same period a year earlier, the company disclosed in its fiscal third-quarter earnings report on Tuesday. Yawn.

But that's cool, because Apple has persuaded people to pay far more for its latest iPhone X. The average price of iPhones sold reached $724 in the June quarter, or $118.50 more than it was a year earlier. If the average price had remained steady, Apple's total revenue would have increased 6.5 percent. Instead, it rose more than 17 percent. That is a snapshot of how reliant Apple is on climbing sticker prices. That may not be exciting, but it is savvy.

Apple's new normal is also characterized by the regular introduction of new products to help keep sales growing. If it seems as if Apple comes up with a new product category every year, perhaps that's not a coincidence. It's not clear whether the Apple Watch, the iPad Pro, the AirPods headphones or the HomePod voice-activated speaker are big sellers on their own because Apple doesn't disclose how many of them it sells. But as Apple's product lineup expands far beyond the size of a tabletop, the increasing number of products is in the aggregate keeping revenue growth chugging along. That's sound. 

In the 12 months ended June 30, more than half of Apple's increase in revenue came from iPhone sales, thanks to those higher prices for new models. And one-quarter of the growth came from the broad category that Apple calls its “services” business, which includes its cut of revenue from app sales, Apple Music subscriptions, the AppleCare warranty program and more. Apple doesn't brag about what it discloses to securities regulators: a healthy chunk of the recent services growth has little to do with direct demand for Apple's products.

In its two most recent quarterly financial reports to the Securities and Exchange Commission, Apple has listed “licensing” as the first in a short list of contributors to sales growth for its services segment. Licensing includes the money that Apple collects from business arrangements with Alphabet Inc. for activity such as making Google the built-in way to conduct web searches on Apple's Safari browser. In short, Apple is leveraging its popularity to squeeze more high-margin revenue from auctioning digital space in Safari. That won't win Apple any cool awards, but it's practical like that well-worn cardigan. 

Apple isn't necessarily willing to settle for a couch-sitting phase of life. The company is spending like it never has before, presumably to find its next hit technology breakthrough, whether that's in health care, driverless cars, entertainment or some area the public hasn't imagined yet. As a result of that spending, Apple's operating profit margin in the June quarter hit its lowest level since 2008. 

Of course on an absolute basis, Apple's profits and cash flow are by the far the largest of any U.S. company. But as the company's spending has increased far more quickly than revenue, Apple's new normal has meant shrinking operating margins. Whether the company's spending splurge will lead Apple to its next cool hit remains to be seen. 

In the meantime, Apple is doing all the right things to keep its growth and profit engines chugging even when it can't rely on that old standby of selling a greater number of iPhones each year. Investors are fine with it, too. Shares rose about 4 percent in after-hours trading. It turns out that the quality that has made Apple great again is one that few could have predicted: Financial cunning in the absence of wow. 

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.

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